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    10.3 Pricing Challenges

    It is widely understood that the Internet presents an opportunity for substantial decreases in the costs of scholarly publishing. Because paper, printing and postage—the principle variable manufacturing costs of publishing—are quite substantial for nearly all publications, there is an opportunity for both publishers and buyers to capture some cost savings through online delivery. But there is also a good deal of misunderstanding about the economics underlying print publication costs and pricing.

    There is more to publishing than covering these variable manufacturing costs. In accounting terms, any price must cover variable costs, fixed costs and margin. When a journal has other sources of revenue than subscription sales, of course, the costs may be spread out over different sources; thus, the subscription price will reflect a contribution to the total fixed and variable costs, but not necessarily full coverage. Even so, many scholarly journals are largely dependent on a single revenue stream for their existence, and more often than not, that single revenue source is library subscriptions.

    Not all journals experience the same level of variable costs. The cost of serving each new subscriber can vary greatly, depending on factors such as the frequency of publication, whether the journal is distributed globally, the size of the circulation, and the number of pages per issue. In general, we can expect online distribution to significantly improve these costs, thus, in theory, making it possible for low circulation journals to publish many pages, circulate them worldwide, and publish as frequently as needed. But, of course, these savings will only be realized if and when publishers can abandon print publication altogether.

    Another misunderstanding that may need clarification is the idea that manufacturing costs are the only variable costs a journal faces. They are not. For instance, the cost of maintaining subscriber records, sending renewal notices and bills, and providing customer service are all variable costs that rise as circulation of the journal increases. Some of these items may also be improved, but not eliminated, by use of the Internet. Science, for example, has begun to accept orders and renewals online, and this source of orders has increased rapidly, relative to more traditional sources such as direct mail.

    The fixed costs of publishing cover things like overhead and the cost of all the staff (not just editors) needed to run a professionally produced journal. Fixed costs are not uniform across all types of print journals. They may vary based on the depth of peer review undertaken, the breadth of disciplines and issues covered, and the extent of the marketing and other support efforts needed to produce the journal. Staffing costs are not likely to be reduced by online delivery, and in fact may increase substantially. Increased reader expectations can drive demand for more editors, more technical staff, and more sophisticated customer services.

    Besides staff costs, fixed costs include major technical systems required to maintain the publication. One reason for the pricing disarray that exists in scholarly publishing right now is the uncertainty about what the steady-state cost structure of online publishing will be. Everyone, by now, has come to realize that merely throwing a few files onto a server will not constitute a viable publishing operation. Publishers are expected to provide value-added services that exploit the special features of the Internet to improve searchability, linking to outside resources, and other aspects of the readers' experience; to maintain a number of back issues indefinitely; and to provide for a more permanent archive. Quality control is also a much larger problem online than in print. With the expectation of retaining back issues online indefinitely and integrating them with new material for searchability, quality control is a job that is, in a very real sense, never completed. All these activities represent new costs associated only with online publishing, and until a more settled view of expectations is reached, it will be difficult for publishers to assess accurately what their fixed costs will be.

    Further complicating the situation is the centralization of buyers. As mentioned earlier, there is some reason to think that, even though the Internet may bring more readers than ever to a journal, there will be fewer paying subscribers. Libraries used to maintain multiple subscriptions to the most popular journals, but will purchase only one site license to online publications, no matter how popular they become.

    More important—if the publisher relies on individual subscriptions—is the problem of library subscriptions cannibalizing the publication's personal subscription base. In print, this phenomenon is a minor factor, because many people will still decide to purchase their own copies for convenience and portability. Some individuals also like to retain their own personal collection of key journals. All this is swept away by institutional site licenses to journals. Many of the compelling benefits of personal print subscriptions are lost if the very same product is available online at one's desktop through the university. Though most readers still report a preference for the look and feel of print, and for its portability, these benefits are strained against the economic incentive to drop print and save the subscription cost.

    If buying centralization continues to grow, it means that the fixed publication costs will be spread over a smaller number of payers, and thus will rise as a portion of total price. Depending on how much the size of the buying market declines, the effects on price can be surprisingly steep.

    Margin, the third component of pricing, is usually expressed as a percentage of the gross cost of production. There may be endless arguments about how much margin (profit) is appropriate for a scholarly journal, or even whether any margin should be charged by non-profit entities. The fact of the matter is that nearly every important and vibrant publication will charge some sort of margin. A publisher cannot produce cash for improvements, fund startup projects (whether charitable or commercial), or even merely ensure that the journal has enough financial flexibility to weather an unforeseen crisis or to pursue an unexpected opportunity without generating some revenue in excess of the precise costs of producing the journal.

    In a durable business, margin is expected to increase with risk. Among the risks faced by publishers navigating the transition from print to online publishing are

    • new competitive challenges,

    • increased demand for technically sophisticated information products,

    • potentially diminished print revenue base,

    • unclear cost basis,

    • centralization of buyers.

    All these risk factors have been mentioned in other contexts in this paper. Given the number of unknowns and their financial implications, it may be predicted that publishers will price their new online products to compensate for substantial risk.

