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EDITOR'S NOTE:
Denise Little

INTERVIEW: JULIET MARILLIER

STORIES:
Kristine Kathryn Rusch:

Research and the Research Librarian

Casey Chapel: Lost Luggage
Yvonne Jocks:
A Solitary Path
Jean Rabe:
Misery and Woe
Petronella Glover
: Quebec Romeo Victor

Dayle A. Dermatis
: This is the World Calling
Deb Stover
: The Enchanted Garden
 

SERIALIZATION:
Emily Brontë: Wuthering Heights
(Part 1)

RECOMMENDED BOOKS:
C.S. DeAvilla

LOVE'S PHILOSOPHY (POEM):
Percy Bysshe Shelley

ON A DATE WITH JANE AUSTEN:
Lezli Robyn and Ellen Josina Lowry

WRITER'S CORNER:
Denise Little:
The Profit Motive
Julie Pitzel: You Read That: Genre
Shaming and How to Deal With It

 

THE PROFIT MOTIVE

by Denise Little

 

Publishing is a business. As much as writers everywhere would prefer that it was a collective or, even better, a charity, almost all publishing companies are run to make some corporate entity a profit. Virtually every book a publisher buys has to stand a chance of at least breaking even, and hopefully earning some money, or the deal never reaches the contract stage. So how do you, the author, figure out where you stand in your publisher’s pursuit of profit? Are your books making the publisher a fat chunk of change, or are you in for some nasty surprises when it comes time to negotiate the next contract? How can you tell?

Some writers feel that if they are earning royalties from a project, the book is probably profitable. While that is certainly a worthwhile goal for every author, and a good sign that your book is profitable, it’s not necessary for some books to earn out and start generating royalties for those books to be profitable for the house. This is especially true for so-called “big” books. With a large advance and big print runs, it takes a whole lot of copies sold to make the project profitable—but not necessarily as many as it takes to make the project generate royalties. Publishers, in fact, will often knowingly pay a bestselling author more in advance than that author can expect to earn from eventual royalties, in the effort to make the author happy, and to get them or keep them working for the publishing house. Other books, usually books with small advances, may not be profitable until well after the royalties start coming in from the project. This may seem counterintuitive—but it’s a reality of publishing. Since royalties aren’t a foolproof way of knowing if you’re making money for your house, how can you tell? One of the best ways of figuring out if you’re in the red or in the black for your publisher is to know the mathematics of publishing.

Publishers estimate if a book is going to make a profit for them prior to purchasing it by producing an estimated profit and loss sheet, or a P&L. An estimated P&L works out all the anticipated expenses of a given project, and all of the estimated income from it, and comes up with a figure called a break-even point—the number of copies the publisher has to sell for the book, under the publishing scenario it has in mind for the project, to start making money. If the break-even point looks achievable, then the publisher makes an offer on the project.

This isn’t the only P&L a publisher runs on a given book. After the book is published and has been on sale for enough time, the publisher will often run an actual P&L, to see if it made or lost money on that title. Both P&Ls are run using the same formula. The only difference is that the estimated P&L is run with estimated numbers, and the actual P&L is run with real numbers from the book’s market performance and the actual expenses it took to get the book published and positioned in the marketplace.

Every company has its own formula for figuring out a P&L. But the logic behind determining that formula is the same from place to place. So here are all the basic components that go into figuring out a profit and loss statement.

***

Gross Income Calculation

To figure the gross income a publisher has to work with on a particular book, this is the formula: Print Run x Cover Price x Sell-Through Percentage (or copies sold ÷ copies printed) x Average Discount = Gross Income

As was indicated earlier, publishers generate a P&L prior to publishing a book by using estimates. The figures used to generate the final P&L a couple of years after publication are actual. Since the pre-publication P&L is generally the most important for authors, that’s what we’ll talk about here, though the formula remains the same for both calculations.

1.    Estimated print run. This is the total number of copies the publisher believes can be distributed on this book. The figure is supplied by the sales department, based on the number of copies distributed for the author’s previous books, both in print and electronically. They’ll look at the sell-through percentages of the author’s recent books to estimate if the initial order for this book will go up, down, or stay the same. In other words, if the prospective author has written three previous books, and the first book distributed 20,000 copies, the second 25,000 copies, and the third book 40,000 copies, then they’ll guess that this new book, the author’s fourth, might get out 45,000 copies. On the other hand, it the author’s numbers have been dropping over those three books, the publisher will use a conservative estimate that’s maybe a third lower in number than the most recent release. This is easiest for the publisher to do if the author has published all their books with the same publisher. The figures are at their fingertips then. But even if the author is new to the house, the publisher will try to get enough information on the competing publishers’ releases to make a good estimate of the author’s track record. If this is an established author’s first book with a publisher, the sales people will call national accounts and ask for sales figures for the prospective author’s previous works from other publishers. They’ll use these to form a pretty close estimate of the author’s previous sales record. Whether the author has published with them or another house, the estimated print run for the P&L will be based on the author’s actual past performance if the author has previously published titles. For first time authors, the publisher will use an average print run generated by other first-time writers of similar books for this publisher.

