The Magic Bakery: Chapter Seven
I knew I was going to need to talk about this topic in a chapter and honestly, have dreaded it. Writers, especially newer writers have no understanding of the value of their own work and how others value it.
So with that problem in mind, I am going to try to add a level of understanding of value of copyright to this book. For most of you, I will fail at this, but at least I can say I tried right here in Chapter Seven.
I’m calling this chapter “Perceived Value” of the inventory in the Magic Bakery.
I cannot even begin to count the hundreds and hundreds of times I have heard a new writer say, “I’m new so I should give my stuff away or sell it for only 99 cents.”
I will not get into a pricing discussion here. There are lots of other places out there in the vast world of the inner-tubes to shout about your price being better or worse than another price. Go to it.
I am talking about “Perceived Value.”
The Dollar Store
Here in the US, there are numbers of chains of stores known for selling things at one dollar. To make sure I was correct in my perceived value of the goods in the Dollar Store, I stopped by the one here on the coast a few days ago.
Lots of small toys, all cheap. Lots of household stuff you could get for a buck in any supermarket.
Everything that was either normally a buck in another store or some cheap knockoff. The entire store.
Now, if I had gone in there looking for a fine bottle of wine, I would have been very disappointed. But I went in there knowing I would be finding exactly what I found. Cheap stuff worth less than a buck.
My “Perceived Value” of that store was right on. I went in expecting cheap and I got cheap. Both in price and quality of the goods.
Let me repeat that: I got cheap price and a cheap quality of the goods.
And I was not surprised.
So I log onto a web site for a writer I do not know. (Most writers, both experienced and new. I have no way of knowing the difference. And neither do readers.) And I see nothing but free and 99 cent books. What do I expect?
I expect a cheap and lower level of goods.
And since I like to be entertained and only have so much reading time, I will go find another author. Yes, I will pay more. But my two hours of reading won’t be wasted.
Quality wine vs a buck bottle of whine. Sorry, I like a good wine.
Readers are no different. (Sure, there are the only buy cheap or free reader and they sometimes find something worth reading. I got that. Not my customer.)
The Discount Mall Principle
Perceived value is a major art form in discount malls. We have a massive discount mall here and all of the stores in that mall show the original price on every item and then the discount price and the sale price and then for today only take off another 25% if you can stand on one leg and snort.
But that original price is right there on the tag. You can get a $200 coat for today only if you snort loud enough for $49.99. The customer has a perceived value of the coat at $200. Wow, what a deal and they grab it.
Also top brand-name stores are in the mall. Nike for example. Just by walking in that door the customer knows of the perceived value of a Nike shoe.
The Magic Bakery Value.
Since you own your Magic Bakery and create all the product, you have the freedom to set your own prices. A logical way to do that is to figure out what other books in your genre are selling for. Then look at what Amazon suggests is a sweet spot.
In other words, toss out all your emotions about the lack of value of your work and do the research to figure out what is a good price range for your genre.
It really is very simple. And then, if you have the price stated clearly, you can do those special one-day sales to see how well your customers can snort.
You set the perceived value of your work.
Do not set it with emotions and fear and self-loathing.
Pretty sure self-loathing is not a principle in business pricing economics. (Except for young writers in fiction. Since new writers gained this control, they have taken self-loathing of their own work into the gutter of pricing. Stop now. Just stop.)
The New Traditional Model of Perceived Value.
Here is where things get tough and I will not turn one person’s head, but I have to talk about it.
Intellectual property (IP) is what makes up all the pies and cakes in your bakery. Everyone got that?
IP has a value. (Yeah, Dean, we know, we know.)
But alas, you do not know at what level.
Ever wonder why over the last ten years traditional publishing contracts have gone to all-rights for the life of the copyright?
Ever wonder why it is almost impossible now to get books back from traditional publishers once you have sold all rights?
Because IP has a value. Not just a sales value of possible income earned. An accounting value to major corporations.
There are many, many companies now that are buying IP and have no intent of ever marketing it or publishing it or making it into a movie. They simply want the IP.
Yes, your IP. (Your pie, your cake.)
I’ll bet you didn’t know that there are a ton of major companies out there with the only job, the only reason they exist, is to value IP for other companies.
Don’t believe me? Simply Google “IP Valuation” and then do some reading.
THIS PRACTICE HAS ONLY BEEN AROUND FOR A DECADE OR TWO. Yeah, about the time traditional publishers stopped putting in even decent claw-back clauses for your rights and bought everything.
They bought your entire Magic Pie and they took it out of your store and they know how to value it. They do not care if anything is ever made. They need the value for their bottom lines in the accounting.
Your pie adds value to the big corporation base.
At the moment there are four or five ways that are basic ways that these valuation companies value your IP. But a couple of the sites said there are over 25 other alternative methods.
