Earning My Money

Charice wrote in to ask, "Can you explain how money is paid on a book publishing contract? I've got a contract in front of me, and I don't understand it."

Happy to, Charice. First, most authors are paid an advance against royalties when signing a book contract. There's a long tradition of publishers paying advances to authors, since it allows the author to survive while he or she is working on a book. This isn't free money -- it's sort of a no-interest loan that will be earned back after your book releases. Let's say the contract calls for a total advance of $20,000. Typically you'd get one-third of this on signing, another third upon turning in the completed work, and the last third upon publication. (That said, there are a million ways to divide the advance. Some pay half on signing, some pay a percentage when the author completes the bio and marketing forms, etc.) So when your book releases, you're now in the red $20,000 to the publisher. You've been paid that amount, but you haven't earned anything back yet. 

Second, as your book sells you are credited with  money for each sale. That's your royalty money, and with each sale it slowly reduces that $20,000 debt. Most trade publishers in ABA (that would include Random House, HarperCollins, Penguin, Simon & Schuster, HBGUSA, etc.) pay a standard royalty on hardcover books: 10% of the book's retail price on the first 5000 copies sold, 12.5% on the next 5000 copies sold, and 15% thereafter. Royalties for most trade-paper books are 7.5% of the retail price, and mass market books pay a bit less than that. (Be aware: Most CBA publishers don't pay on the retail price of the book -- they pay on the net price, which is the amount of money the publisher actually receives from the bookstore. So though CBA royalties may seen higher, you'll have to do some math to determine which method will pay you more money.)

If your book is a $25 hardcover, you'd be making $2.50 for each of the first 5000 books sold. (Did you see how I got that figure? $25 x 10%.) What happens is that the publishing house keeps track of that figure, and applies that as a credit to your account. So if you sell one book, you no longer are in the red $20,000 -- you're now in the red $19,997.50. After the first 5000 copies have sold, your earnings jump to $3.12; and after 10,000 copies have sold, you are earning $3.75 per book. With every book sold, they credit your account  the appropriate amount. Eventually you erase the $20,000 debt, and you begin making money that will be sent to you a couple times per year. Once you've passed the $20,000 mark (or whatever your advance was), it's said that your book has "earned out." Now you're in the best possible situation -- a company is going to send you checks on a book you finished a year or two ago. There's no better feeling than getting a healthy royalty check and remembering that you're making on a project you're no longer working on.

Some publishers pay once a year, some twice a year, and some four times per year. Whether or not your book has earned out, you should be receiving a royalty statement from the publisher with each pay period, stating exactly how many copies of your book sold, what your earnings are, and either (A) the amount of money you are being paid or (B) the amount of money you're still in the red. And by the way, I've used the terms "debt" and "in the red," but an advance is really not a loan, in that you're not generally required to pay back an unearned advance. 

On a related matter, Brynn asked, "Does a publisher lose money if a book doesn't earn out?"

Every business can lose money. I mean, if you own a shoe store, you order in shoes you can't sell, and have to drastically reduce prices, you could lose money. That said, the argument that an unearned advance equals a loss for a publisher just isn't true. All you have to do is look at some math...

Let's take some big book the publisher is doing with a celebrity. She's created a $25 hardcover, and the publisher has paid her a $100,000 advance. The average discount a bookstore gets when ordering a book is 50% -- so they're paying the publisher $12.50 for that book. From that amount, you have to subtract the author royalty on the first 5000 copies ($2.50), the next 5000 copies ($3.125), and thereafter ($3.75). Of course, the publisher has to pay for the actual hard costs of the book (ink-paper-binding). That $25 book probably cost about $3 to produce. (The more copies they printed, the cheaper each copy becomes.) Some of the publishers state right in their contracts that anything sold at an 85% discount is considered "at cost," so they're assuming a hard cost of $3.75 for a $25 book. That seems a bit steep to me, but let's assume it's correct. In fact, let's round it up a bit. Most business economists will tell you that about one-third of a product's cost can be attributed to overhead, so let's say the $12.50 the publisher received for the book is down to $6 after paying the author, the printer, and the overhead (including the editor, the publicist, the light bill, etc.)

Six bucks. That's more than twice what the author was paid per book. (I'm not complaining, nor am I criticizing the publisher. Just pointing out the facts.) Still with me? Okay, since this is a big book, let's say the publisher printed fifty thousand copies and sold half of them. They spent $200,000 on printing and overhead ($4 x 50,000). They received $312,500 from bookstores ($12.50 x 25,000 copies sold). They would pay the author her royalty of $84,375 ($2.50 x 5000; $3.125 x 5000; $3.75 x 15,000).  The author hasn't earned out -- she's still in the red $15,625. The publisher is left with $228,125. Out of that they pay their overhead, and they've got $28,125. Even if they write off the rest of advance, they're sitting on $12,500.  Maybe they remainder the rest of the books for a dollar each , so they just got in another $25,000 (and royalties aren't paid on remaindered books), so now the publisher has $37,500. Did you follow that? The book did NOT earn out, but the publisher still made money.

