Tag Archive - Contracts

Goodbye to Traditional Publishing?

May 14, 2012 in Business, Contracts, Defense of Traditional Publishing, E-Books, Publishing, Steve, Writing with 68 Comments

by Steve Laube

Recently Ann Voss Peterson wrote of her decision to never sign another contract with Harlequin. One major statistic from the article is that she sold 170,000 copies of a book but earned only $20,000.

Multiple clients sent me Peterson’s “Harlequin Fail” article and wanted my opinion. My first thought is that this was the typical “a publisher is ripping me off” fodder. But that would be a simplistic and knee-jerk reaction and unfair to both Peterson and Harlequin.

Yes, Harlequin pays a modest royalty that is less than some publishers. Since when is that news? That has always been their business model because it is the only way to create and maintain an aggressive Direct-to-Consumer and Trade publishing program. Their publishing machine is huge and they are a “for profit” company. For Profit. If they are unprofitable, they go away.

If an author is uncomfortable with the terms, then don’t sign the contract (which is Peterson’s decision going forward). I urge each of you to be careful not to sign a contract and then complain about it later. Unless you were completely hoodwinked you agreed to those terms and should abide by them.

Understand that I am not being critical of this lady’s decision. It is her choice to do so.

But my issue is not with the money (although it is important) it is a larger question. She says she has sold 170,000 books but not made that much money. For the record Peterson has signed with Thomas Mercer which is one of the publishing divisions of Amazon.com…a traditional publisher of sorts, so she may still reach a 100,000 plus audience. So is it all about the money and not about number of readers? If Peterson had chosen to go Indie (solo) and published using the e-book option (like the Kindle Direct Program) and sold 10,000 copies she would make the same amount of money. BUT she would have 160,000 fewer readers! One Hundred and Sixty Thousand.

Consider the stadium where the Arizona Cardinals (NFL) plays seats 63,000. So, in essence this author’s choice could mean walking away from three stadium sized audiences for her stories.

In Peterson’s case it does not appear to be a dollars vs. readers issue because she has signed with another publisher. But for many who are frustrated with their publishing experience it is a good question to ask.

Reaching 170,000 readers is a rare place in this busy industry. And don’t forget that the success of those numbers made her an attractive acquisition for Amazon.com . That is not the case for most writers whose midlist numbers can be depressing. (Read CBA fiction author Eric Wilson who laid out his income while publishing with traditional publishers over a ten year period and has chosen to go a different route with his new books.)

If you wish to wave goodbye to traditional publisher and go Indie (independent) I believe the first question to ask is whether or not you want to start a small business. Just like an entrepreneur.  Those authors who are entrepreneurs are ideally suited for the self-publishing route. The understand the energy it takes and pitfalls ahead.

The second question is whether they can sell enough copies to make it all worthwhile. And are also are willing to take responsibility if a book fails.

But not all artists are entrepreneurs. I know of many authors who have gone this route. One sold 1,000 copies of their e-book in a year. Another is averaging about $1,000 in revenue each month…but had to self-publish ten books to reach that threshold. Another has sold about 2,500 e-copies in a few months but the numbers are slowing considerably. Each of these writers can get much more guaranteed income from going the traditional route. Their indie effort is nice income (in this business any income is nice) but it is not a replacement.

P.S. In my opinion it is wrong to compare Amazon’s traditional publishing divisions (like Thomas Mercer) with other publishers. Amazon is so incredibly large and diversified that they could lose money on publishing for five years and still be profitable elsewhere. For a company like Harlequin they are solely vested in publishing (not Zappos shoes, or used books, or electronics). Thus their cost structure is different. Amazon has brilliantly used their economic model and created one that takes advantage of their infrastructure without having to build from scratch.

Is that a defense of traditional publishing? It could be seen that way. But it is more a reminder not to compare oranges with apples. They are not identical.

Your Turn

What is your take on this issue?

Is there a question on this topic you would like to have answered in a future blog?

What if You Get a Book Deal on Your Own and Then Want an Agent?

March 5, 2012 in Agency, Business, Conferences, Contracts, Publishing, Steve with 4 Comments

by Steve Laube

One of our readers asked this via the green “Ask us a question” button.