2.    Estimated cover price. This is the retail price that the publisher plans to charge for the book. Hardcover novels these days typically run somewhere between $20 to $28, trade paperbacks run $13 to $18, and mass market paperbacks $6 to $9. The ebook version is usually about 70% of the paper version. The estimated cover price is based on the going rate for similar books in the marketplace. If the publisher actually based the cover price on prospective costs, first novels would probably cost a lot more than bestsellers. But competition in the marketplace actually puts a downward pressure on non-bestselling books, and an upward pressure on blockbuster bestsellers. Publishers put higher prices on books by authors that they know readers will purchase no matter what, prices as high as they think the market will bear. They need the money—and the profit. New, higher price points will debut on novels by authors like Dean Koontz, Tom Clancy, Stephen King, Robert Jordan, Nora Roberts, and so on. For authors who are not bestsellers, publishers must charge a competitive price in order to encourage new readers to purchase these gems, discover the budding author, and hopefully fall in love and become a fan of the author’s work for life. For a number of reasons to be discussed later, the per volume cost to the publisher is often higher for new writers than it is for bestsellers. Added to the pressure to keep prices low, this makes it tough for publishers to make money on mid-list authors.

3.    Estimated sell-through percentage. This is the number of copies out of that estimated print that the publisher believes it will sell, divided by the total number of copies printed or distributed electronically. Typical sell through percentages on bestselling authors run as high as 80% in mass market, while a typical mass market paperback by an established mid-list author runs about 55%, and a first author typically runs about 40%, and can run as low as 5%. The reasons for the differences have a lot to do with visibility. A new bestselling author’s book will be stacked up in massive eye-catching displays at the very front of the store or featured on the front page of the on-line vendor, usually with signs announcing the date of its arrival placed there prominently for weeks before it is shipped. Online and traditional vendors will take prepaid orders for the book, and many copies are sold before the book even arrives. For both bestsellers and established mid-list authors, publishers will often announce the title and release date of the author’s next book in the back of previous books by that author, so readers will know what to look for and when. Both bestsellers and established mid-list authors have previous sales records that help buyers to plan how many copies to put in each store, matching the book order with some degree of accuracy to the expected demand for the books. First-time authors have little advance advertising, no dedicated fans hunting for their work, and their books are shipped in small quantities that are only displayed spine out somewhere in the section for that kind of book, which is usually not the most visible place in the store, or at the low end of a typical online vendors’ book browser. The orders for that book are based upon intuition and guesswork, and the most well-intentioned buyer can be dead wrong. Surprise bestsellers can be dramatically under-ordered, and books that have high expectations can tank. Both scenarios cause terrible problems for publishers.

4.    Average Discount. Publishers don’t get to keep all of the money that a consumer pays for a book. In fact, they only get to keep about half of it. The rest goes into the booksellers’ and wholesalers’ pockets. Typically a publisher sells a book to a bookstore at 48-60% of the cover price, depending on the number of books purchased by the vendor. It sells a book to a wholesaler at 40-52% of the cover price. And it sells books direct to the consumer at 80-100% of the cover price. So a typical P&L assumes a roughly 50% discount when figuring gross income.

***

Examples of Gross Income Calculation

Here’s the formula for figuring gross income again: Print Run x Cover Price x Sell-Through Percentage (or copies sold ÷ copies printed) x Average Discount = Gross Income

Here’s the math for a new blockbuster bestselling original paperback novel:

2,000,000 x $8.99 x (1,600,000 ÷ 2,000,000) x 0.5 = $7,192,000 gross income

Here’s the math for a nice low-level bestseller paperback:

50,000 x $6.99 x (30,000 ÷ 50,000) x 0.5 = $104,850 gross income

Here’s the math for a typical first science fiction or fantasy paperback:

