Who Gets Paid in Publishing?

by Steve Laube

With all the talk about Independent 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.

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

Follow the Money

Let start with a paperback book that retails for $15.00 and is projected to sell 10,00 copies the first year.

Expenses per book:

Trade Discount $8.25 55.0%
Print cost $1.25   8.3%
Royalty to Author $1.08   7.2%
Marketing/Publicity $1.00   6.7%
Publisher overhead $3.00 20.0%
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)

Print cost: $1.25 (based on the cost to print a ten thousand 240 page books. Includes freight to the warehouse)

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 $1.125)

Marketing/Publicity:  $1.00 (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.

Publisher overhead: $3.00. This is where they pay for the editorial work (content, copy, and proofreading edits); cover design; typesetting, warehouse, collections, sales team expense, telemarketing, accounting, legal fees, administration, etc.)

Five things to note:

1)      Ebooks only eliminate the print cost. There is still production costs which 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.

5)      Before you look at that 20% 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? (bad example) Or a dry cleaners? Or a bookstore chain called Borders? What about your own business? What about your church (ouch. You mean a church has expenses?).

Bigger Picture

If we create a cost analysis of the above model, except this time do it on 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 10,00 copies the first year.)

Expenses (combined):

Trade Discount $82,500 55.0%
Print cost $12,500   8.3%
Royalty to Author $10,800   7.2%
Marketing/Publicity $10,000   6.7%
Publisher overhead $30,000 20.0%
Total Profit $    420   2.8%

 

Remember that model is for the first printing.

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. And the same efficiencies apply if this were an ebook. (And in this scenario, if the author had been given a $10,000 advance they would be getting a new check for an additional $800.)

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

Editorial – $5,000 (again, a variable cost but if you consider hiring a high quality content editor like our own Karen Ball, a copy editor, and a proof reader or two, the cost will add up)
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 e-book that was formatted wrong? This is the place where those kind of errors can be fixed.)
Sales expense – $1,000 (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.)
Admin., Legal, Accounting, I.T., Building Maintenance, Corporate Taxes, etc. – $19,500 The money to pay the rest of the infrastructure has to come from somewhere.

If there are any publisher types out there who read this and wish to chime in and verify or correct? Please do so!

 

16 Responses to Who Gets Paid in Publishing?

  1. Timothy Fish October 10, 2011 at 3:44 am #

    It is probably an issue of a poor choice of words more than anything, but it appears you are double dipping. In your definition of Publisher Overhead, you include things that seem like they should fall under Marketing (sales team, telemarketing). Also, things like cover design and typesetting are poorly described as Overhead, since these activities can easily be tied to the project. When I think of overhead, I think of things like the electric bill, janitorial services, etc. In general, a large publisher should have a lower overhead per book than a small publisher because there are more books to carry the load.

    As for the comment that this is not a hobby, the fact is that writing is a hobby for most authors, they’re just afraid that if they admit it the publishing industry professionals won’t take them seriously. I know of many hobbiests who are very good at what they do and they even make money from what they do, but it is still a hobby.

    • Steve Laube October 10, 2011 at 10:55 am #

      I intentionally separated sales from marketing. Because they are separate divisions in a publishing house with separate budgets. There is no double dipping in the numbers.

      And it is not necessarily true that having more books creates less overhead per book. Certainly there is an economy of scale, but we are talking about generic averages here. One cannot compare Random House with Home-Grown One Title Book Company. This is not that kind of post. Re-read the bold print that says “Your mileage may vary.”

      It is a challenge to write a post like this in 500 words.

      • Timothy Fish October 10, 2011 at 11:34 am #

        I said “in general” by which I meant that given a publisher like Random House and one that is smaller but is doing all the same stuff, Random House will have lower per book overhead. There are differences in management strategy and a number of other things that could make that an untrue statement, but your post isn’t really talking about that.

        As for the small one title publishing house, I agree that its difficult to compare that to Random House. That type of publishing house has an advantage over a company like Random House because though the per title overhead is technically higher, the company wide overhead is so low that they usually have under utilized resources that are sufficient to account for much of the overhead. The family computer serves as the office equipment. The spouse serves as the editor. The spare room serves as the warehouse. So while these authors won’t get rich off the additional money, they’re able to make money from resources and services that were previously unused.

    • Angela Benson October 11, 2011 at 7:54 am #

      As to writing as a hobby, there is also some concern that the IRS could come knocking at the door, but that’s a different story.

      I know this article is from the publisher’s perspective but how about an article from the writer’s perspective? When does independent publishing become a good option for the writer?

      An important point is that there is no one “author” model. There are lots of authors writing for different reasons and reaping different results.

      A Christian writer who believes God gives him/her stories to tell and share could find independent publishing of ebooks a way to accomplish that mission. It doesn’t require a publishing house or a publishing contract. It only requires a good story, some technical know-how, and faith that the person is doing God’s will. I see this as very empowering.

      There is another set of authors whose writing incomes supplement their primary incomes. This is a case where writing income pays for the family vacation but not the family home. These authors might seek independent publishing to bolster their outside incomes in ways that they have not experienced with traditional publishers.

      Then there are authors who are very well compensated from their publishing contracts who may have no interest at all in pursuing any other avenues. There could also be mavericks who want to try it on their own.

      With all the warnings of what independent publishing won’t do for authors, is there a case to be made that it is the option for some authors?

