Pricing Digital Textbooks for growth and profits Team Project 15.567 Economics of Information MIT Students Exponential growth forecast, but pricing is key Digital Textbook Sales Five-year projection % of U.S. textbook market 25 18.8% 20 15 10.45% 10 5.5% 5 1% 2010 2.5% 2011 2012 2013 2014 Year Image by MIT OpenCourseWare. Pricing in the ‘textbook’ category is less variable Fiction Price Textbooks 140 120 100 80 New (AMZN) New (ALT) Used 60 Kindle 40 20 0 0 20 Source: Amazon.com 40 60 80 100 120 140 0 10 20 30 40 50 Sample # 60 Hypothesis In a market with • a well developed 2nd hand market1 • where goods do not degrade significantly through use pricing will be less variable 2nd hand pricing indicate WTP for rental 1 50-60% of textbooks are purchased 2nd hand. Source: Survey of MIT Sloan students. 49 respondents. Data suggests WTP for rentals is ~30% of list price Price 140 120 100 80 New (AMZN) Used 60 Linear (Used) 40 20 0 0 10 Source: Amazon.com 20 30 40 50 60 Sample # Survey confirms WTP for rentals ~30% of list price Q: At what discount rate do you expect to sell your books at the end of the semester? 10 8 6 4 2 0 Source: Survey of MIT Sloan students. 49 respondents. Many versions exist in the current market Buy digital textbook, 4% Rent, 1% Buy-newtokeep, 25% Buy-usedtoresell, 34% Buy-newtoresell, 10% Buy-usedtokeep, 26% Source: Survey of MIT Sloan students. 49 respondents. Digital textbook limited to one version: Purchase at ~20% discount Price 120 100 80 New (AMZN) 60 Kindle 40 Linear (Kindle) 20 0 0 Source: Amazon.com 10 20 30 40 50 60 Sample # Current price point fails to maximize growth & profits • 29% willing to pay full price to own – But currently purchase at 20% discount • 44% would not buy digital as buying and reselling print is better value – Slows growth in digital textbook sales – Printing + shipping costs reduce profits • 30% of new and 55% of used books purchased will be resold – No value captured on these transactions Source: Survey of MIT Sloan students. 49 respondents. Hypothesis II Enabling resale of digital textbooks would create a 2nd hand market and increase growth and profits • Buy-to-own • Buy-to-maybe-own Resell fee controls size of 2nd hand market 10 Next: Use survey data to establish supply curve and optimal fee 100 8 80 6 60 4 40 2 20 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 Source: Amazon.com 0 0% 5% 6% 12% 15% 25% 39% 46% Current conclusions • 2nd hand textbook market enables us to establish the value of temporary ownership and hence WTP for rentals • Enabling resale of digital textbooks, whilst controlling the size of 2nd hand market through resale fees, would increase profits Could this help maintain higher price points for other digital goods? Pricing Digital Textbooks for growth and profits Team Project 15.567 Economics of Information MIT Students MIT OpenCourseWare http://ocw.mit.edu 15.567 The Economics of Information: Strategy, Structure and Pricing Fall 2010 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.