18,000 x $6.99 x (5,000 ÷ 18,000) x 0.5 = $17,475 gross income

***

Expenses Calculation

Now that we know our gross income, we get to figure out what our expenses are. So here are the typical expenses of publishing a book: (Print run x cost per unit) + corrugation + shipping costs + overhead + publicity and marketing + author’s advance and royalties + copy editing costs + typesetting costs + proofreading costs + cover art = Expenses

1.    Print Run X Cost Per Unit. Publishers have to pay to print every copy of every book they make, regardless of whether or not they sell it. They have to buy paper for the pages, cardboard and possibly cloth for the binding, have the book laid out at the printing factory, printed and bound with a cover on it that can be plain Jane or eye-poppingly expensive. Some things that go into figuring cost per unit are the same for each title, no matter how many copies are produced. This includes the initial cost to set up the printing presses to print the book and its cover, including things like making printing plates for the pages, having molds carved for any embossing, die-cutting, or foiling needed for the covers, getting good color separations for printing the book’s cover art, printing the initial run of cover flats used to sell the books for accounts, and so on. Publishers spend roughly $3000-$5000 on these set-up costs, whether they are printing 10 copies of a book or 10,000,000. That means the set-up cost, on a per-book basis, can be negligible for a bestseller, but will be a big percentage of the unit’s price tag on a mid-list title. Add that into the higher overall sell-through percentages of bestsellers, and you can see why publishers find bestsellers so profitable. Since publishers sell almost all books on a fully returnable basis, all printed copies that aren’t sold are a total loss for the publishers. Unsold hardcover books and trade paperbacks are returned to the publisher and can be resold to vendors, helping to reduce the costs lost to low-sell-throughs in given locations and redistribute the books properly to maximize sell-through, but mass market books are stripped, and only their covers returned. Every single shipped copy of a mass market that isn’t sold becomes something that the publishers paid for that is lost forever. Low sell-throughs eat away at a publisher’s profit margin faster than anything else does. While economies of scale are the rule in publishing, some book production costs are fixed per unit, no matter how many books are produced, such as the amount of paper it takes to print each volume. It costs twice as much to buy paper for a 600-page book than for a 300-page book, no matter how many copies you print. This is why publishers are often adamant about enforcing contracted word counts. And there can be additional printing costs that can run up the price per volume—slick paper, photo sections, acid-free paper, color printing within the book’s pages, line art on the pages, special book page design and layout, and so on. It typically costs about 65 cents per unit to print a standard-sized mass-market paperback with a respectable print run, and about $2.50 to make a medium-sized hardcover novel. Depending on how fancy the cover is, the base cost per unit can vary substantially. Every special effect that a book has on its cover—foiling, die-cutting, embossing, special texturing, matte finishes, holograms—adds to the price both by requiring more material, and by requiring another run through the printing presses for the covers, which adds to the time it spends in the presses and the labor to make it. Basically, you can expect to add about 7 cents per unit for each special effect on the cover, with a base cost of about a dime per cover.

2.    Corrugation. Publishers have to make cardboard boxes to put the books in before they can ship them. That runs roughly 10 cents a book. Some bestselling books also have special cardboard display cases with pretty custom printed headers. That adds some serious money to corrugation costs for those books.

3.    Shipping Costs. It costs money to get a book from the printing plant to the vendor. Whether shipped by UPS, USPS, FedEx, or truck, plan on at least 30 cents a book for mass markets and a dollar a book for hardcovers. Some hardcovers have a freight pass-through (FPT) included in their cover price. That means that the bookseller is invoiced at a lower price than is listed on the cover of the book to help offset the price of shipping the book. If the book has this (it will say FPT right by the price on the book jacket), that alters the shipping costs for the publisher by about 50 cents per book. With the percentage of ebooks rising every year, the cost is actually dropping overall.

4.    Overhead. A publisher has to pay for the real estate of their offices and warehouses, and for the salaries of all the people who work for the company, and for the electric bill, and the water bill, and for office supplies and office equipment, desks and computers and carpets, phone bills, travel expenses to send their sales reps around the country selling books and their editors to conferences and conventions, and all the other basic business expenses that are a part of publishing—things like BEA and regional book shows, sales conferences, and so on. They include those expenses in each book’s P&L as an overhead calculation, which is computed as a flat percentage of the gross income of every book printed. That overhead expense usually ranges from 10% to 25% of the gross income of the book, as computed in the P&Ls. Each publisher sets its own overhead percentage, and it varies from house to house. Because overhead is computed as a flat percentage of gross income, it is easy to see why bestselling books are so important to a publisher’s financial health. The more gross income a book has, the bigger the chunk of the overhead it picks up.

