How Electronic Resources Really Get Priced

The recent letter (pdf) from the University of California Digital Library (CDL) about price increases  proposed by Nature Publishing Group (NPG) and the response from NPG have raised a storm of controversy and rebuttal (pdf). To me, the mess is symptomatic of a communications failure between publishers and librarians.

In the interests of promoting better library-publisher understanding, I've decided to reveal some secrets from both sides.

Libraries: Here's how publishers set pricing for electronic resources.

Once upon a time, pricing for library materials had a relation to the cost of their production. Even before the internet came along, this started to change. Printing costs fell, and more and more of the production costs of a good-quality journal were "first-copy" expenses. With electronic materials, the marginal cost of servicing an additional subscription became almost zero. Pricing then became a game whose object was to sustain existing pricing, along with "reasonable" annual increases of a few percent per year or so. (Nature Publishing translates "a few" to "7".)

The game was most difficult for very large or complex institutions. The value of a top medical journal to a US medical school is huge; the value of the same journal to a vo-tech school would be much smaller, but still significant. A medical school in a developing country will also need the journal, but it's not fair to ask them to pay the same as a US school. Differential pricing helps a publisher capture value while still extending access to customers who might otherwise be able to afford the journal. But how, then, to set pricing?

I learned the secret of e-resource pricing through long hours of research (spent mostly in bars). Here's how it works:

1. Find out how much money the customer has.
2. Set price somewhat higher than that.
3. After hard bargaining by customer, offer discount to closely match customer's available funds.
4. Swear customer to secrecy; you can't give that price to everybody!
   

In times of budgetary cutbacks, this pricing mechanism works to a library's advantage. A library that needs to cut its electronic resource expenditure in half simply needs to disclose to salespeople the fact that their funding has been cut in half, cancel the subscription...and wait for panic to set in.

The library's leverage will never be greater. It's much more painful for a digital publisher to lose an digital customer than it is to lose a print customer. That's because the publisher has to spend money on digital publishing infrastructure when its customer base grows, but doesn't get anything back when a the customers go away. If anything, the publisher will have to spend more on sales to try replace the customers.

Oh and by the way, libraries, this all works easier if things are quiet- when you agree to give a publisher a higher price than you wanted to, swear them to secrecy- you can't afford to give the same deal to every one of your publishers!

Publishers: Here's how to get libraries to cave on pricing

Many librarians suffer from feelings of powerlessness. They are prisoners of their patrons' needs and desires. They are captive to changing technologies and archaic standards. They are trapped in arbitrary budget gaps. And they are stuck in endless committee meetings.

Libraries are thus willing to spend a great deal on things which offer escape from powerlessness. They dislike monolithic packages that bundle content together, even if they save money. The current reality in libraries is that budgets have been cut. Publishers need to give their library customers options that help them deal with budget cuts. The smartest publishers can figure out ways to help libraries cut costs and free up funds currently spent in other areas.

When I was developing an electronic resource management service for libraries, I had this recurring nightmare that e-journal publishers would someday make it as easy for libraries to activate and maintain an e-journal subscription as Apple's iTunes makes it to buy and maintain a song. My software would instantly become worthless. Just kidding- I slept soundly knowing it would never happen in a million years.

Perhaps NPG confused powerlessness with weakness and saw an opportunity to force CDL to act like the other prisoners. Perhaps NPG never saw the movie "Cool Hand Luke".
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