by Deanna Carlyle 2003
Author’s note: This article first appeared in the March 2003 issue of the Romance Writers Report, a magazine that goes out to over 10,000 members of Romance Writers of America. In it, I laid out a detailed profit-and-loss analysis for a single, traditionally published paperback book from acquisition to distribution, a publishing model which is still alive and unwell. I predicted that e-publishing would solve the problem of high production costs for publishers and authors. Was I right? Heck yeah!
I used to think of the big publishing houses as robber barons rubbing their palms together while I — the lowly hack — wrote for pennies at my kitchen table, a slave to one of the last great cottage industries in the western world.
But then I did the math and saw the error of my ways….
First of all, we are not hacks, at least not according to our readers and therapists. Second, and equally important for our positive outlook, we need to realize that most publishers are struggling as hard as we are to turn a profit–any profit.
Admittedly, one or two of those mega-media gloms is out of control, but this article isn’t about them. It’s about the average guys, the medium-sized publishers and corporate divisions that are fighting hard to stay out of the red.
But don’t take my word for it. Let’s do the math.
First… A Dose of Insta-Biz
Before your publisher even thinks about taking on your book, she completes a comprehensive profit and loss analysis (P&L) on your manuscript. She and her team estimate all the expenses they will incur, and then forecast your expected sales over the first, second, and third year, using several price points to determine acceptable profitability for worst and best case scenarios.
Below, we’ll trace one such scenario: the fate of a midlist mass market paperback as it trundles down the production pipeline and lands on a bookstore shelf in hope of a customer.
A caveat: The numbers cited here do not represent an industry standard. Not all publishers use the same profit and loss formulas or even have the same production needs and costs. According to Bob Erdmann, past president of the Publishers Marketing Association, “a mid to large size New York publisher would have very high overhead in many categories (rent, salaries, freelancers) than another similar size publisher in Dallas. . . . What is normal for one publisher may be extravagant or insignificant to another.”
The costs for our sample case, generously provided by Steven Zacharius, president and chief operating officer of Kensington Books, reflect a 50,000 first print run for a midlist title retailing at $5.99, with a 52.5% sell-through rate.
And now, let’s crunch some numbers:
#1 First stop: Advance/Royalties
For calculation and budgeting purposes, many publishers factor the author advance and royalty costs together as a single figure. In our scenario, the royalty total is based on the cover price, calculated as 8% of the number of net units times the cover price. How does this look with a print run of 50,000 at a 52.5% sell-through rate? Here’s the math: 50,000 times 52.5% = 26,250 (net sales in units) times 5.99 (the list price) times 8% = $12,579.
Price Tag: $12,579
#2 Next Stop: Proof/Copy/Edit
Outsourced copyediting and proofreading cost this publisher $4.00 per page, whereas the in-house editor salaries are factored into the overhead category listed below.
Price Tag: $1,536
#3 Then on to: Typesetting
Typesetting costs $5.00 per page. Interior design and layout, on the other hand, are done in-house, and those salary costs are factored into the overhead.
Price Tag: $1,920
#4 Meanwhile: Cover Art
Commissioned cover art isn’t cheap.
Price Tag: $5,000
#5 Then Comes: Paper, Printing & Binding (pp&b)
Because of the low retail price point on mass market paperbacks and the major costs of distribution, mass market publishers must attain a very low unit price for paper, printing and binding, hence the necessity for a low grade of paper. Mass market costs are normally well under a dollar per unit, which isn’t often the case for trade publishers. In our example, the pp&b costs come to 45 cents per unit.
Price Tag: $22,500
#6 Including: Embossing
Add another .06 per copy for foiling and embossing.
Price Tag: $3,000
#7 As well as: Separations/Promo Covers
The promotional covers used as sales tools cost $3,000.
Price Tag: $3,000
#8 To Have and to Hold: Warehousing
The warehousing fee covers both the storage and handling of the books when they’re shipped. The fee for this large print run comes to 5.5 cents per copy.
Price Tag: $2,750
#9 Keep on Trucking: Freight
Shipping and warehousing are separate costs, with shipping at 5.5 cents per book.