A couple years ago, a publisher paid huge money to the Clintons for a book. The advance was in the millions, and never earned out. The publisher still made money. Don't accept the  myth that a book must earn out or the publisher is losing money -- it's just not true.

In fairness, I should add that publishers DO lose money on some projects. If they paid a huge advance and the book tanked, they'd lose money. If they spent a fortune on full-page ads in USA Today and nobody bought copies, they'd lose money. But the majority of books do not earn out their advance, yet publishers stay in business... that alone should help you realize that "earning out" does not equal "the publisher making money."

And now that I've said that, let me clarify something: I think it's great that publishers are making money. I don't begrudge anybody making money. In fact, I hope they all do very well and make lots of money, since I work with publishers on a daily basis. I just want to answer your question clearly, Brynn.

Kathy wrote and asked, "I'm in negotiations on my book contract. What's a fair advance?"

Um...that question is impossible to answer. It depends on how many copies the publisher can sell. Agents will sometimes create a formula of trying to establish a book's worth based on past sales, your history of advances, size of audience, and the proposed marketing for the book. It may also depend on what you think the book is worth to you based on your time and energy. It's funny, but authors often approach a negotiation as an emotional thing -- i.e., "I feel this advance isn't big enough." That's a trap. Your feelings may not be correct. And you can't always compare your contract to someone else's contract and be sure you're comparing apples to apples. Try not to think of the advance as the only important part of a contract. Some of the romance publishers pay fairly small advances -- but they sell a lot of copies, and the authors don't complain when those big royalty checks come in.

If you need a formula for determining the value of a book, you might find it helpful to think like a work-for-hire writer. If he needs to make $1000 per week in order to meet his budget, he'll try to determine how long a project will take him to complete. The creation of an article that will pay $600 is measured by time -- he needs to be able to write it in three days in order to stick to his budget. If he's afraid it'll take him two weeks to complete the article, it doesn't make financial sense to say "yes" to the project.

Still, that's a tough method for a novelist to follow. You might spend a year creating your book, and the publisher is only willing to offer you a $10,000 advance -- pretty skinny money for a year of your life. (Perhaps this is why so many novelists are women married to men with careers.) But most novelists aren't in the business for the money -- they're in the business because they have stories in their heads, and they have to write them down. That's the life of an artist -- any artist. There aren't a lot of poets, musicians, scupltors, and dancers who are making a fortune off their art. We do it for art's sake, I guess, and to be able to use this great gift God has granted us.

So...you may not be happy with my answer, Kathy. A "fair" advance is the one you and your publisher can agree to. Let me know how negotiations go.

If you've got a publishing question, send it in and I'll be happy to try and respond.

Comments

[Susan Page Davis]

Chip, this is a lucid explanation that even I can understand. :) Thanks! Hooray for every book that earns out. Hooray for publishers who take a chance on us.

[Timothy Fish]

A few weeks ago, I put together a calculator based on Rachelle Gardner's figures (http://www.timothyfish.net/Articles/Article.asp?ID=149). One of the things that really stood out to me while I was doing it was what you said here that a book doesn't have to earn out for a publisher to make a profit. (On the calculator, that is shown in the difference between the Breakeven Point and the Earn Out Point.)

Also, given that, for many novels, the majority of the writing effort is complete before the book is sold, what are your thoughts on the author foregoing the advance? How much, if any, would a typical publisher be willing to add to the royalty? As the author’s agent, how would that affect what you would earn?

[Judythe Hixson]

Chip,
Excellent, excellent explanation of a process every writer (wannabe published or published) needs to understand.

And thank you Timothy Fish for that great calculator site. I hope to need it soon.

Judythe

[Judythe Hixson]

Chip,
Excellent, excellent explanation of a process every writer (wannabe published or published) needs to understand.

And thank you Timothy Fish for that great calculator site. I hope to need it soon.

Judythe

[Pam Halter]

When my picture books got picked up by Concordia, they explained their policy to me regarding royalties. When they publish an author for the first time, there is an author fee. No royalties. Unless they have to reprint or if they publish another book. That seemed fair to me.

They also provided someone to explain every aspect of the contract to me. I thought that was nice.

I also caught a big mistake, which would have benefitted me, but I told them about it anyway. They were appreciative, but they didn't publish any more of my books. HA!

Well, that was because of an editoral change, but that's another story.

[Kristi Holl]

I've been writing 27 years and have sold 35 books, and all this time I assumed the publisher didn't make money till my advances earned out. I would hold my breath waiting for that first royalty check, thinking they were doing the same. Your math makes it pretty obvious I was way off! I wasn't getting any big promo tours or full-page ads in the NY Times, so I imagine my books earned them money fairly often before the advance earned out. Nice to know!

[Sam Pakan]

Yup, and ditto. Very clear explanation of precisely what I needed to know.

I'm hoping my publisher gets filthy rich off me, and that I'm sufficiently perspicacious to retain a significant portion of it for myself.

Thanx!