What happens if you get a book contract before you have an agent? What if, by some miracle, an editor sees your work and wants to publish it? (1) would having a publisher interested in my work make an agent much more likely to represent me, and (2) would it be appropriate to try to find an agent at that point (when a publisher says it wants to publish you)? My fear is that querying an agent and receiving a response could take several months, but I’d need to accept a potential contract with a book publisher right away (I would think). Is it appropriate to ask the editor to speak with an agent on your behalf to speed the process?

This is a great topic but there are a few questions within the question. Let me try to break it down.

Many times we have had authors approach us with contracts in hand and seeking representation (happened just last week). Of course this will get an agent’s attention immediately. But there are caveats:

a)      Who is the publisher? There is a big difference between a major company and your local independent publisher. Not all publishers are created equal (see the Preditors & Editors warnings). I remember a situation where the publisher who had made the offer to the author was not well known in the industry, they appeared to be a startup, and the terms in the contract were onerous. This was not a publisher we could recommend the author work with. We declined to represent the project. The author signed the contract anyway. A few years later the author came to me detailing their regrets.

There are also packagers, subsidy publishers, and vanity presses that can easily confuse a new writer into thinking that their contract offer is similar to getting a contract offer from Random House. This is not a criticism of those companies but merely to present their contract offers as a contrast to what is offered by Traditional Publishing. Do your due diligence and practice discernment.

b)      Is this a real contract offer or an editor who said they were interested? This is a big difference. I once had a writer literally beg for representation because an editor had said they were interested at a conference (and when I wrote “literally beg” I mean with all the fullness of what that phrase suggests). Found out later the editor had been stopped in a hallway and after hearing the author’s pitch said to the writer, “Sure I’ll give it a look if you have an agent send it to me.” [FYI: That is not a contract offer.]

c)      What is your content? To maintain our integrity we would still need to see your book. We never will represent someone’s work without seeing it first. Our company becomes associated with that material. But if your contract offer is from a major house, trust that we will not sit on the content for long. There is no need to ask the editor to get involved at this stage. It would put them in an awkward position, especially if they would prefer working with a different agent! Also do not ask the editor which agent they prefer. Again you would be putting them in an awkward position. Better to ask, “I’m thinking of working with Steve Laube as my agent, are there any red flags that you feel comfortable sharing with me?” [I anticipate a few jokes in the comments with that set up line.]

d)     Who are you? We may have never met or talked. We need to find out if you are who you say you are. If we have met in the past, remind me of the context.

I have a client right now who I met at a conference. The writer pitched their idea I thought the idea intriguing but challenged the writer to “blow me away” with their sample material and send it to me. At the same conference the writer connected with an editor at a major publisher. That editor became quite enthused and worked directly with the author for a few months refining the project. I did not know this was happening and was simply waiting for the proposal to arrive at our office. Good news is that the editor and publisher offered a contract. The author immediately contacted me with the deal in hand. I asked a few questions including:

a)     “Can you send me the material that got the editor so excited?”

b)      ”Have you agreed to contractual terms yet?” Fortunately the answer was no. NEVER agree to terms with a publisher if you want to have an agent become involved. If you do, the agent is handcuffed in their ability to adjust certain rights and terms to your benefit.

c)      ”Why do you want an agent? You already have a deal in hand!” The author said, “Steve, I know my limitations. If I were to represent myself I would have a fool for a client.” We signed and have been working together ever since.

I also want to make sure the writer knows what an agent does for a client beyond just the sale or the book deal. It is a myth that all an agent does is have exotic lunches and influence editors with their wiles and force of personality. In today’s publishing labyrinth an author needs a guide. I firmly believe that every author needs a good agent by their side. But that is a post for another day.

 

News You Can Use – Feb. 7, 2012

February 7, 2012 in News You Can Use with 9 Comments

Author Says McGraw-Hill Cheats on Royalties - Details of a pending lawsuit.

What is Pinterest? -  The latest craze in Social Media Networks. AuthorMedia shows you the simple steps to sign up and tips on how to use it in the next article below.

Three Ways an Author Can Use Pinterest – Last week an editor told me how she was following a couple of her authors on Pinterest and how much she liked it.

5 Ways to Break Out of the Social Media Doldrums - Well said by Aubre Andrus.

10 Ways to Ensure No One Will Read Your Blog Post – Ali Luke give great insight

How Hard Can it Be to Write a Kids Book? – Sally Lloyd-Jones helps dispel a common myth.