Price Tag: $2,750
#10 Meanwhile Back Home: Overhead
Overhead is a major per-book expense for big-city publishers. “Every company does this differently,” says Kensington president Zacharius. “I assumed a 15% rate of gross dollars billed [$149,750 in this case, which is the gross sales after discounts and before returns].” This amount covers all the expenses of running the business: lights, rent, salaries, computers, and the rest. Zacharius understands that “writers will say, ‘but we have overhead too,’ but this is a cost of running our business.”
Price Tag: $22,463
#1-#10: Subtotal of publisher investment (not accounting for returns): Price Tag: $77,498
Red or Black? That is the Question
The costs don’t stop there for publishers. They must also grant deep sales discounts and account for 20-60% returns. Only then can they arrive at a net profit figure. Let’s do the math in Kensington’s case:
First we need to arrive at a gross sales figure. To do this, we multiply the 50,000 print run times the list price of $5.99 to get a subtotal of $299,500, which we then multiply by the %50 retail and wholesale discounts. The result:
Gross sales (after discounts): $149,750
To arrive at a net sales figure, we then multiply the gross sales figure times the percentage of the projected actual sale: that is, 52.5% of $149,750, which equals $78,619 net sales. “In this case,” Zacharius explains, “I figured 65% sale for direct channel (stores and chains) and 40% sell thru for wholesale business (supermarkets and mass merchandisers).”
Net sales (actual sales after returns and discounts): $78,619
See the Numbers Crunch
Now for a summary of our profit and loss analysis:
78,619 Total net sales
-77,498 Total publisher investment
$1,121 Total Net Profit
The Bottom Line
In our sample scenario the royalty earnings come out to $12,579, while the publisher made all of $1,121. “The author is making more than the publisher in this case,” Zacharius explains. “If we had to pay the author more . . . it would come right out of the bottom line.”
“Historically, publishers have only earned about 2 to 3% Return on Investment (ROI),” says Robin La Fevers, a book production coordinator and women’s fiction writer. “One of the biggest negative impacts all the publishing house mergers have had is that the large media companies are buying publishing houses expecting a 7 to 10% ROI, but it ‘ain’t gonna happen.’ There just isn’t that much room in the numbers.” Nor in our sample P&L analysis.
In the traditional distribution system–as opposed to print on demand and epublishing–most books are sold on consignment. Wholesalers and bookstores, as well as most other retail outlets, are allowed to return unsold copies of books to the publisher for credit. As La Fevers points out, “it is rare not to get some returns, and many of the returns are so beat up they can’t be resold. Returns can run anywhere from 20% to 60%. So that could equal 20 to 60% of the print run that you would have to write off as a loss.”
And this is just for trade paperback and hardcovers. Mass market books can’t be resold at all. “[They] come back as stripped covers only,” explains Zacharius. “It’s too expensive to ship them back in relation to the cost of reprinting them.”
Now we know why first-time and veteran fiction authors are rarely offered a $50,000 advance or a huge promotional budget, and why midlist books are falling through the profitability cracks, in some cases being phased out altogether. On June 27, 1997, for instance, the front page of the New York Times carried an article with this shocking news: HarperCollins –the publishing giant owned by Rupert Murdoch’s News Corp.– planned to cancel an unprecedented 100 titles slotted for publication.
Holding Out Hope
With the market as tight as it is, what’s a no-name writer to do? It’s easy to view the situation as hopeless, but there are some areas we can personally and positively influence:
We can dig deep into universal themes and hone our craft.
We can explore ways to increase our name branding and story “franchising” (for instance, a club-like author website or a book series sharing the same fictional universe).
We can hold on to our subsidiary rights and look for creative ways to earn more for ourselves with them than a traditional publisher might.
We can ask for an advance against royalties calculated as a percentage of the cover price of the book rather than a percentage of net monies received.
We can ask for our print run numbers and keep a close watch on our royalty statements to track the actual sales of our book.
And if we’re feeling adventurous, we can pursue alternative production and distribution models like ebooks and print on demand. Someday readers and traditional publishers will embrace these new channels in a big way . . . but I’ll leave that topic for a future article.