Every traditionally published author needs to understand the principle of “Reserves Against Returns” which is an integral part of publishing economics. It can reduce the amount of money an author receives in their royalty statement. 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.
Instead, the publisher makes an estimate on every royalty statement and withholds a “reasonable reserve against returns.” In some situations it can seem like the publisher abuses 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!
But never fear! If the returns do not use up the reserve the difference is credited back to the author. Let’s watch the math in the following example:
- Book sells 10,000 copies which generated $10,000 worth of author earnings in July-December. (This is assuming the author earned $1 in royalties for every book sold.)
- Publisher creates a reserve of $5,000 in January in case there are returns after Christmas. This, in essence, means they hold back paying the royalties on 5,000 copies in case a truck full of that book suddenly appears at their warehouse. Meanwhile they 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 back to the author the $2,000 balance in their account.
Does this make sense? I hope so. The bottom line in this example is that the book sold 7,000 copies and the author earned $7,000.
By the 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. It can happen if a bunch of people return their ebook purchase, but it would be rare if it were thousands of copies.
[This is a heavily updated version of a post published in June 2011.]
Fun Fridays – August 24, 2018
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.
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
I’m learning so much from your blog, Steve. Knowing all this before pursuing
publication is like taking childbirth classes before going into labor. You know exactly what to expect, are aware of all the possible complications and eagerly anticipate bringing your “baby” into the world.
I am grateful for the education you and your agents provide and enjoy the comments of fellow writers. Thank you so much! It’s very helpful to know what we’re getting into. Like birthing, creating the story was the easy part .
Thanks for clarifying! I’ve wondered how this works.
I wonder if you could do a post on how to read the royalties statement.
Math at 9 in the morning? I’ll take it!
Thanks for putting this in plain English. I’m sure I’ll be so starstruck when I finally get a contract that I may not want to read the fine print. Like Nancy said, I’m glad I’m reading this now so I can get a better understanding of the process before I jump into a contract.
Makes sense. It would be interesting to learn how that practice developed, since it’s unique to hard goods.
Excellent question Andrew. Below is a quote from an amazing book called MERCHANTS OF CULTURE by John B. Thompson (page 18 footnote). I highly recommend the book to anyone interested in the history of publishing and bookselling.
“The practice of allowing bookseller to return stock for full credit has a long history in Europe but was used rarely and half-heartedly by American publishers until the Great Depression of the 1930s, when publishers began experimenting seriously with returns policies as a way of stimulating sales and encouraging booksellers to increase stockholdings. In spring 1930, Putnam, Norton and Knopf all introduced schemes to allow booksellers to return stock for credit or exchange under certain conditions, and in 1932 Viking Press announced that orders for new books would be returnable for a credit of 90 percent of the billed cost…The practice of returns subsequently became a settled feature of the book trade and marks it out as somewhat unusual among retail sectors.”
Thanks, Steve, for all the info you and your agents share so we can fully understand the publishing industry…it takes the guesswork out of what we can expect.
This is very informative – thank you for sharing this information. I have found this blog incredibly helpful in many respects. Gleaning from this content will undoubtedly help many determine what to expect as they progress toward their publishing goals!
I’ve learned so very much here,
this intersection of market and art
that adroitly stokes hope; but fear
that I may not be wise enough to play a part
in the writing world, this passion so dear
to my thought-and-word-overflowing heart!
But my hand is held – “Don’t cry in your beer,
just learn today’s lesson, make a start.”
So a loud, bold THANKS to the folks at Laube
without whose help, writing would stay a hobby.
Thank you for sharing, Steve. This article explains questions I’ve had but never asked simply because I’m not published…yet. Now that I know I’ll not be surprised when it happens.
Along with thanks for your teaching, is it proper to point out typos? Or perhaps I’m reading it wrong.
“means they are hold back paying” — “are” is not needed
“By they way?” — the instead of “they” and I wonder about use of “?”
Apologies from a former editor.
Thank you Ann. I’ve never claimed to be a proofreader.
In fact, I keep proving it.
Steve
It is crazy that books are the only commodity that can be returned to the “manufacturer” in this way!
I was pleasantly surprised to receive a royalty check for my Christmas book that released last fall. I was more surprised that the reserve was 30% (way more than previous books). I’m sure seasonal books are returned at a higher rate than the average book though; it will be interesting to see if any of the reserves are released on the next cycle.