A very cool six minute video envisioning a future technology. Imagine computing being done on glass walls, desks, and even in National Parks. From Corning. By the way, Corning makes the “Gorilla Glass” that you find on the iPad2.

Deadlines and Taxes

January 16, 2012 in Business, Steve, Writing with 1 Comment

by Steve Laube

Two certainties in the life of a writer. Deadlines and Taxes.

You know what a deadlines is. It has the word “dead” in it for a reason. And intrinsic to the reality of taxes is that April 15th filing deadline.

But what about those taxes?

Many articles appear in early April about taxes when approaching the filing date. But I thought we should explore a couple items now so there won’t be any surprises come April.

First, the obligatory disclaimer. I am not a tax attorney or a tax accountant. I am merely discussing concepts and ideas which you may or may not use in your situation. And, as always, when it comes to your taxes, make sure to consult a professional.

Some of you may roll your eyes and say, “I already know this.” But remember there was a time when you did not. I get many “beginner” questions each year from debut authors who are discovering much of the business side of this industry for the first time.

Keep Good Records

One advantage of the self-employed writer is the ability to deduct certain expenses as they relate to the writing profession. Writers conference fees, writing magazine subscriptions, web site hosting fees, promotional items used to market your book, etc. These are possible deductions, but you must have a record of each expense.

And I mean keep everything. Receipts, ticket stubs, bank statements, check registers, ATM receipts, mileage (when and where and how far). Nowadays a good scanner and smart use of Evernote can put it all in one place.

Now is the time to start trying to recreate your 2011 expenses if you haven’t already done so. Trying to find that receipt on April 14th might be a challenge.

Hobby-Loss Rules

If you are writing as a hobby or for something that only occasionally earns money, then you can only deduct expenses equal to the amount of your revenue. In other words you can’t buy a submarine and claim it was for research for that underwater thriller you’ve been trying to write for years.

But if you have the “intent” to derive a living from your writing you can show a loss (and maybe deduct that submarine!?) Proving intent is something judged case by case. Put it this way, if you show a loss in your writing business for five consecutive years, expect a red flag to appear in the IRS inbox. It is commonly understood that the IRS will accept that you are running a business if your writing work shows a profit in at least three of the last five tax years. But in an audit the IRS can go back many years and determine if your deductions were valid. If disapproved you will end up with a very expensive new tax liability and additional penalties. Here is the official page on the IRS site for their Hobby-Loss Rules.

Separate Your Home from Your Business

As much as possible keep your household income and expenses separate from your income and expenses for writing. It can be as simple as keeping a separate bank account. (This is one way to prove “intent,” see above.) And then keep records separately for the business using Quicken, Mint.com, or a spreadsheet.

If you work out of your home, consider exploring the “home office deduction.” But be careful. If you write occasionally from the home computer and that computer is used by other family members for things other than your writing business, it is likely you will not qualify.

I know of some authors who have a separate phone line (or cell phone) just for their business. That way interviews and publicity inquiries from the Today Show don’t come to the house where your teenager answers the phone and shouts, “Mom! Some dude is on the phone for you!”

Resources

I can recommend the book New Tax Guide for Writers, Artists, Performers and Other Creative People by Peter Jason Riley. This is one of the few annually updated tax guides that helps those in the arts. This 2012 edition is supposed to be available soon.

The other is Carol Topp’s Business Tips and Taxes for Writers. (Amazon link; Kindle link; Direct) It is simple, clear, and specifically intended for the writer.

And last, an excellent book The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People with Not-So-Regular Jobs by Joseph D’Agnese and Denise Kiernan. It is one of the few books out there that is specifically designed to help those in the arts.

For many of you, numbers are either a toxic topic or the equivalent of hieroglyphics. But take this issue seriously. The writing profession is ultimately a business. Granted a business based in the Creative Arts, but it is still a business. Talk to a qualified tax accountant if you have questions. Never rely on the hearsay of another writers who gives anecdotal information at a writers conference. The IRS won’t accept the excuse that “Sally told me it was okay to write-off my Australian Cruise because I was researching an article about Sydney!”

2011 – The Year in Review

January 2, 2012 in Agency, Business, Contracts, Publishing, Steve with 6 Comments

by Steve Laube

It is a good exercise to reflect on the past year. Count the blessings, reflect on the hard lessons, and remember the good times.

