With due respect to Manfred Mann’s Earth Band, I just came across a great example of a business so blinded by their stale model that they cannot respond rationally to competitive threats: textbooks.
Anyone involved in education, from students to professors to parents, knows that textbooks are exorbitant. There are several reasons for these prices:
- Market size: It is easier to sell 100MM Harry Potter hardcovers for $20 than a chemistry book that sells 20,000 copies.
- Cost of goods sold: It is more expensive to put together an accurate textbook with data, graphs, visuals, and sources, than to have a single author write a novel, perhaps with the help of an editor.
- Demand: This is the most important reason. As long as publishers know that the professor can require this textbook, they can charge far more for it than if students have options.
Over the last several years, the market for student source material, the job that the textbooks do, has created many such options, thanks to technology.
- eBooks provide a lower-cost version of the same textbook.
- eBooks also make it far easier to transfer books from one owner to another. They also make it possible to copy them illegally. At high prices, the law is unlikely to stop many.
- The Internet makes it easier to find people who want to purchase or swap used textbooks.
- The Internet creates opportunities for scale textbook-rental business models, like Amazon’s Textbook Rental.
- Last, but most important, the Internet has created a mass of free source material, from YouTube to wiki pages to interactive applications to Coursera.
In short, technology has created competitive alternatives to pricey textbooks.
Given the significant increase in competition, the expected response of textbook publishers should be to lower prices to make their product more attractive.
And yet, surprisingly, my wife, a brilliant PhD who is teaching a psychology course this fall, showed me that the textbook she wanted costs $220! Apparently, textbook prices have risen to nearly 3x their already expensive prices.
Of course, my wife chose not to use it for her college students:
- She didn’t want to spend that kind of money, even if it is reimbursed by the university.
- She didn’t want to require students to spend that kind of money.
- She didn’t want to encourage publishers to charge those absurd prices.
Granted, the textbook is a good book, with good visuals, charts, sidebars, and all of the things that make a textbook appealing. But it simply isn’t worth three times the price.
Given the competition, why would a textbook publisher choose to raise the price of their product?
The answer, I find, comes from the father of disruption, Clayton Christensen. In his excellent Innovator’s series, Christensen explains the response of established companies to competitive threats from below.
When attacked head-on with better products, entrenched incumbents have the resources and relationships to fight back and win. But when attacked from the bottom, with cheaper products that aren’t quite as fancy or feature-laden, the incumbents’ response normally is to scoff, “those products aren’t anywhere near as good as ours!”
As the competitor starts to improve, and eat at the bottom end of the incumbents’ market, incumbents are quite happy to let that market go. Because it is the bottom end, the profit margins there are lower. Leaving the bottom end to the new entrant actually strengthens the bottom line of the existing companies, as they can have higher prices with much higher margins serving the “best customers.”
Eventually the new entrants’ products become good enough to steal even the best customers at a much lower price, leaving the incumbents to wither and die.
Thus, incumbents react to cheaper but simpler products not be lowering prices but rather by raising them as they “move up-market.”
I believe the exact same process is happening here. Students – even those not pirating digital copes of books – have many options, from book rental to used eBook purchase to free or low-cost material online.
Is the textbook better? Probably. It certainly was initially. It is far better structured than the mass of pages, visuals and videos spread all over the Internet. Is it three times better? I suspect not.
When the response to competition is to raise prices and “let them have those weak customers”… sound the alarm.