Jun

27

2011

Many Happy(?) Returns!

by Steve Laube

Every first-time author is confronted by the reality of “Reserves Against Returns” as part of publishing economics. It is usually a shock and elicits a phone call to their agent crying “What happened to my money?”

Did you realize that book publishing is the only “hard goods” industry where the product sold by the supplier to a vendor can be returned? This does not happen with electronics, clothing, shoes, handbags, cars, tires…you name it. If it is a durable good the vendor who buys it, owns it (which is why there are Outlet Malls – to sell the remaining inventory). Except for books. Somewhere along the line the publishers agreed to allow stores to return unsold inventory for credit. In one sense, publishers are selling their books on consignment. Bargain books are actually resold by the publisher (after getting returns or to reduce overprinted inventory) to a new specialty bargain bookseller or division of a chain (which buys the bargain books non-returnable).

Consequently book contracts have a clause allowing the publisher to establish “a reasonable reserve against returns.” By “reserve” they mean a pool of money withheld from the author…holding that money in “reserve.” The intention of the clause is to protect the publisher against paying the author for books that have been shipped and billed to a store but may eventually be returned to the publisher.

Imagine if Walmart purchased 10,000 copies of your book. Everyone celebrates. If you are earning $1.00 in royalty (on average) for every book sold, that means you will receive $10,000 from your publisher at some point. Hooray! Steak dinners for every one!

But wait.

What if Walmart doesn’t sell all the copies they purchased and returned 5,000 of them?

And what if your publisher had already paid you for all 10,000 sold copies? That means your publisher overpaid you by $5,000. Do you have to give that money back? You really don’t want their collections agent (his name is Guido) to come to your door to get their money back.

Thus the publisher will make an estimate on every royalty statement and withhold a “reasonable reserve against returns.” It seems that some publishers abuse the word “reasonable.” One author I know had 70% of their revenue withheld for a complete royalty cycle because their publisher had made a big sale to a big box chain. But is that really abuse?

The Big Box retailers are notorious for returning over half of what they purchase.

I don’t begrudge a publisher for holding a reserve. I’d rather they not demand the money back later!

There was situation, many years ago, where an author’s book sold 8,000 copies to a single big-box retailer as part of the initial launch. Six months later, the author developed a new proposal and the editor was going to present it to the committee because the author had already sold 12,000 units (including the 8k to the big-box retailer). The day before the committee meeting the big-box retailer returned the books. All of them. All 8,000. The warehouse said it looked like the cases were untouched, in other words they never made it into the stores. Thus the author’s total sales went from 12k to 4k in one day. The editor walked into that committee meeting and was ambushed by the sales manager with this news. The publisher declined to contract a new deal. Author had to switch publishers.

The author was crushed, the publisher stunned, and everyone lost. So before we get all huffy with publishers and their accounting practices we have to realize that history tends to dictate accounting policy.

However, there is a practice regarding reserve against returns that is quite frustrating. There are some publishers that roll the reserve over every cycle….forever. No matter how old the book, if it is still in print, they hold back a reserve. And the new reserve they choose is suspiciously consistent to the amount the book had sold in the previous royalty accounting period. In other words the author never seems to get a respite because the reserve keeps rolling forward. This is just plain nasty.

If a publisher is savvy (and most are) they put that “reserve” in an interest bearing account. And they can sit on that float for six months earning interest on what is technically the author’s money. And if the returns do not use up the reserve the difference is credited back to the author. Let’s use the above example:

Books sells $10,000 worth of earnings in July-December.
Publisher creates a reserve of $5,000 in January in case there are returns after Christmas, so they only send the author $5,000.
In Jan-June there are $3,000 worth of returns sent back which is charged against that reserve.
So the publisher gives the author the $2,000 balance in their next check.
But the publisher, in essence, made some additional interest income on that $2,000 because that reserve sat in a bank for six months. Smart business!

