Publishing Basics, Part 2: Royalties

March 3, 2009

Royalties are all tied up in advances, as yesterday's post indicated. A royalty is a percentage of money that is paid the author based on the price of the book. As indicated yesterday, that royalty can be based on the list price of the book or the retail price. Or, based on whatever the publisher wants to base it on. Here's part of a clause from one of my contracts with my former publisher:

"...including but not limited to hardcover, trade paperback, and mass market in English and Spanish, in whole or in part, at prices to be determined by the Publisher, in return for which rights the Publisher agrees to pay the Author a royalty amounting to 10% for the first 5,000 copies, 12-1/2% for copies 5,001 to 10,000, and 15% for all copies thereafter of all moneys actually received by the Publisher from sales of said Work after all returns and allowances. Sales made at a loss such as damaged and imperfect copies sold for clearance, overstock or remainders sold at discount of more than 80% shall not be subject to payment of royalties by the Publisher to the Author."

First, a comment about the royalty amounts. These are more or less typical for trade paperback and hardcover, although 8% is not unheard of for the first print run either. When you get into mass market paperbacks it's not uncommon for the royalty percentage to be 6-8% and when  you get into print-on-demand companies like iUniverse the royalties may be in the 25% range, which is also not uncommon in electronic publishing.

The point there being that although there are "industry standards" for royalties, there's typically a range and that range is negotiable. As you can see it's common for the royalty rate to go up the more books you sell. There are also "elevator clauses" although I have never had them, that more or less says if your book suddenly goes crazy and sells a million copies you'll get a bonus of some sort in addition to all the extra royalties. I've even heard rumors that some regular bestsellers have clauses indicating bonuses if they end up on various bestseller lists.

Second, let's examine this part of the clause: "..all copies thereafter of all moneys actually received by the Publisher from sales of said Work after all returns and allowances..."

Here you need to think a bit about how the book business works these days. A publisher prints the books, sticks them in a warehouse, then informs the distributors (Baker & Taylor, Ingram, et al) and bookstores that your book is now available. The bookstores order them from the distributors. The books are delivered to the bookstore. The bookstore pays for those books, somewhere in the range of 40%-60% of the list price of the book (I don't have the exact figure), and then tries to sell the book. If they sell the book, great, they take their profit off the top and pay their bills. If the book doesn't sell and they eventually decide they need to make room on their bookshelves for better selling books, they return the books to the distributor/publisher and get a refund on the amount they paid. My understanding is they take a 10% hit and the publisher pays for UPS to deliver the books back to the distributor. (Which makes me think that if you want to make any money in this business, either own a warehouse or own UPS).

So, back to that clause. What this means is, when a publisher decides to pay you royalties--typically two times a year although some large publisher might actually do this quarterly--one of the things you might see on your nearly incomprehensible royalty statement is: "Held on returns" or something similar. What this means is they're not paying you all your royalties. What the publisher is doing is holding back on some of the royalty money because they expect a lot of your books are going to get returned from the bookstores and they're going to be refunding money to the bookstores. This is often 10% ... although that's not a given. I had lunch with an author friend and an editor a few years ago and the author was claiming that his publisher was holding back about 90% against returns. The editor sympathized, but said they'd loosen up at the next royalty period. I mentioned this to my agent who thought they must have both been mistaken. I don't know, but given my own experiences with publishers, it wouldn't surprise me if that's how they did it. Again, this is a policy that decreases the risk for the publisher.

As Joe Moore, The Great and Terrible, suggested in yesterday's comments, I need to mention sell-through. Sell-through might have belonged in the advances piece. Here's the thing about royalties that you really need to keep in mind. Ready?

Publishers don't expect to pay you any.

Yeah, I know. "What?" you say. "Are you crazy?"

The answer to that is, "Yeah, I'm a novelist." As mentioned yesterday, publishers base their advances--in theory--on how many books they expect to sell. Sort of. Because in reality, most books don't earn back their advances. "Sell-through" is the term used to describe the percentage of your first print run you sell, or, in other words, how much of your advance you earn back. And here's the key: publishers believe that 70-80% sell-through is terrific.

NOT, we should point out, selling all your books and going onto another print run. That's fantastic all right, it just doesn't happen all that much. Publishers increasingly look at an author--especially a first-time author--and evaluate his or her's "success" based on sell-through. You sold 60% of your books, not so good. 70%, pretty good. 80%, great. Anything more than that, Boy Howdy, Hallelujah! 

But where in there are royalties calculated? Hmmm...

Which brings up the sell-through corollary. Let's take two authors. One's novel sells 1000 copies in the first 6 weeks of being on the shelf, then dies off completely and doesn't sell anything else the rest of the year. Author #2, however, whose novel came out the same day, has a much slower start, but sells gradually over the course of the year and by the end of the year sells 1000 copies. Which author is more successful?

The one that sold 1000 copies in the first 6 weeks.

There's a term to describe this, but I don't remember what it is. Something to do with velocity. Anyway, the typical shelf life of a novel is about 6 weeks. This didn't use to be the case. But back in the 1980s or 1990s the government passed a tax law making it more difficult for companies to write off excess stock kept in the warehouse. This was meant to prevent companies like Black & Decker from keeping electric drills in the warehouse indefinitely, writing them off on their taxes forever. What it did to publishers was make them remainder books in the warehouses a whole hell of a lot faster and push to get those books off the shelf in about 6 weeks.

Remainder is another publishing term meaning they unload their warehoused books for about a buck a copy to whoever will buy them--often the authors--who then try to sell them for a couple bucks. Those that don't get remaindered get delivered to a pulper or shredder where they're turned into attic insulation. At the bookstore you see these books selling for about half price, but the bookstores still run a profit on them. Now, if you look at the clause way up there above, you'll see that the author, however, gets bupkis. 

This is going on forever, but I want to mention all the interest in electronic publishing, particularly as it regards the Kindle. Amazon is selling novels for the Kindle at about $10 a copy. It's not at all clear to me how these royalties are working out. The publishers are complaining that the price is too low, but Jeff Bezos, the Grand Poobah of Amazon claims he's merely selling them at the price consumers are willing to pay. (From an outside perspective, Bezos is almost single-handedly revolutionizing the publishing industry by doing this).

With e-publishing there's no returns. There's no printing costs. Publishers are whining that they still have expenses and overhead. (And has anyone ever wanted to suggest that publishers cut their overhead, especially those whose offices are in New York City, one of the most expensive real estate markets in the world? One of my clients' offices were on Park Avenue. A year or so ago they moved to Newark. I bet that helped their bottom line a lot, although I think it also increased the number of people pushing for telecommuting).

I suspect that e-publishing is the wave of the future. We'll still have paper books, but not as many of them. And e-publishing might very well get rid of remainders and print runs and sell-throughs and holding against returns.

Again, I might have missed something or been too general, so if anyone has any comments, please share them here.

Cheers,

Mark Terry