Trust me, traditional publishing, after grabbing your IP for next to nothing, leaving your bakery with your pie, know all the tricks of making your IP far, far more valuable to their bottom line than what they actually paid.
There is even one method called “Relief from Royalty” that allows the valuation to be made up in case they needed to sell the movie rights, or the translation rights, or whatever. And assuming all those rights did sell in this made-up “arms-length” scenario, that would be the value of your IP.
And did you know one major thing about IP??? It is a property and thus can, under certain circumstances, be deprecated by the corporation.
So they buy your IP for $5,000 because they promised you a movie. They now own it.
They value it under one of the many ways of valuation far, far higher than what they paid and get some major valuation company to sign off on it.
Then they start depreciating it to get the tax deductions on other money coming in. Only one minor way.
Another method is the “Venture Capital Method” which is a name for what I try to get writers to understand about the value of their copyright over the 70 years past death. This method basically values the possible future cash flow OVER THE ASSETS LIFE. And there is no adjustment to any probability of success. Just a wild guess as to what it might make over its lifetime. Yup.
Your wonderful pie is nothing more than an accounting trick.
(If you want to read one good article about this on the IP Watchdog site, it is here. But do the Google search. It will blow you away.)
— Never sell all rights. Never let your pie leave your bakery for any reason or any amount of money.
— Research and learn the common indie prices for your books, both paper and electronic. (Ignore traditional publishing prices, as you have just figured out, they sort of don’t much care any more.)
— Grow a sense of self-worth that your writing has value. Then treat it as it has value.
How your readers perceive your work is everything in this new world. Start making sure they don’t think of your stuff as cheap plastic doomed for the dollar store.
Oh, The Magic Bakey is definitely my favorite D.W.Smith story 🙂
Excellent! And shared far and wide.
IP valuation. Now that’s something new I haven’t heard you talk about. I’ll google that!
Dean, I hope that if ‘inner-tubes’ was a typo, you don’t change it. The visual is perfect 🙂
No typo. (grin)
This IP valuation practice by IP purchasers reminds me of the “new economy” mantra during the .com bubble. Through sheer luck in timing, I found myself right in the middle of it. I saw company valuations (in the form of stock) go through the roof for company after company that had no record of actual income. They couldn’t; they were simply too new. Everybody hopped on. But not me. I quietly read financial statements and watched founder after founder get turned upside down as vulture capitalists shut them out of their options just long enough to conduct the now infamous pump and dump, leaving the founder with worthless paper.
This IP thing is similar – but different. When they buy an IP asset to add value to their balance sheet, many of those valuations have nothing to do with the only thing that counts: income. Sure, they’re getting away with it, but the bottom line is that much of that IP is not paying dividends and has no resale value on a market. They can’t trade that copyright inventory for cash money. (Unlike the music publishing business where copyright inventory is bought and sold on a regular basis – but it’s based on potential INCOME.) In short, it’s a scam asset valuation unless the property is generating income. And it will bite them in the ass eventually.
So there’s that. As to pricing, in the beginning, I released my books at 2.99 because that’s what Amazon said to do. And every book sold a few copies at that price and then dropped off. Then I saw their imprints come out at 4.99. Why would they sell at 4.99 when they were telling us to sell at 2.99? Hmmm…. Like most new indie writers, I did the 99 cent thing. I did the free thing. Then I read your posts and looked at Data Guy. So I set my prices at a respectable level and have kept them their. My sales are a virtual flatline, which is not really new, but then something interesting happened. For the first time, one of my books sold for 4.99. Somebody perceived that my book was worth 5 bucks to read. Just one – but it was an important moment. It was like breaking the sound barrier.
But there is still the problem of perception. The value must be perceived. While a low price can kill that perceived value, a respectable price is not enough to establish it. In our world, I think a lot of that perception comes from things that are either beyond our control or we don’t understand how to access. This leads right into marketing. Because perceived value is highly influenced by things like stars and reviews, social validation in the form of editorial blurbs from various sources – the NYT still being the most valuable. And so on. Basically, a lot of perceived value comes from outside sources giving our books a stamp of approval. There is still this paradigm where buying a book is seen as a high-risk outlay even though my book costs less than a Starbucks and will last much longer. (Thank you Kristine.) But until an author is a Trusted Brand for some audience, it’s very difficult to get the perceived value factor in motion.
Which is where I’ve been for the past three years now. This is the most important part: whether I’ve sold them for 99 cents, put them out for free or sold them at a respectable price, my brand is not yet trusted for any definable audience. Yes, good story, good covers and good blurbs are the beginning. But I’m not sure they’re enough. Many indies have figured out the brand-building thing and I’m guessing they’ve spent real money doing it. I dunno. But I do have this feeling that becoming a Trusted Brand is both imperative and elusive. I have yet to figure it out.
Mike, the trusted brand comes from quality stories over time. No gimmicks, not tricks, no fancy marketing tools. Just good storytelling, one reader at a time.
