Anyone spending any time at all on Amazon will notice the penny books for sale. And there are not just one or two copies for sale but sometimes hundreds of copies. Do people really make money selling books for a penny? Why do they list them for only a penny? I know curiosity drives some people to pursue an answer because they are wondering if they are missing a sales opportunity. The one sure way to get flamed in the Amazon forums is to ask these questions there. You will promptly be scolded for not searching for an answer prior to posting the question. After all, the logic goes; This question is asked about once an hour on the forums and has been answered hundreds of times. Just look it up!
The only problem is I have looked it up and the explanations given in the "answer" are partial answers at best. So I have decided to stick my neck out, go on the record, and attempt a more thorough answer. After all, if you are an expert in online book selling you should be able to answer this one right? It's like the number of angels dancing on the head of a pin for a theologic or why the Detroit Lions can not win a super bowl for a sports analyst (or win a game for that matter). So sit back, relax, and let me explain.
The first concept to understand is a product called a re-pricer. This product will check each listing you have on a venue like Amazon and compare your price with all other current listings and then update your price for that item based on rules you set. You can choose for example to be the cheapest, the most expensive or in the middle of the pack price wise. You also have some control over how often your re-pricer will run. This is typically a stand alone product you purchase, a web based service, or some avenues even have it built in like Alibris.com. The tool is based on the theory that people will buy the cheapest product that meets their needs.
This has been validated to a great extent by the new media venue Glyde.com which recently went online to compete with larger retail sites. When you go there to buy you will only see the cheapest listing for any one product in a particular condition. If you look for a book you will see one price for new and one for excellent for example. When you list an item to sell there you are given a recommended price for that item at its condition and when you enter your desired price they give you your location in the queue. Until you are the cheapest one (first in the queue) you will not have a chance at a sale.
The second concept understands understanding the priorities in the day-to-day activities of a large commercial online bookstore. Let's say you have 20,000 books online and are selling 100+ books a day. You get paid when books sell. This means you have to list books to sell them. Once they sell you have to get them in the mail ASAP to keep Amazon and your buyer happy. The more you list the more you sell and the more you make. That is your priority and to keep overhead down you hire just enough staff to ensure you get your priorities done in a timely fashion.
The last concept to understand is acceptable profit. What I mean by that is where do you look to judge your success? Do you feel like a failure if you do not make a profit on each item sold or do you look at the overall numbers and judge based on them. When I was running an on-line bookstore I was happy when overhead was under five grand and total sales were over fifteen grand. I figured if I lost a few dollars on a few books a month it was acceptable given my overall profit. After all no one is perfect.
Now let's walk through the scenario. You have set the re-pricer to run four times a day on your inventory inventory. You have left it configured with the default value of $ .01 for the bottom price and you want to be the cheapest by $ .03. You then leave your inventory in the hands of the re-pricer and concentrate on listing new books. All the books you list for sale start out with a price of at least $ 4.00. One particular book you have listed has a competitor that is also running a re-pricer set to be the cheapest by $ .02 and also left the default of $ .01 as the bottom price. Your re-pricer sees his price at $ 3.98 and reprices your copy of the book to $ 3.95. His re-pricer notices on the next pass that you are cheaper and lowers his price to $ 3.93.
This process continues until you are both at $ .01. You do not really notice though because you would have to allocate time to look for this. Once identified you would have to pay someone to find the book on the shelf, de-list it from your routes and then pay to have it disposed of. You are not only paying for this whole process but you are also diverting resources away from listing new books, so reducing the number of books you sell. The cost to you then to eliminate the penny books is much more than selling the book and shipping it at a penny. When shelf space becomes tight and you need to eliminate the older books not sold to make room for new ones that will sell you systematically eliminate the lower priced older books and dispose of them. I used to do this once every six months or so. By doing it once or twice a year you can optimize the process and keep the effect on your sales to a minimum.
In summary, that is why there are penny books. No one starts out selling books at a penny. It is just the results of using the re-pricer technology. So relax, you are not missing anything really. There is no secret of the penny books. One more thing before I go. The humorous part to the re-pricer is the newbie book seller that typically checks the price of his hundred or so books everyday. He notices every time he lowers his price you soon lower yours. He then tries different strategies like lowering the price to near nothing and then setting it very high. He begins to take your actions personally. Imagining you are setting at your computer day and night changing your price just to annoy him. I have actually received email from these sellers almost threatening me bodily harm. I had to explain they were trying to outsmart my re-pricer and it would always win.