5.    Publicity and Marketing. Even a book that has absolutely no visible publicity has a significant publicity and marketing cost. This calculation computes the cost of author tours, advertising, launch parties, consumer sweepstakes, and so on, all visible publicity expenses, but it also covers the cost of printing advance covers and catalogues used to sell the book to the various accounts, giveaways to the accounts to draw attention to the title, printing the order forms that the accounts use to send in orders for the books, assembling and mailing the sales kits sent out to all accounts, and presenting the book at sales conferences to the sales reps. For a mid-list book, just those costs alone run around $2000-$3000 dollars. For a big bestseller, when you add in national advertising, author tours, and all the other perks and responsibilities of bestsellerdom, the publicity and marketing costs can easily run to a million dollars.

6.    Author’s Advance and Royalties. This is something every author knows by heart. What they may not know is that, when preparing an estimated P&L prior to buying a book from an author, this cost is tabulated after all the other expenses are computed, and the author gets either whatever money is left after expenses are subtracted from the gross profits—or, especially for some first and mid-list books, whatever minimum amount the publisher thinks the author will accept. Publishers lose their shirts on first books and many mid-list books, so the advances for these books, if it accurately reflected publisher costs, would often be in negative dollars. But publishers realize that they can’t develop the next blockbuster author without buying books from and working with new authors, so they belt up and pay a small advance, even though they anticipate losing money on the title. It’s a gamble they hope will pay off once a talented author’s career begins to take off.

7.    Copy-editing Costs. It costs roughly $3000 to get a typical novel in reasonably good repair copy-edited and prepared for the printer. Non-fiction books, books that require significant correction and rewriting, legal vetting, or significant fact-checking or field testing (for things like cookbooks and car repair books) can cost quite a bit more. Other freelance costs add in here, including the cost of writing copy for the book’s cover, and the cost of pulling and editing a blurb for the front matter if the book is a paperback (some houses pay freelancers for this, others have it done in-house by the editors).

8.    Typesetting Costs. It costs roughly $2000 to get a book typeset and ready for the printing presses and various eplatforms. With increases in automation and the use of electronic media instead of scanning, this cost is one of the very few that is actually dropping instead of rising.

9.    Proofreading Costs. It costs about $1000 to get a book proofread and slugged (this refers to checking the typeset manuscript against the copyedited manuscript to make sure all suggested changes were successfully input.).

10.  Cover Art. Beautiful book covers can be generated in-house by the art department, thanks to the magic of computers, using machine lettering and color backgrounds, for essentially free. But if the cover is to have an image created in addition to type, something that shows a scene from the story, then a professional artist needs to be employed, and that doesn’t come cheap. Commissioning someone really brilliant and well known, like Michael Whelan, to do a painting for a book cover, for example, might cost $20,000 or more (cover paintings, even by the same artist, vary in price, depending on whether it’s a front cover only or full wrap-around art, and whether they do the lettering for the cover or whether the publisher provides it). Other artists run roughly $3,000 to $15,000 for a painting, depending on the quality of their work and their past successes in launching authors’ careers. Since most novels have original art incorporated into their covers, plan on including at least $5,000, and maybe more to pay for cover art. If the title and author’s name are hand-lettered for the cover rather than computer generated, that can cost an additional chunk of change, usually at least $1,000.

You may have noted that a lot of these costs are fixed, regardless of the number of copies printed. That means that bestsellers have some nice economies of scale that are built into their P&Ls. In addition, as previously mentioned, they pay for the lion’s share of publisher overhead. In many publishing houses, half the publisher’s overhead expenses are taken care of in the P&Ls of the house’s bestselling author.

***

Examples of Expenses Calculation

Here’s the formula for Expenses again: Print run x cost per unit + corrugation + shipping costs + overhead + publicity and marketing + author’s advance and royalties + copy-editing costs + typesetting costs + proofreading costs + cover art = Expenses

Based on a publisher overhead calculation of 15%, here’s the math for a new blockbuster bestselling original paperback novel:

2,000,000 x 1.00 (0.65 for the book plus 0.35 for a really fancy cover) + 200,000 + 600,000 + 1,078,800 + 500,000 + 2,000,000 + 5,000 + 3,000 + 1,000 + 10,000 = $6,406,800

Here’s the math for a nice low-level bestseller paperback:

50,000 x 0.75 + 5,000 + 15,000 + 15,728 + 10,000 + 15,000 + 5,000 + 3,000 + 1,000 + 10,000 = $107,228

Here’s the math for a typical first science fiction or fantasy paperback:

18,000 x 0.65 + 1,800 + 5,400 + 2,621 + 2,000 + 4,000 + 5,000 + 3,000 + 1,000 + 5,000 = $36,521

***

Calculating Profit using Gross Income Calculations and Expense Calculations

Here’s the math for a new blockbuster bestselling original paperback novel:

Profit = Gross Income – Expenses. Net Profit for publisher: $785,200

Note that the bestselling author got a $2,000,000 advance, and the gross income covered $1,078,800 in publisher expenses, and yet the book still made a nice profit for the publisher.