Scary, and not fast as so many want in shortcuts, but as your other examples laid out clearly, there are no shortcuts. Good storytelling one reader at a time.
Edward M. Grant
Yeah, I’ve found that price makes no real difference to my book sales so long as they’re priced in a reasonable range for their genre; $0.99 doesn’t magically increase sales, and $4.99 doesn’t eliminate them.
And, at a personal level, I generally avoid $0.99 books these days, unless it’s a temporarily discounted price. I’d rather pay $5 for a book I like than waste an hour on a $0.99 book before I toss it aside.
That’s not to say that, if a friend tells me ‘you must read this book!’ and it’s only $0.99 I won’t feel like I got a good deal. But then I already know I’ll probably like it.
Exactly, Edward. Lots of studies done that one of the most powerful sales tool of books is word of mouth. And a $5 book discounted to 99 cents for a short time, like a week, will draw in buyers who might end up buying your other books.
Martin L. Shoemaker
Which workshops do you have that would guide us on pricing?
Not a one. Just do the research in your genre.
D J Mills
Yes! Intangible Assets. 🙂
Readers could start with https://en.wikipedia.org/wiki/Intellectual_property_valuation
Thanks, DJ. Good place for those to start because where I linked to will just confound most. Although today a professional writer and I had a very long discussion about the impact of this change on the valuation of IP in estates and how to get IP through estates without killing the poor souls who inherit your IP. (Trust me, many judges are understanding this new valuation stuff and if you have enough IP being dropped into a probate, it would not be unlikely that a firm is hired to evaluate it for the purposes of estate valuation and taxes. (oh, oh)
I actually think Kris and I need to do an ADVANCED, ADVANCED BUSINESS STRENGTHS WORKSHOP. We could have in it cover areas as this IP evaluation, IP in trusts for estates, movie negotiations, shopping agreements, profit/loss concepts in publishing, corporation valuations and tax shelters, and so on. We cover a bunch of this in different ways in the Master Business Class here on the coast, but not everyone can make it to the coast.
Maybe I should ask this on my blog to see if anyone would be interested in that level of knowledge about the publishing business. I kind of doubt there would be many takers. Most writers, sadly, are like corporations, more worried about what they make this month than long-term business thinking, which is where all the real money is at.
*raises hand* Actually, I would definitely be interested. It’s been too long since I’ve done any type of estate valuation, and I’m trying to draft a revised estate plan for myself since I now have IP.
I’d be right there for that. Hell, I’d sign up for it tomorrow, even though I’ve already spent my education budget for the first two quarters of ’17, because I’d be worried about it disappearing.
I would definitely sign on for this class, Dean! Please consider doing it.
sounds very, very good. That would raise my hand, too.
and/or…”WMG Live – from the coast!”
Hi Dean I have a question about the “Venture Capital Method” of IP valuation. One of my poor selling books sold only 30 copies in its first year. If I calculate its lifetime sales, it only comes to $13,000. Assuming I’m making $100 in a year and assuming I’m 32 years old who would live up to 92 years. So the calculation somewhat goes like $100 per year x 130 years (60 years of my life + 70 years after my death) which equals to $13000. So my poor selling book too is worth thirteen thousand dollars. And this is assuming word of mouth doesn’t develop critical mass or I’m offered a movie deal. Have I valued my book correctly as per this method? And so by this method an advance of $15000 from a traditional publishing would be worth even if I sign away all rights?
Prasenjeet, No. There are so many other factors involved in the valuation, even with what I understand of that method. You simplified it and didn’t account for a ton of things.
So no, your thinking is wrong on this one. If you sold an all rights for $15,000, you think traditional would only value it at that number? Of course not.
The key is the reason for the valuation. For estate purposes, if every novel you write over your lifetime and you write 100 of them, is valued with that simplistic method, your estate would be dealing with an inheritance of one-point-three Million value they would owe taxes on. Oh, oh. So you would want an evaluation far less than even that simple calculation.
However, you have a corporation and it has IP, you are going to want that IP to be valued much higher for valuation for the corporation purposes.
As I said, this area is growing and becoming critical in so many ways beyond worrying about the check next month from Amazon. Scary, but also fun for us geeks about this stuff. (grin)
So reason for the valuation is critical. You used a way of giving your IP value that has no other factors involved and thus led you to the conclusion you could give the IP away for $15,000. Oh, oh…
And you give it away and they make a movie out of it and it becomes the next Game of Thrones and you sit and watch without making a nickel. You would have wished you had done a different valuation, or at least added in some factors. (grin)
Yeah, I think this is why you need more ways to value your IP. You mentioned “Relief from Royalty” method. I think that method you’ll need if you are deciding whether to license movie rights or translation. I guess licence for a single movie in itself would be half a million dollars. And licensing ten movies… Twenty movies… 🙂