It's not dollar parity, it's the unusual pricing strategy

The hullabaloo surrounding federal Finance Minister Jim Flaherty’s push to jawbone Canadian retailers to lower prices had the aura of a stage play. He goes shopping and doesn’t like what he finds. The Canadian Retail Council fires back with some lessons in economics, and a “gotcha” regarding the various Ottawa-area booksellers that are selling the newest Harry Potter book at far lower prices than Minister Flaherty paid.

In my mind, the issue isn’t solely the fact that U.S.-published books generally sell for $5 – $15 more in Canada then they do across the border. We understand that it costs money to get them up here. Even more to Prince Rupert, B.C. That a U.S. published book or People Magazine costs the same in Prince Rupert as Montreal isn’t a function of economies of scale, obviously, but we get the point re our smaller market.

What is not comprehensible, however, is the pricing strategy around books. Figure this out:

If a book is popular (ie., on a Best Seller list), Indigo/Chapters will drop the price by 30%, invariably stimulating more sales. The recent Chretien and Mulroney books might have a cover price of $40 or $50, but few consumers paid the cover price as the 30% discounts swung into action almost as soon as the books were released.

Amazon.ca does one better, offering the recent Bill Clinton, Naomi Klein and Brian Mulroney books at 45% off the cover price, with free shipping on all orders over $39.

The publishers and authors of these particular books love this, as their own cut isn’t touched by the discounts offered at the cash register. All of price cut comes out of the fat margins Indigo and Amazon.ca get on the retail vs. wholesale game.

Can you name another industry that systematically drops the price on the most popular items?

Can you imagine Apple lopping 30% off the best-selling iPod release?

Or Porsche cutting 30% of the 911, as its most popular line of car styles?

Or a 30% drop in the quarter chicken dinner at Swiss Chalet?

To make matters worse, all Indigo et al are doing is steering their own customers away from the thousands of other books already sitting in their stores. With a few dozen titles at 30% off list, and the balance at full price (unless you join a club), Indigo is playing the volume game on a very small group of titles.

The idea that store traffic spurs other full-price sales just isn’t credible: how are Canadian authors doing as a result of those Starbucks customers trooping into the Waterloo Chapters to buy a Latte? Lots of increased traffic there, but the products closest to the coffee shop are magazines and soon-to-be remaindered books about WWII aircraft.

For reasons that are lost on me, the entire publishing industry has no one to blame but themselves for this unusual marketing behaviour. By selling books on consignment, book publishers are consenting to reckless marketing tactics.

Unlike most other retail industries, the inventory is not owned by the actual store chain. If Indigo receives 4,000 copies of a particular title, and sells just 1,400, the balance are returned for a full refund. This may not be news to you, but just think how profitable Hudson’s Bay would be if they could send back all the weak selling ties after Father’s Day!

I don’t have any unique insight into what proportion of Indigo’s sales are at a 30% discount, but let’s assume that it’s 20%. Just think of the across-the-board price cuts that could be installed if every book was sold at a discount, and not just the best sellers. In a way, that what happens with the discount cards, but penetration rates of those schemes can’t approach even be 50%.

Most people won’t drive from Vancouver to Seattle to buy a Harry Potter book for a few dollars off; certainly not with gas at 98 cents a litre. And Harry Potter isn’t the right example in any event, as that cash cow doesn’t seem to need discounts to fly off the shelves.

That the dollar has rallied 27% this year is a sideshow in this particular business. If Indigo wants to earn higher profits, they’ll just charge more – one way or the other. If they aren’t passing on economies as a result of the CDN dollar rally, so be it; thats another tool to charge more for the same product. I don’t expect the Toronto Raptors to send refund cheques to their season ticket holders as a result of MLSE’s windfall on the US$, as ticket prices for the 2007/08 season were set last April (“Raptor owners rubbing their hands with glee?“, October 21, 07).

Dollar parity just isn’t the key issue in the book business. For the life of me I can’t comprehend why popular books are automatically cheaper than “unpopular” ones. Perhaps they’re “unpopular” due to a backwards pricing strategy, which is aided and abetted by the publishers that unwillingly stock book stores with consigned books.

It’s a strategy that eventually bankrupts most domestic book publishers – whatever the CDN$ is trading at – and it does nothing to expose great Canadian writers to an audience of willing readers, both young and old.

MRM