Now all you accountants out there, please don’t criticize this example. I know there are new sales and new reserves and all sort of other nuances and the interest rates are currently pathetic (and therefore little incentive), but I’m trying to make a different point.

Therefore let me use real numbers for you. I won’t tell you who the publisher is, or what the book is, or how many copies were sold to generate the numbers. You won’t be able to guess, so please don’t try. These numbers are taken from an author’s last two actual royalty statements to show you what I’m illustrating. I can tell you that the author’s book was published more than three years ago… And publisher is still withholding returns each cycle.

Statement A (first six months)
Royalty earnings from Sales – $941
Reserves withheld in previous cycle credited back to Author – $940
Reserves withheld this cycle – $626

Total Earnings this cycle – $1,255  ($941+$940-$626)

Statement B (second six months)
Royalty earnings from Sales – $825
Reserves withheld in previous cycle credited back to Author  - $626
Reserves withheld this cycle – $688

Total Earnings this cycle – $763

The publisher has kept about $600 of the author’s money in their “reserve” pocket in case there is a return, for a full year. But if this were multiplied across every title in this publisher’s warehouse think of the amount of that reserve. If they have 5,000 titles in their warehouse and they are only floating a reserve average of $400 per title, they are earning interest on two million dollars. (At 2% that is $40,000 in earned interest.)

Again, I do not begrudge the publisher of the necessity of withholding a reserve. But when it starts to appear to be a form of clever accounting I get a little testy.

My preference would be to have a clause in the contract under the Reserve Against Returns section to read:

Publisher has the right to reserve for anticipated future returns. Reserves are never established to avoid paying royalties, but to eliminate the situation where royalties might be paid out on sales that are ultimately reversed. Such reserves will be used only when the publisher is aware that inventories exist in the marketplace that are not selling through and will likely be returned. Reserves are not limited to a certain percentage of sales, but in all cases must be defensible by the publisher.

Agents can dream too, can’t they?

By they way? Lest you think I’m ignoring the E-elephant in the room? Ebooks technically do not have returns since there is no physical inventory on a shelf to handle. Consequently there should never be a reserve against returns on e-books. But I’m still trying to track down the oddity of a recent royalty statement where the author had negative 3,000 e-books sold. How can you unsell 3,000 e-books? Yes, you can return an e-book bought by mistake on Amazon. I’ve done it to see if it is possible. It is. But all that does is counter the sale made the day before. So to have thousands of returns boggles the mind. Even the accountants are flummoxed. Maybe I’ll tell you the rest of that story when the mystery is solved.

For a brilliant discussion about other implications of returns take a look at this post by Mike Shatzkin and Michael Cader.

 

 

 

 

 

 

 

 

12 Responses to “Many Happy(?) Returns!”

  1. Richard Mabry June 27, 2011 at 6:18 am #

    Steve, Thanks for a very knowledgeable exposition on a fact of life that is largely unknown to fledgling authors. It’s true, the situation exists, and it can be a nightmare to work through it.

    And I agree–how can you “unsell” an e-book?

  2. Marji Laine June 27, 2011 at 10:43 am #

    This publishing world is much more confusing than I realized. No wonder pub companies are so persnickety about the books they choose and I certainly don’t blame them for the withholding of reserves. Isn’t there a way for the interest on those reserves to be used for the benefit of the book – promotional purposes? That would seem to be helpful to both publisher and author. Maybe that’s a little naive?

  3. Lisa Hall-Wilson June 27, 2011 at 11:37 am #

    Hmmm – good to know. Hadn’t heard about this – though I suppose it makes sense given the option book stores have to return product. I’ve heard it said that there needs to be a new business model for publishers to remain successful. Interviewed Jeff Gerke at Marcher Lord Press about this. He has an interesting take – will be watching to see if his model stands the test of time.
    Thanks!

    • Steve Laube June 27, 2011 at 11:48 am #

      Jeff’s model at Marcher Lord Press is to use print-on-demand (POD) printing for books (and ebooks for the rest). While that works well in his case what most folks don’t know is that it costs more per book to print using POD.

