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.