The highlight was bringing both Tamela Hancock Murray and Karen Ball into the agency in late May. I was and continue to be very excited about the talent and work these two are doing on behalf of our clients.

That hard work had visible results as we secured sixty-four (64) new book contracts that will cover 113 new books. That works out to a new contract every four business days.

There were some challenges with three authors having their contracts cancelled for a variety of reasons. This is never easy, but it can happen.

Keeping track of the blistering changes in the industry would give any sane person whiplash. Amazon’s surge and Border’s demise gave many of us pause. I read over 150 pages of industry related material each week in an attempt to keep up. I like to joke that an agent’s job is to keep track 24/7 because the industry can change on Tuesday. This was proven last month when two major personnel changes were announced on the same day at two different firms…and that day was Tuesday.

The biggest publishing news event was the sale of Thomas Nelson to HarperCollins. (click here for my thoughts on that event.)

Our client list grew exponentially with the addition of Tamela and Karen. We now represent over 150 authors. It is an honor and a privilege to serve such a talented group.

We redesigned the web site early in the year which created the infrastructure to ramp up our blogging efforts. Having three agents allows us to share the blogging load so each person takes one day while I also collect weekly news articles and find something lighthearted to share each Friday. The number of regular readers has tripled since mid-year.

I spoke at seven different writer’s events around the country and also attended my 30th consecutive ICRS convention in July.

On a personal note my wife and I celebrated our 30th Anniversary and we took an Alaskan cruise along with my brothers and their wives. What made it even greater was being able to watch our daughter perform 14 times in 10 days since she was one of the dancers on board the Sea Princess. We topped off our trip by visiting my parents to celebrate my father’s 90th birthday. Then later in the year we celebrated the 100th birthday of my wife’s grandmother.

Here is wishing you all a happy new year!

Writers Learn the Waiting Game

November 28, 2011 in Business, Contracts, Marketing, Publishing, Steve with 33 Comments

by Steve Laube

Ours is a process industry. Good publishing takes time. Unfortunately time is another word for “waiting.” No one really likes to wait for anything. Our instant society (everything from Twitter to a drive-thru burger) is training us to want things to happen faster. Awhile ago I wrote about how long it takes to get published which gave an honest appraisal of the time involved. Below are some of the things for which a writer must learn to wait.

Waiting for the Agent

We try our best to reply to submissions within 6-8 weeks and are relatively good about that. But if your project passes the first review stage and we are now reviewing your entire manuscript remember that reading a full manuscript is much more demanding than reading a few short proposals.

If you are already represented all I can say is that agents do their best to be responsive to your questions and phone calls. Crisis Management is part of our job description. But one of the first things a First Responder must do is triage. Some issues are more critical than others which can create consternation if yours is next in line instead of first.

Waiting for a Publisher

After working hard to get your proposal just right we send it out to a select list of publishers. Then we sit back and wait. It can take 3-6 months to hear an answer from a publisher. The longest our agency waited was 22 months before we received a contract offer. No kidding. Just shy of two years. [Both I and my client had already moved on, thinking the project was dead.] But that is truly the exception. I believe that if we don’t receive some sort of answer within four months it is probably not going to connect.

Waiting for Your Contract

Once terms are agreed it can take quite a while to get the actual contract issued by some publishers. Many can take as long as two months to generate the paperwork. We once had to change the date of the contract because it had taken so long to create the paperwork that the due date for the manuscript was earlier than the actual date on the contract! This delay can be excruciating. Ask your agent what is typical for the specific publisher you are working with. Some are quick some are slooooow.

Waiting for Your Editor

You met your deadline. And then you wait.

Months.

And you begin wondering if anyone is reading the manuscript at all!

This is actually quite typical. The publisher needs to have the manuscript in hand to know that it actually has been written. But don’t think the editor is sitting at their inbox, on the due date, with rapt anticipation of receiving your contracted manuscript. They manage their time in order to keep things in the queue and moving along. It can very frustrating to wait. The key here is to be in communication with your editor. It is okay to ask! Or talk to your agent to see if they know if there is anything going on that is preventing that editor from working on your book.

Waiting for Your Marketing and Publicity to Kick In

The new author is so excited about their new book that they want to start chatting about it the day after they turn in the manuscript. A great athlete or sports team wants to peak at the right time, never too early. The same with book promotion. If you begin tweeting and Facebooking (is that a verb now?) without inventory to back it up, the window of sales opportunity closes.