I’d like to see us implement the British tradition of paying authors even when their book is checked out from the library (kind of how songwriters get a royalty whenever their song is played).
Mary,
Surprised they only held back 30%. I’ve seen 50% reserve on seasonal books in the past.
I doubt the U.S. will ever implement a royalty on library check out. It would come out of the taxes we pay! It is called a “Public Lending Right” (PLR) and is found in a number of European countries. Here is the Wikipedia article in case anyone else is interested in learning more:
https://en.wikipedia.org/wiki/Public_Lending_Right
Interesting. How many books does a publisher typically have to sell for a mid-level author before they earn out the advance and start paying royalties? Until that point, the author wouldn’t even know what their return rate was, would they?
It is possible to return a Kindle purchase within 7 days for possible refund. (The Amazon help section says they will “consider your return if we receive your request within seven days of the date of purchase.” I have read blogs about people who buy, read, and return within that 7-day limit, effectively trying to get books for free that weren’t. I don’t know how common that is in the ABA market, but I doubt it’s big in the CBA. From when my first return showed up and the total I’ve seen so far, ebook returns might be only a small fraction of a percent.
I’m not sure if I could tell whether there had been POD paperback sales followed by return for refund for CreateSpace sold through Amazon. There’s no obvious listing in the reports I download. The author can enable returns or not at Ingram Sparks, and I didn’t enable that. IS sells to bookstores, so it might experience return issues, but indie sales tend to be to the final reader who deliberately orders a copy, not speculative purchases by resellers.
Think of an average of $1 royalty earned per book sold by a traditional publisher. Therefore if the advance is $10,000 then the book needs to sell 10,000 copies (after returns) to begin earning more money.
Yes, ebooks can be returned. But traditional book publishing reports royalty earnings every quarter or twice a year depending on the publisher. Therefore any returns in ebooks are not visible in the report since they happen within a longer time frame. The only “problem” would be if the cut off date for reporting is August 31st and then a billion ebooks were returned on September 1st. That would be a problem…but an unlikely one.
As for Indie’s not enabling returns at Ingram Spark or CreateSpace? That is the author’s choice, of course. But note that stores will NOT carry a book on their shelves if it is not returnable. Thus they might be reluctant to even special order a copy in case the customer refuses to come in an buy the book, or returns it after purchasing it. I know of an author whose local store refused to carry her book until she made it returnable. They also refused to support her book signing events if the store had to buy the books for the event. Unsold books could not be returned for credit. So the store simply said “no thanks” to any signing events.
Understand the implications of the choice.
I’ve had to special-order fiction by best-selling traditional authors through my local Christian store, and they make me pay when I place the order so there is no risk to them. Is that common, or does it reflect on the vulnerability of the local store, which had 6 spine-out racks of Christian fiction two years ago and now has 3 racks of face-out. (It’s the biggest Christian bookstore in a market with 600,000 people in a 40-mile radius.)
It may be that each store has differing policies with regard to special orders. I cannot speak to them all.
If the store you are describing is a Lifeway, they have recently cut back on their in-store fiction selection.
It’s a large independent that’s been in operation for at least 35 years, maybe more.
Sad that Lifeway is doing that. Is that an industry trend? What can be done to reverse it?
Carol, in my view you’re doing the best thing possible to reverse the trend – writing excellent an engrossing fiction that has a strong appeal outside the CBA corral.
You’re showing people, through your masterful storytelling, that Christians can be really cool people, and Christianity a lifestyle that’s far more vibrant than paganism.
In short, you’re showing that Church can be a real toga party.
Sorry. Couldn’t resist.
But seriously, writing like yours is exactly what we need to broaden the base, and increase the demand.
Thanks for the very informative blog posting, Steve. I appreciate your taking the time to explain that.
Thank you for making this issue clear to authors. Based on your example, I am assuming it is a business contract with a one-year time limit, which is then renegotiated?
Thanks for this post on returns. My questions when a small publisher is bought out by a larger publisher. a contract with the smaller house did not have a return clause and they never withheld money against returns. When the larger house bought the smaller one, they did not issue a new contract. The new publisher started withholding money against returns- even though my contract had no such language. When challenged, they simply said it’s their policy. Can they legally do this, or is it a violation of the contract? No agent is involved.