by Steve Laube
Understanding the economics of your local brick-and-mortar bookstore should help you understand the upheaval that is happening in our industry. So put on your math cap and let’s take a ride.
This article focuses on the bookstore not the publisher or the writer. I spent over a decade in the Christian bookstore business, and while that was a long time ago the economic principles are the same.
Let’s start with a $10 book (retail price). I’m using $10 because it will make the math a little easier to follow.
The bookstore buys the book for $6 (or 40% discount off the retail price) from the publisher (who calls that $6 the net price). Note that this discount varies between 40% and 50%.
When the books sells to a customer the store then makes a $4 profit ($10 – $6 = $4).
If the store discounts the book during a 20% off promotion they have to sell two copies to make that same $4 profit. But often a 20% off sale is not enough to double the sales volume. Why? Because a high-volume operation like Amazon.com is happy to sell that $10 book for $6.50 (35% off). They can do this because they plan on selling 10 copies at the discounted price and clear $5 in profit. This pricing strategy has a chilling effeBooct on the ability of the local store to compete.
An operation like Amazon can do this because they have a different expense structure than your normal store-front bookstore.
Remember that the publisher is obligated by law to offer the same discounts to the same vendors based on the volume of their purchases. So don’t believe the myth that Amazon is buying the above book for $3 and selling it for $6.50.
In my hey-day as a bookseller our store did nearly $2 million in annual sales. That sounded like a lot, until I discovered that the local Price Club (a per-cursor to Sam’s Clubs and Costcos) did $1 million PER WEEK in sales. High volume, low prices. It crushes the local independent store because they simply do not have the volume in sales to compete solely on price. And Price Club was not reliant on a single type of product line to generate their sales. The did not care if they sold a Bible or a set of new tires. But now we have an Amazon that carries all the same products found in the bookstore and also carries other products too. A one-stop shop.
Let’s go back to that store who made $4 on the sale of that $10 book. Here is a list of some expenses that the $4 in profit covers: Rent, salaries, utilities, advertising, supplies, shrinkage, bank charges, taxes, etc.
Shrinkage? This fun line item is about 3% of sales. It includes shoplifting, employee theft, and paperwork errors. Believe it or not, one of our store’s biggest areas of “shrinkage” was leather-bound Bibles.
Bank charges include the percent that the credit card company charges to process your purchase. This can range form 1% to nearly 3% of every credit card sale.
Our store did a training video to show new employees how this all worked. We started with a $10 bill in the palm of a hand received for the sale of the book we mentioned above. When all expenses were deducted (cost of the book, rent, salaries, etc.) there were two dimes left in the palm of the hand. There is very little room for error for the store-front retailer.
Now do you understand why your local stores are having a tough time in this online age? A good friend of ours had her bookstore for 32 years. When the economy soured and the city built a light rail track in front of her store her sales at Christmas plummeted by 40% compared with her previous year. She went bankrupt.
To counter the online pricing wars some stores are becoming boutiques where books are not as critical to their profit margin. A store may have a larger gift or greeting card section…items with which they do not have to compete with Amazon. Others create community spaces with coffee shops and hold local events to draw people to the store. The survivors have successfully adapted to the changes in the market.
In the same way traditional publishers and independent authors and forward-thinking agents are adapting to this ever changing industry.