“But e-books solves that issue because they can be ready today!” you shout. Remember that a lot of people still buy books in stores, online, and off your back table at an event. The physical book is still alive and well and must be available if your publicity and marketing is to be effective.

Recently we had a client contacted by “People” magazine for an interview. Unfortunately their book won’t be out for another year. The story is timeless and we asked if they would be willing to wait for the interview and run it as part of a larger campaign. The risk is that they won’t do the story, but it would have been worse to tell the story and not have a book to back up the feature.

Waiting for Your Money

When I became an agent I didn’t know I’d become a Collections Agent…not just a Literary Agent. Getting paid can take time (i.e. waiting).

Waiting for the “on signing” advance — Normally the publisher can take a full 30 days before issuing the check.

Waiting for the “on acceptance of manuscript” advance — This can vary widely. Just because you turned it in doesn’t mean it is acceptable. One publisher we work with will not issue a “acceptance” check until the book has gone through every stage of the editorial process and has been sent to production for typesetting. This can take months.

Waiting for the advance to earn out and new royalty earnings to arrive — Yes, some books do not earn out their advances. (Read the post about “The Myth of the Unearned Advance.”) But many do earn out and the money eventually starts coming, even if in tiny pieces. This can take a couple years.

_____

At each stage the writer chaffs at the process. This is quite understandable. Recently I read an author’s angry screed (on their blog) criticizing their publisher for the excruciating process of getting their book out. The problem, as I see it, is that the author’s expectations were not in line with reality. Much of a writer’s angst can be avoided by understanding the process and modifying their expectations to match.

Therefore my encouragement for you is to learn the waiting game. Some scientists even claim that it might be good for you (click here for the article). Truly it is to your benefit to accept the nature of this process and embrace the agony of waiting. Anticipating the result can be as fulfilling as holding the finished product.

 

Who Gets Paid in Publishing?

October 10, 2011 in Business, Publishing, Steve, Writing with 16 Comments

by Steve Laube

With all the talk about Independent publishing vs. Traditional publishing and the talk about how writers can get rich if they follow a certain plan…I got to thinking. Maybe we should do a quick look at the Economics of Publishing to see if anyone is making off like a bandit. Sorry for you non-numbers people, but it is critical to understand the infrastructure (i.e. the lifeblood) that keeps your ideas in print.

The detective in the movie says “Follow the money,” so we shall. But first a disclaimer. These models are estimates based on years of reading contracts, profit and loss sheets, spreadsheets, and royalty statements. Your mileage may vary.

Follow the Money

Let start with a paperback book that retails for $15.00 and is projected to sell 10,00 copies the first year.

Expenses per book:

Trade Discount $8.25 55.0%
Print cost $1.25   8.3%
Royalty to Author $1.08   7.2%
Marketing/Publicity $1.00   6.7%
Publisher overhead $3.00 20.0%
Total Profit $0.42   2.8%

 

Explanation of each line item

Trade Discount  is the discount given to the retailer/wholesaler: $8.25 (I’m using a 55% discount as the average. This number can fluctuate wildly depending on the account which is buying the book.)

This leaves $6.75 for the publisher to work with. (also known as the Net Receipt)

Print cost: $1.25 (based on the cost to print a ten thousand 240 page books. Includes freight to the warehouse)

Royalty to author: $1.08 (based on a 16% of net royalty rate. On contracts that use a 7.5% or retail royalty this number would be $1.125)

Marketing/Publicity:  $1.00 (a wild guess that varies from book to book and author to author and where the money is spent. But in general conversations the publisher will look at a book’s first year sales projection and plan on $1 per book sold to determine the marketing budget.) This cost also includes any graphics design work for catalogs, advertisements, banner ads, etc.

Publisher overhead: $3.00. This is where they pay for the editorial work (content, copy, and proofreading edits); cover design; typesetting, warehouse, collections, sales team expense, telemarketing, accounting, legal fees, administration, etc.)

Five things to note:

1)      Ebooks only eliminate the print cost. There is still production costs which fall under the publisher overhead section.

2)      There is no mention of the cost of returned inventory for unsold books. I lump that into the Publisher overhead cost

3)      Many independent and maverick writers will be thrilled to read this saying “Whoopie! I can get rich because I not only keep the royalty, I keep the publisher overhead too!” And there is the rub. If the author can generate the sales and is willing to handle the infrastructure, then indie is a distinct possibility. But realize you are going into a business, not a hobby.

