The economics of publishing is a bit of a mystery if you are just coming into the business. With all the talk about indie 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.

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

Follow the Money

Let’s start with a paperback book that retails for $15.00 and is projected to sell 10,000 copies the first year.

Expenses per book sold:

Trade Discount	$8.25	55.0%
Print Cost	$1.25	8.3%
Royalty to Author	$1.08	7.2%
Production	$1.00	6.7%
Marketing/Publicity	$1.00	6.7%
Publisher Overhead	$2.00	13.3%
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).

I could have set this up with the following expenses as a percentage of the net receipt but chose to base these numbers as a percentage of the retail price for simplicity’s sake.

Print cost: $1.25 (based on the cost to print ten thousand books at 240 pages in length; includes freight to the warehouse). Prices fluctuate, depending on the printer, paper availability, type of paper stock, number of books printed in a single printing, etc. If you were to use print-on-demand, each book would cost approximately $3.60 for a 240-page book.

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 $1.25). Note that this scenario does not account for any upfront advance dollars paid to the author. If the author was given a $10,000 advance, the monies earned in this column would go toward offsetting that expense.

Production: $1.00. This is where they pay for the editorial work (content, copy, and proofreading edits); cover design; and typesetting. While this is a fixed cost, I’m basing this on the first 10,000 sold or about $10,000. (This may seem high, but the top-level editors and designers are worth their weight in gold.) Even if all work in this section is done in-house, it is still an expense that must be covered (salaries/benefits).

Marketing/publicity:  $1.00. (This is 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. Also do not forget that the editorial department is involved in writing back-cover copy, writing catalog copy, proofing advertising, and more.

I intentionally separated sales (see below under overhead) from marketing. They are separate divisions in a publishing house with separate budgets.

Publisher overhead: $2.00. This is where each book sold contributes to pay for office space (rent and utilities), warehouse, returns of unsold books, sales-team expense, telemarketing, accounting (accounts payable and receivable), legal fees, bad debts, unearned advance write-offs, administration/management, nonbook-related editorial costs, etc.

Six things to note:

(1)      Ebooks only eliminate the print cost. There are still production costs that 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. Recently, an article interviewed an author who claimed to have spent only $300 to produce their book. That author obviously did not pay for freelance editors.

(5)      Before you look at that 13.3% 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? Or a dry cleaners? Or a bookstore chain? What about your own business? What about your church? (You mean a church has overhead/expenses?)

(6)      It is not necessarily true that having more books creates less overhead per book. Certainly there is an economy of scale in some service areas, but we are using generic estimates in this post. One cannot compare Penguin Random House with Small Press Ten Titles Book Company.

Bigger Picture

If we create a cost analysis of the above model, except this time do it on selling 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 10,000 copies the first year. A value of $150,000 at retail.)

Expenses (combined):

Trade Discount	$82,500	55.0%
Print Cost	$12,500	8.3%
Royalty to Author	$10,800	7.2%
Production	$10,000	6.7%
Marketing/Publicity	$10,000	6.7%
Publisher Overhead	$20,000	13.3%
Total Profit	$ 4,200	2.8%

Remember that model is for the first printing.

Note that if the author received a $10,000 advance paid before publication, that has been offset by royalty earnings and the author has received an additional $800.

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. Similar efficiencies apply if this were an ebook.

Go back to that “Production” section. Who gets paid there?

Editorial: $6,000 (again, a variable cost but if you consider hiring a high quality content editor, a copy editor, and a proofreader or two, the cost will add up). There can be as many as five or more editorial people involved in the direct editing of a book.
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 ebook that was formatted wrong? This is the place where that kind of error can be fixed.)

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

Sales expense: $1,500 (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.)
Production manager and managing editor: $2,000 ($1k per person per new book published–a wild guess). These people are critical to the smooth running of a large publishing house. The production person is not only involved in this one title, but also the inventory management and printing of older titles. If a book (4-color) is being printed overseas, there are a number of logistics that must be managed. The managing editor insures overall work flow inside the editorial department. In my days at Bethany House as editorial director of nonfiction, I leaned heavily on my managing editor.
Acquisitions expense: $500 (a wild estimate for this contribution). What about all the time the editors spend reading proposals and full manuscript submissions only to have to decline them? That is time not spent on editing contracted books. That expense is part of overhead that does not produce sales.
Administration, legal, accounting, IT, building maintenance, corporate taxes, etc.: $14,500. The money to pay the rest of the infrastructure has to come from somewhere.

A client of mine, a debut author, visited the headquarters of his new publisher last Fall. He said, “I met 35 people who were involved in the management, production, marketing, and sales of my book. I had no idea!” Imagine if he were an indie author. He would have to be all 35 of those people and be an expert in every aspect. That is why a traditional publisher keeps around 80% of the net revenue (approximately 20% going to the author in royalties). Those people have earned their living.

[A previous version of this blog was posted in October 2011.]