    This review of publishing costs should provide a more nuanced understanding of the complexity of moving from print to online publication of scholarly journals. Although some publication costs will decrease in the transition to online, others will increase. Further, the total cost may be borne by a smaller number of paying subscribers. The net effect on subscription pricing is uncertain.

    A simple example, summarized in Table 10.3, will illustrate the point. See the King and Tenopir (this volume) chapter for a substantive discussion of these effects, using actual industry cost and price averages. For this example, assume no other major revenue stream that will share costs or be affected by a transition to online, and no price differentiation among target market segments. The purpose is only to illustrate the effects of changes to the paying base on the pricing for a journal. Imagine a print periodical with 10,000 subscribers and a frequency of 12 issues per year. Suppose the fixed costs for producing the journal are $1 million, the manufacturing and distribution costs are $2 per issue, other variable costs are $.50 per issue per subscriber. Then the cost base per subscriber, exclusive of margin, would be $130: $24 in manufacturing costs, $6 in other variable costs, and $100 for fixed cost contribution. The publisher would likely add between $13 and $26 dollars of margin to produce a price per subscriber of, say, $149.

    Table 10.3: Illustration of the impact of buyer centralization on online pricing
    Print Scenario Online, no centralization Online, w/ centralization
    Circulation $10,000 $10,000 $7,000
    Total Fixed Cost ($) $1,000,000 $1,000,000 $1,000,000
    Fixed contribution/subscriber/year $100 $100 $143
    Variable cost/subscriber/year $30 $11 $11
    Straight margin $19 $19 $19
    Percent margin 15% 17% 12%
    Total subscription price $149 $130 $173

    Now suppose this journal switches to online publication, entirely abandoning print as a medium. Again, this scenario is simplistic in order to underscore what the economics of a fully online journal might look like after a transition is completed. I am ignoring, for now, the effects on pricing from producing the journal in two media simultaneously, although this is the reality facing many scholarly publishers today.

    The middle scenario in Table 10.3 demonstrates the ideal circumstances for a journal moving online. Assuming that fixed costs remain the same, variable costs decline, and circulation sales hold steady when the journal moves online, there is reason to expect that both buyers and the publisher will gain by making the transition. With online production, the variable costs will decrease quite significantly. Suppose the manufacturing decreases by 75% to only $.50 per issue ($6 per year), while the other variable costs reduce to $5 per year. Costs that had represented $30 of the print price now represent only $11. Of course, if all other factors remained equal, this should be a boon to all parties. The publisher could lower the price and still maintain the same gross profit as before.

    But all other factors do not remain the same. In all likelihood the fixed costs will be higher, as reader expectations increase. Even if the fixed costs do remain the same, if there is a decrease in the number of buyers, the fixed costs will have to be spread across a smaller group. The percentage increase in the fixed-cost portion of the price can be greater than the percentage decrease in subscriptions. If, for example, the number of buyers falls by 30%, dropping from 10,000 to 7,000, the fixed cost portion of the price will rise by nearly 43%, from $100 to $142.85. And overall, this would result in a higher base cost of $142 + $11 = $153. Even if the publisher accepts the same gross margin (which would be a thinner percentage), the final price would rise to $172, a 15% price increase to subscribers, despite the substantial decrease in variable costs.

    The last scenario in Table 10.3 summarizes the pricing effects of a 30% decline in circulation sales due to cannibalization from moving the contents of the journal online. Among the distortions caused by this scenario are that the price for buyers increases 15% over the print price, and the publisher receives a lower marginal percentage for a more risky model, which defies normal business practice. If the publisher decided to maintain the same margin as print, the end price would rise even further, to $177, nearly a 19% increase for subscribers. The greater the pricing impact, the more probable that the circulation figures would decline. If they decline even more sharply than the projected figures, it could set off a "death spiral" reaction in the journal, also described in the King and Tenopir (this volume) chapter, where prices keep rising to cover the circulation shortfalls, thereby dampening demand even further.

    Of course, this is just an illustration. For many reasons the end result for a particular journal may be different. For instance, a creative publisher could turn an online presence into other revenue opportunities, such as advertising. But these opportunities may be wishful thinking. There is little reason to believe that a publisher who cannot sell ads in the print journal would succeed much better merely for having the journal online. Indeed, if the publisher does sell print advertising, there may be a loss of revenue, since many advertisers remain skeptical of the online medium, and highly resistant to paying prices similar to print advertising rates.

    Another possibility is that subscription losses of this magnitude may not occur. It is certainly true that the scenario described above allows some flexibility for the publisher to lose subscriptions. The break-even amount of subscription loss in the case above is around 16%. That is, assuming a drop in subscriptions to 8,400, and assuming the fixed costs for producing the journal stay the same, then the variable cost savings are enough to offset the increased portion of the price dedicated to fixed costs. So the problem for publishers isn't whether they will lose any subscriptions, but a more complicated problem: how much will fixed costs increase due to online publishing, how much will subscriptions decline, and how much variable-cost savings will there really be? It is the complicated interplay of these uncertain effects, along with the enticing but uncertain prospect of developing other revenue streams, that leaves the pricing of online journals a very tricky matter.