4)      Independents must face the fact that there are costs associated with creating a fine product. Nothing gets published for free. Even time costs money.

5)      Before you look at that 20% for the publisher overhead and start railing against the “money-grubbing” evildoers called “publishers,” stop for a moment. Would you say the same thing about a car dealership? (bad example) Or a dry cleaners? Or a bookstore chain called Borders? What about your own business? What about your church (ouch. You mean a church has expenses?).

Bigger Picture

If we create a cost analysis of the above model, except this time do it on the entire print run (multiplying everything by 10,000) we get the following profit and loss projection:

(Paperback book that retails for $15.00 and is projected to sell 10,00 copies the first year.)

Expenses (combined):

Trade Discount $82,500 55.0%
Print cost $12,500   8.3%
Royalty to Author $10,800   7.2%
Marketing/Publicity $10,000   6.7%
Publisher overhead $30,000 20.0%
Total Profit $    420   2.8%

 

Remember that model is for the first printing.

On a second printing there is no longer a cost for the cover design or editorial or typesetting. And even other costs become more efficient. So if a publisher is able to cover their cost on the first printing then they start making money. And the same efficiencies apply if this were an ebook. (And in this scenario, if the author had been given a $10,000 advance they would be getting a new check for an additional $800.)

But wait! Go back to that “Publisher Overhead” thingy again. Who gets paid out of that stash?

Editorial – $5,000 (again, a variable cost but if you consider hiring a high quality content editor like our own Karen Ball, a copy editor, and a proof reader or two, the cost will add up)
Cover Design – $2,500 (variable. I’ve seen cover designs cost $5,000. And if the designer is in-house then the cost is absorbed into general overhead.)
Typesetting – $500 (variable. Freelancers used to charge as much as $8 a page, but desktop publishing destroyed that price structure. But there is still a cost to have this done well. Have you bought an e-book that was formatted wrong? This is the place where those kind of errors can be fixed.)
Sales expense – $1,000 (if the publisher uses a commission based sales company then this number can vary. If it is in-house the cost to travel and manage an account properly is still the responsibility of the publisher.)
Warehouse – $1,500 (a wild guess because it is nearly impossible to do cost account per book against the cost of maintaining an entire warehouse. Usually that total cost is simply divided by the number of books in the warehouse.)
Admin., Legal, Accounting, I.T., Building Maintenance, Corporate Taxes, etc. – $19,500 The money to pay the rest of the infrastructure has to come from somewhere.

If there are any publisher types out there who read this and wish to chime in and verify or correct? Please do so!

 

Fun Fridays – July 8, 2011

July 8, 2011 in Contracts, Fun Fridays, Steve with 11 Comments

Contracts can be confusing. Enjoy this wisdom from Chico and Groucho Marx:

Many Happy(?) Returns!

June 27, 2011 in Business, Contracts, Publishing, Steve with 11 Comments

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.

 

 

 

 

 

 

 

 

The Myth of the Unearned Advance

June 13, 2011 in Business, Publishing, Steve, Writing with 43 Comments

by Steve Laube

A common myth permeating the industry is that a book is not profitable if the author’s advance does not earn out. I would like to attempt to dispel this myth.

First let’s define the term “Advance.” When a book contract is created between a publisher and an author, the author is usually paid an advance. This is like getting an advance against your allowance when you were a kid. It isn’t an amount that is in addition to any future earnings from the sale of the book. Instead, like that allowance, it is money paid in advance against all future royalties, and it must therefore be covered by royalty revenue (i.e. earned out) before any new royalty earnings are paid.

The advance is usually determined by a series of assumptions that the publisher makes with regard to the projected performance of each title. The publisher hopes/plans that the book will earn enough royalty revenue to cover the advance within the first year of sales.

A NY Times essay a couple years ago casually claimed “the fact that 7 out of 10 titles do not earn back their advance.” Of course they did not cite a source for that “fact.” But I have seen it quoted so often is must be true! (and it isn’t.) The implication then is that a book isn’t profitable if it doesn’t earn out its advance. The publisher overpaid and has lost money. The author is the happy camper who is counting their cash gleefully celebrating the failure of their publisher to project sales correctly.

