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.
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Pause and reflect on that for a moment.
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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)?
Thanks! I see the difference now between paperback/hardback and Christian and general market publishers. I look forward to hearing what you have to say about expectations.
Thanks for this very helpful post. I like how you put into perspective the idea that the advance is simply one of a number of fixed costs for the publisher (but one that gets more attention than printing, administrative costs, etc.). It’s easy for people to overlook how relatively small the advance is compared to all those other costs.
Excellent post. As a writer, I see all the work that goes into writing a book on the front end, but the publisher is assuming an enormous amount of risk, especially with an unknown. It’s great to see the costs lined up like that. In the end, if the publisher doesn’t make money, he doesn’t stay in business. And where does that leave the writer? It’s in everyone’s best interest to understand the costs involved.
My agent Natasha Kern suggested your blog to all her clients and I’m glad she did. You explained the economics of book publishing so well; you’d make a great schoolteacher. I am curious, though, about the $10,000 for marketing the first book versus $75,000 for p.r. and marketing for the second — the exact amount listed as the advance for each book. Should I expect my publisher to spend $20,000 for marketing and p.r. for my next book, since that was the advance I got?
The models I presented are not REAL. They are generic estimates to show costs and profitability with regard to advances.
The advance is not tied to the marketing budget. One agent told me that they have a situation where the advance was over $200k and the marketing budget was closer to $75k. The publisher was evidently using the name recognition of the author as a way to market the book without having to spend as much money.
But that is the exception.
Generally an advance is based on what the publisher think the author will earn in the first year of the book’s sales. So if paid $20k the publisher thinks you’ll earn that much.
Also, a general rule of thumb is that the publisher will spend $1 for every copy they think will sell in the first year. So if they project first year sales of 20,000, the marketing and PR budget will be $20,000.
But don’t take this as gospel or tell your agent that “Steve Laube said I should have THIS size of a budget.”!!!
The problem is that all marketing budgets are not equal either. A $20,000 marketing budget may not be actual “cash” the publisher spends on the book. It may have a sizeable portion allocated as co-op advertising expense with a major chain.
Please. Do not see the above post or this comment as a Rule or a stated Fact.
Each book has its own customized cost and revenue structure.
The print costs may be different depending on the type of paper stock chosen, the time of the year, paper shortages in South America where the printer bought their last supply, whether or not the cover has gold foil stamping on it or not.
Get the picture?
Steve
Thanks for explaining this labyrinth in a way those of us who think in words instead of numbers can understand. Now if you’ll please tackle the logic of “reserves against returns…”
Sorry, but I don’t see that this shows that not earning out is good for the publisher. It shows that the publisher pays the author more if the royalty rate is higher. To prove what you’re trying to prove, you’d need to have two examples that used the same royalty rate but different numbers of books sold.
And BTW, as an a former auditor, I’ve never seen an instance where administrative costs are a flat percentage of gross income, ie that administrative costs rise in step as the number of units sold increases. In fact, selling more units is a way of making a profit after you’ve covered administrative costs. So you wouldn’t be able to use 20% of net as administrative costs and have a realistic example.
Soooo….I’m sorry, I’m not at all convinced.
Barbara,
I never said that “not earning out is good for the publisher.” The point I’m trying to make is that if a book doesn’t earn out, it doesn’t necessarily equal “FAIL.”
The financial models I put out there are not necessarily real. They are controlled statistics to illustrate that a book with the same advance and same unit sales doesn’t equate failure of success BASED ON THE ADVANCE. Instead it is the revenue, as you pointed out. It is the earnings subtracted by the expenses.
And if the total advance paid is presented as a line item expense the model changes. Most models I’ve seen separate the earned royalty as a line item expense and leave the total advance paid as a ubiquitous number outside the profit/loss statement.
As for admin costs? I’ll have to respectfully disagree. Every Profit/Loss projection sheet I’ve ever seen has admin as a percentage of revenue for the profitability model.
And when they do “cost accounting” per book at a publishing house they apply standardized cost numbers to the revenue of each book. I argued this point when I was an editorial director. I said you should not charge a flat editorial rate on every book. But they simply took the total editorial costs in a season and divided it by the number of books we produced and charged them all the same.
However you are right. When auditing a company’s books, the admin charge would be an actual figure, not a projected one. Thus what you saw as an auditor would be different because an audit is of real numbers “as a whole” not projected profit/loss by unit.
If I had used a smaller or a variable number in “Admin costs” any publisher reading the blog would have laughed at the model as unrealistic.
Excellent post, Steve. I’ll be forwarding the link to many. Hope all is well!
Most informative! Thanks, Steve, for posting.
Thanks! I was just asking Tamela about this very thing, because my “royalties” for the first three months the book was out was $800 below what the publisher paid her and me thus far. She told me not to worry and referred me here. Okay, my brain is melted from all the numbers, but its a little clearer. Thanks!
Excellent post, Steve. And I’ve enjoyed reading the exchange that followed. Your scenario of the unearned advance has stirred up a lot of attention. Not surprised.
Grace and peace to you.
Very nice explanation, Steve. And, one of the best things about the ebook explosion is that revenues for the publisher increase without as much outgo. There’s the formatting, of course, and possibly the cost of a publisher purchase portal development, but overall, ebooks are really helping midlist authors survive and publishers keep paying decent advances.
Thanks for the great post!
Try doing some calculations for a book that has earned 30% or 50% of its advance instead of the 91% ($9,100/$10,000)you pick. 91% has practically earned its advance.
A super post that explains the mystery of the advance very well. I think I’d happily deal for several bags of wine gums though. That’d make life easier.
Amazing post Steve. being a new author is my is hard to move from the creative side to the business side. But I realize that if I pay attention to the business side I’ll have more time to be creative.
The question I would have is what kind of profit for the publisher would make them take a second swing on your follow up book?
Thanks again
Actual profit for a book to be considered good depends on the original expectations. If they planned on making $100,000 and only made $15,000 they might not be so effusive the 2nd time around.
But if they planned on a profit of $5,000 and made $9,000 there would be celebrations in the Finance department….
Thanks for your post. I’d love to know how “reserves” factor into the equation. When the publisher holds back money due to reserves, that directly impacts the ability to earn back the advance.
Yes, reserves against returns reduces the amount of money paid to the author. But if those reserves are unused they are put back in the author’s account in the next reporting system.
Example:
Author earns $5,000 in a royalty period. The publisher withholds $2,000 of that in case the stores return a bunch of books.
Next cycle the returns were $750….this means $1,250 is returned to the author.
Hope that makes sense.
just another question. if someone gives you a two book deal and for some reason you aren’t able to make good on the contract and have to return the advance. What happens with the agent’s share. Do you have to pay that back yourself?
The answer depends on the agreement you have signed with your agent. (Best not to rely on a handshake because of situations just like this.)
Most agencies have a clause that if the author is in breach of their contract with a publisher the author owes the publisher the entire amount, including the agent’s commission. So if the advance was $1,000 and the agent received $150…the author would owe the entire $1,000.
The reason for that is the agent is paid for their work to land the contract and negotiate the contract in the first place. If the author later bails on the deal for whatever reason, the agent should not be penalized for the client’s inability to fulfill the obligations of the contract.
Hope that helps.
I wondered about the advanced. Does this have to be mentioned in the contract that an advance will be paid out.
Thanks for this great post Steve. I have always wondered how some authors lived solely on their careers. God bless you.
Thanks for the post. Amazing read indeed.