  2. Lindsay Harrel October 10, 2011 at 10:46 am #

    Steve, thanks for the information. I must admit, my head is spinning a bit. It’s so easy to forget that publishing is first and foremost a business. That doesn’t mean it cannot result in something akin to a ministry (if we as writers want to reach others with God’s love, etc.), but even ministry oftentimes takes money, and profit/loss must be considered. Thanks for a realistic view of the industry.

    • Steve Laube October 10, 2011 at 10:49 am #

      Lindsay, I could not have said it better myself!

      Steve

    • Timothy Fish October 10, 2011 at 11:50 am #

      I don’t know of a ministry that doesn’t require money, but one of the biggest differences between ministry and a business is that a business measures its profits by a dollar figure and a ministry measures its profits by results.

      • Angela Benson October 11, 2011 at 7:56 am #

        Wow, Timothy! What a powerful distinction. That money has become a measure of success in ministry is a sad commentary on where we are today.

  3. Debbie Lynne Costello October 10, 2011 at 3:12 pm #

    Hey Steve, Thanks for this information. We don’t get to see these numbers very often so this was a great eye opener. As someone who’s parents owned a hardware store I understood overhead…well, I thought I did. You brought a whole new light to it for the publishing industry.

    • Donna Russo Morin October 10, 2011 at 4:23 pm #

      While I appreciate the concisely written, easy-to-follow the money explanation; however, I call question to one fact in particular: unless you’re one of the big names, there is not one publisher today expending a $1.00 per book specifically for that book in marketing/advertising. It is an inconceivable notion that a 10K print run book is receiving a $10,000 marketing/advertising budget. And without such an marketing/advertising budget, it is very difficult to become a big name.

      • Steve Laube October 10, 2011 at 4:40 pm #

        Donna,
        That one dollar per projected sales is truly the rule of thumb. And publishers do use that measure. The problem is that marketing and publicity dollars are mixed in the same pot and there are both “cash” expenditures for ads and design and catalogs and “personnel” expenditures for media placement and the like.

        Recently I saw a client’s Marketing campaign from their publisher. That book (a novel) is projected to have 10,000 copy first years sales (this was stated back when we contracted the book). The publisher is hiring an outside PR firm for the publicity campaign. The cost of that three month campaign is $9,000 (I saw the invoice). So there truly are publishers who are spending money on marketing and PR.

        Publishers also will use something called Co-op advertising dollars to get a store to put a title on a table or an endcap. This money is garnered from a percentage of that store’s annual purchases from the publisher. Thus it isn’t “cash” but it is a “value” that the publisher “spends” with that vendor. (By the way, all the quotation marks are to emphasize the word with the air quotes around it, if we were talking over coffee.)

        In the romance field where it appears that you are writing, marketing dollar is a little harder to come by. Many times the romance publishers use cover design, store placement, the strength of the line itself (like Summerside Publisher’s “Love Finds You” line of books).

        As I’ve said before, “Your mileage may vary.” Publishing economics and marketing dollars is often a study in situation ethics. :-)

  4. Donna Russo Morin October 10, 2011 at 4:55 pm #

    I actually write straight historical fiction; the misimpression could be a symptom of misplaced publishing economics. But thank you for the additional information.

    • Steve Laube October 10, 2011 at 5:22 pm #

      Sorry for assumption. I just glanced at your web site and saw the cover and publisher and made an general comment. (Beautiful cover, by the way.)

      I am sorry your publishing experience has not received the marketing support it deserves.

      At a recent conference I made a very public comment (to a room of about 70 people) that one of the main problems for publishers is a lack of communication. If the author doesn’t know what the publisher is doing for them and the author cannot see it, or have something tangible to point to, the author feels that the publisher is doing nothing for them.

      True story:
      Publisher changes marketing focus from spending money on media and publicity and targets space ads in magazines and online banners and blog tours. Author’s media exposure dropped 90%. Author calls me in a fury saying, “The publisher has abandoned me and nothing is happening for my book. I went from over 40 interviews on my last book to four this time around!”

      I talked to the marketing director and found out about the shift in marketing dollars. I said, “In other words you are spending money that does not touch the author. And you failed to tell the author about it.”

      The irony is that at the end of the day both books sold about the same number of copies. That was the author’s “audience.” But the publisher blew it big time not communicating what they were doing and the author left for another publisher.

  5. Karen Barnett October 11, 2011 at 10:03 am #

    This is very eye-opening. I always struggle with the $15.00 price tag in a bookstore. I’m spending more time at the library and buying from Amazon, but I hate that I’m one of the reasons that stores like Borders are going under. I also have always wondered why e-books aren’t cheaper than print. Now I know.

    Thanks for crunching the numbers for us!

  6. Mhairi Simpson October 11, 2011 at 11:52 am #

    Thank you for the transparency. However, for me this still doesn’t answer the question of why e-books are as expensive, and sometimes more so, than their print counterparts. For a start, no physical printing or shipping costs. For another thing, the editing which has to be done for the print copy goes for the e-copy as well. Unless you’re saying that the book is edited again before being uploaded in e-format?

  7. Jeannie Campbell, LMFT October 16, 2011 at 9:49 pm #

    This is such an eye-opener into the business side of the book. I’m vastly appreciative of the time and effort I’m sure this post took. I’ll be tweeting about this for sure.

    It was nice getting to sit next to you at lunch during the ACFW conference. You got me thinking about my LMFT initials…licensed massage therapist indeed. Can’t have anyone thinking that! :)

    Jeannie

Leave a Reply

Your email address will not be published. Required fields are marked *