Let me try to explain why that isn’t always true. And to do so means we have to do math together. This may be a little complicated, but realize that these calculations are critical and each publisher runs these kind of scenarios on your books. To dismiss this conversation and claim you “don’t do math” is to ignore the lifeblood of your profession.

Realize that this is a generic model. Each and every number below fluctuates from title to title. That is the weakness of the exercise, but bear with me.

Assumptions:

Advance paid to author: $10,000
Retail price: $13.00 (paperback)
Net price: $6.50 (this is what the publisher receives when they sell the book – to dealers, big box retailers, distributors, etc. )
Copies sold: 10,000

Scenario one: Author earns 14% of net for each book sold. ($6.50 net x 14% royalty x 10,000 sold)
Thus, after selling 10,000 copies the author has earned $9,100.
Leaving $900 of the advance unearned.

Scenario two: Author earns 16% of net for each book sold ($6.50 net x 16% royalty x 10,000 sold)
Thus, after selling 10,000 copies the author has earned $10,400.
The publisher writes a royalty check to the author for $400. The amount above the original advance.

The myth says that scenario one equates a failed and unprofitable book , while scenario two is a profitable book.
But wait! Let’s do some more math.

New Assumptions. (remember these are all estimates based solely on this scenario.)

BOTH scenarios have the publisher making the same amount of revenue. ($6.50 net x 10,000 sold.) Both scenarios generated $65,000 in net revenue for the publisher.

To determine profitability we have to subtract costs.

Fixed costs

Editorial expense: $8,000 (includes all stages of the editorial process)
Design (typesetting/cover): $4,000
Printing and warehousing:  $15,000 (the approximate cost of printing 12,000 copies)
Marketing and PR: $10,000 (an average of $1 per book)
Administrative costs: $13,000 (20% of the net revenue)
Advance paid to author: $10,000
TOTAL COSTS: $60,000

Profit for the Publisher: $5,000 (or 7.7% of revenue before tax)
or the $65,000 in revenue minus the $60,000 of total costs.

Are you with me so far?

Now watch this.

Scenario one – (with the unearned advance still on the books) has a profit of $5,000 for the publisher.

Scenario two – (pays the author $400 for earnings beyond the advance) has a profit of $4,600 for the publisher.

In this comparison it is the book that didn’t earn out the advance that actually makes more money for the publisher!

Why? Because scenario one pays a lower royalty per book sold. The advance itself has NOTHING to do with it. The advance is a fixed cost that is covered by the revenue generated by the publisher.

_____

Pause and reflect on that for a moment.

_____

The advance is a cost of acquisition. If that cost of acquisition in the above scenario were $50,000 of course neither scenario would have been profitable because sales would not have been enough to cover all the costs. And it is likely, if there was a $50,000 advance, the publisher would have spent more on marketing and PR.

So this is not an argument for bigger advances. Instead it is an attempt to show, albeit using controlled statistics, that an unearned advance does not necessarily equate the failure of a book!

So when is a book profitable if there is a bigger advance?

Let me do one more set of numbers to illustrate:

Assumptions:

Advance paid to author: $75,000
Retail price: $13.00 (paperback)
Net price: $6.50
Copies sold: 45,000
TOTAL REVENUE ($6.50 net x 45,000 sold.) = $292,500.

Fixed costs

Editorial expense: $8,000
Design (typesetting/cover): $4,000
Printing and warehousing:  $55,000 (the approximate cost of printing 50,000 copies)
Marketing and PR: $75,000
Administrative costs: $58,500 (20% of the net revenue)
Advance paid to author: $75,000
TOTAL COSTS: $275,500

Profit for the Publisher: $17,000 (or 5.8% of revenue before tax)

If you are an experienced person from the publishing side of the table it is obvious that this is a very generic scenario that has only an echo of reality. For example, the net revenue for a publisher is usually less than the 50% of retail that I used above. That is because distributors and specialty vendors (like the book racks you see in the airport) command a much higher discount off the retail. Thus the true picture is highly complex. And we don’t even touch on ebooks or ebook sales or royalties here. This exercise is merely to show a business model where the advance is a fixed cost. Not a cost that has to be earned out for the book to be profitable.

In the above case, a book with a $75,000 advance makes money after only 45,000 copies are sold.

So what do you think? Is the math realistic? Does it make sense? What are the implications (either to the publisher or the author)?

 

 

 

 

 

 

 

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