      When using off-set printing (long press runs) the more you print the less each book costs. In POD (print-on-demand) each book costs the same since you are printing one at a time.

      For example, a 6×9 paperback (300 pages) using POD technology would cost a little under $5.00 per book to print.

      The same 6×9 paperback (300 pages) would cost about $1.25 (or so) if you are printing 10,000 copies.

      That is a significant difference and should not be ignored.

  4. Sally Apokedak June 27, 2011 at 4:46 pm #

    Great post.

    One small publisher told me he had to sell his company when he was hit with huge returns years after he’d paid out on books sold. It’s a crazy way to try to make a living and there ought to at least be a time limit on when the books can be returned. Is there such a limit?

    I worked in a bookstore and ripped the covers off of books and returned them two weeks after we’d shelved them. Category romance were done that way. They had two weeks. I can’t remember how old the hardbacks were that we returned. I don’t recall ever trying to return old books. We put those books on a sale table and sold them for 40 or 50% off retail.

    • Steve Laube June 27, 2011 at 4:55 pm #

      Sally,

      This fellow blew it with his returns policy. Most publishers have a time limit of one year (or less) from the time of purchase. And the returns must be in re-sellable condition and must include the invoice number to prove where it was purchased from.

      The “tear cover” returns you mention is the way of the mass market paperbacks you see in the grocery store racks. They usually stay there about a month and are then swapped out.

      Returning just the covers is a cheaper way to process them.

      Notice also that some have bar codes on the inside of the jacket as well as one on the outside back cover. That is become some retailers use a different bar code system so the publisher has to print the second bar code somewhere but not on the back cover because that confuses a scanner.

      This means that in those instances the publisher has to print the cover jacket twice. Once for the front color title, etc. then run it again for the backside to have a bar code. That is why you see author info on the inside of the back jacket in some instances. They figure, “why waste the second printing of the jacket with just a bar code?”

      And people think this business is straightforward and simple. It is not.

      Steve

  5. Susie Finkbeiner June 27, 2011 at 7:26 pm #

    I’m a little dizzy. It just solidifies the importance of knowledgeable agents!

  6. Kate June 28, 2011 at 5:03 pm #

    Fascinating post…still learning about all the “hidden mysteries” of the publishing world. Thanks for the great information Steve.

  7. Lynnette Bonner June 28, 2011 at 6:05 pm #

    I think it would be great if the returns policy went away, but until then publishers have to work with the system they’ve built for themselves.

    This author (linked below) isn’t with a CBA house, but she is a N.Y. Times author with Penguin who shared her royalty statements over the course of a year. The link is to her first post, and then toward the bottom of that one is a link to the 2nd article “More on the Reality of a Times Bestseller.” I found them interesting and since it relates to what you are talking about here, I thought I’d mention them. Hope that is okay.

    http://www.genreality.net/the-reality-of-a-times-bestseller

  8. Andrea February 27, 2012 at 9:21 am #

    Thanks for this great article, Steve. I’m still weeping over my “happy returns.” Waahhhh!!!!! :(

Trackbacks/Pingbacks:

  1. Book of the Month – September 2011 | The Steve Laube Agency - September 3, 2011

    [...] I have been a student of this industry for 30 years and thoroughly enjoy understanding its nuances. (It just dawned on me that this means I’ve read nearly 1,500 issues of “Publisher’s Weekly!”) In my opinion, this is the one book you should read if you want an overview of everything that goes into the publishing business. Did you know that the practice of allowing booksellers to return stock for full credit did not start in the U.S. until the early 30s? It was used during the Great Depression as a way to stimulate sales and to encourage booksellers to carry more inventory without risk. Eighty years later that practice still plagues the industry (see my post “Many Happy Returns“). [...]

  2. Why Is My Royalty Check So Small? | The Steve Laube Agency - December 6, 2012

    [...] For an excellent post that goes into much more detail about reserves and returns, please see Steve Laube’s insights: “Many Happy Returns.” [...]

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