Here’s the math for a nice low-level bestseller paperback:

Profit = Gross Income – Expenses. Net Loss for publisher: -$2,378

Note that this author got a $15,000 advance, and covered $15,728 in publisher expenses, and showed only a small loss on paper. That overhead calculation means there’s really a bit of padding in a mid-level project, before the book starts dripping actual red ink for the house. The publisher would have been reasonably happy with these results.

Here’s the math for a typical first science fiction or fantasy paperback:

Profit = Income – Expenses. Net Loss for publisher: -$19,046

Note that the author got a $4,000 advance, and covered only $2,621 in publisher expenses, and yet lost the company nearly $20,000 dollars. Even with a low advance ($4,000), cheap cover art ($5,000) and a plain Jane cover, that scenario bleeds red ink, and there’s almost no way around it. The fixed costs of getting a book produced, and the low sell-throughs typical of less visible projects, combine to mean that almost every beginning author’s books cost their publisher a lot more than the house stands to earn.

Lest you think that I’m making these numbers up to prove a point, I took all three examples from actual books I’ve worked on, typical of their kind—rounded off, of course, to make the math easier.

To do your own estimated calculations to see if you make your publisher money, you need your royalty statement.

Here’s the formula: Your Cover Price x Copies You’ve Sold x 0.5 = Your Estimated Gross Income

We don’t need a sell-through percentage to figure gross income from a royalty statement—the number of copies sold is printed on the statement, though reserves held against returns and late returns from accounts can make this calculation less than accurate until at least two and more probably three years after a book’s release.

Your Print Run x (0.75 for a mass market or 2.50 for a hardcover) + (Your print run ÷10) + (Your Print Run x 0.3 for a mass market or 0.75 for a hardcover) + (Your Estimated Gross Income x 0.15) + Your Advance plus any royalties received + 11,000 + however much you think the publisher paid to publicize your book on top of basic expenses + $3000 if you recognize the name of your cover artist and feel smug = Your Estimated Expenses

Your Estimated Gross Income – Your Estimated Expenses = Estimated Publisher Profit

This number will result in a very rough guess as to the kind of money you make for your publisher. As I said, this is only an estimate. Every publisher has their own formula for doing this, and rising postage costs, paper costs, and fuel costs can change these numbers dramatically.

Several things, like subrights sales to book clubs, foreign editions, and audio companies, can put some nice dollars into your gross income not dealt with here that can help make a marginal book quite profitable. And if you’ve got hard/soft/ebook publication of your work, the expenses per book are reduced by spreading them out between formats. Most hard/soft/ebook books use the same cover art for all versions, and need to be copyedited only once, for example. So this basic calculation needs to be run twice, once for each version, pulling out or reducing the appropriate expenses of the paperback version, and then the totals for the formats added together, before you can guess if your book is profitable.

Know that publishers don’t expect to make a killing off of genre writers—on the whole, their expectations are that you’ll break even after your third book, and demonstrate a rising number of sales after that. Even if it looks like your books aren’t profitable, it might not be cause for concern. Publishers buy new writers knowing it’s going to take awhile for their work to catch on and find its audience. If you’re winning awards and getting good reviews and excellent reader buzz, it helps generate publisher patience to wait for reader recognition to catch up to your eventual bestselling potential, or to just enjoy the prestige of having you on their list. If they think you’ve got something special in your writing with a potential for bestsellerdom down the road, they may be very prepared to hang tough for several volumes before they see financial success through your work.

These calculations are only estimations—and even if their results are spot on, they may not mean a thing. Publishing is a business built on hopes and dreams—even in its finances. The most important thing for a writer to do, when trying to figure out if he or she is meeting publisher expectations financially, is to listen to the book’s editor, ask intelligent questions about whether the publisher is happy with the performance of the book, and go with the answers that you get that way. The definitive answer from the publisher will always come when it’s time to negotiate a new contract. But if you want to have a look at the math of publishing, you’ve now got a formula to play with. Good luck! I hope that your numbers are beautiful.

Copyright © 1997, 2002, 2016, 2017 by Denise Little.

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