Agency Model and the Wholesale Model

Source: Konrath blog, Apr 2012

let’s make sure we’re all on the same page about what the agency model is. Here’s a detailed explanation, but in a nutshell it is this: in a wholesale model, the one supplying the goods sells to a retailer at a predetermined price, then the retailer sells to consumers at whatever price they see fit.
In the agency model, the one supplying the goods gets to set the price for consumers, and then gives the retailer a set percentage (in this case 30%.)
It should be obvious that the one who sets the price has a great deal of power over the market.
The agency model by itself is not illegal. Retailers can choose to adopt any pricing structure with their suppliers as they see fit. And as I said before, I care less about the legality of this particular business relationship, and more about if it was good for authors.
And it wasn’t, for this very big reason:
Under the Agency Model Authors Make Less Money
I’ve gone into this in detail before, but let me distill it.
Under the prior model, Amazon bought ebooks at a percentage of the recommended retail price. Then they priced them how they saw fit.
The recommended retail price for ebooks was often about half of the hardcover price. So a $25 recommended retail price meant Amazon paid $12.50 for the ebook.
According to most contracts, the author made 25% of the net price the publisher received. So at the above numbers, an author would make $3.12 NO MATTER WHAT PRICE AMAZON SOLD THE EBOOK FOR.
With the wholesale model, authors made more money per unit and sold more units.
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