I'm a newly published author receiving an inaugural royalty statement, and I was hoping you could help me understand it (I'm too sheepish to ask my busy agent). Everyone knows we want out books to earn out, but until now, I thought "earning out" meant making a profit for my publisher. But my royalty statement made me think otherwise. Let's say hypothetically my advance was $10,000. If my royalty statement says I've earned $7,000 toward that back so far, is it possible I've made a profit for my publisher?
Ooo, earning out is SO interesting. Mathses!! What we all thought we were getting away from by writing. It's nice to flex those brain muscles sometimes, isn't it? [Streeeetch.]
So the answer to your question, my dear, is yes, it IS possible you've made a profit for your publisher--although neither you nor I will ever know. The truth is, some of the hugest bestsellers only cost their publishers money, and some tiny sellers--even some that never earn out their advances--turn a net profit. So... this is a bit of a mathematical mess. Or you might call it mystique. But I'll start by fleshing out those two ideas (earn out and profit) separately, so maybe you can make an educated guess about how happy your publisher is with you.
The important thing to remember about earn out is that it is related only to the advance you were paid vis a vis the numbers of copies you sell. This is the more straightforward of the two concepts. Alas.
So in almost every publishing contract, the author is offered an advance--that's short for "advance against royalties." Basically, your publisher is *loaning* you the specified sum of money under the stated assumption that the royalties your book will earn will eventually pay the publisher back.
But remember a couple things:
1) You won't see any additional money until your royalties (or rights sales) have paid back the publisher, so don't sit around specifically waiting for a royalty check to come immediately upon publication
2) In most cases, especially if you have an agent and/or the situation was competitive, the publisher offered you the absolute most they could see safely earning out (and in some cases, they threw caution to the wind and went above that). This means that many advances never earn out. And while yes, earning out your advance is a great target--it shows your publisher the investment in your book was worthwhile--don't kick yourself too hard if you don't earn out right away.
3) The advance is a loan in the sense only that you pay yourself back with royalties; no one can ever actually bill you for the balance, unless you did something in breach of your contract (for example, never delivered your manuscript).
4) Everyone is on the same sliding scale here--if your advance was relatively high, you have to sell relatively more books to earn out. A bestselling thriller and a tiny paperback collection of haiku may equally likely earn out or not earn out.
Ok, so think of royalties as YOUR profit. Is this pretty clear? Let me know if there are any questions.
Profit for Publisher
This is a little more complicated, because the math is soft and mystical like a fluffy down pillow.
For a publisher, there are two kinds of profit:
1) Gross (the retail cash value of the books we sell)
2) Net (the dollar value we make after all the costs--production, overhead, marketing, etc--have been deducted)
We use either number when it suits us better.
In a vacuum, if *hypothetically* your book earned out immediately and not a penny was spent on marketing, you would know, safely, that you had made your publisher a profit. Everyone else can only guess.
How do I know this? Your royalties on a hardcover are almost certainly 10% (except exceptions). Your book's price was determined by an 8-times markup of the cost of production, including allotments for overhead, author advance, distribution, and the very paper and boards the book is printed on (except exceptions). Your publisher will actually sell it at half the retail price to vendors, meaning a 4-times markup from cost. You get 10% the retail value, your publisher makes 40% of the retail value. In terms of cash flow, your publisher definitely profits, in this magical hypothetical vacuum of which we speak. Ok?
If only there were a vacuum for us to publish into. Now moving on, to what makes it complicated in the real world.
Let's talk about marketing dollars. A percentage of anticipated gross profit is allocated at the beginning of the sales schedule to each book. Usually, this number is 5% of the gross cash value of the laydown (meaning the number of books that go out with the first shipment of the first printing). 5% is considered manageable risk.
But then, of course, there are the exceptions. The biggest exception is the books that got huge advances. You can't just let them loiter at 5% of the safest gross estimates you make, because if more money isn't thrown behind them, they will all sink into the midlist and that horrifically huge advance you paid for them will be lost forever. Often (usually) how this plays out is the books that received the biggest advances will receive the most marketing dollars. The publisher of a company would never have allowed that huge advance to be spent if there wasn't a plan in place pre-acquisition with the sales and marketing teams to make sure that this book got itself everywhere. Basically, books become bestsellers because it was decided they would be at point of acquisition.
There are of course some exceptions in either direction. There are books--often second novels following a smash-hit first novel--that never perform as they were expected to, and represent huge, huge losses on every front. One example is Thirteen Moons, Charles Frazier's follow-up to Cold Mountain. I've heard that $8 million was paid for that book--alas all the money and marketing in the world can't make people buy something if they're not in the mood. Surprise hits are rarer. Harry Potter is my one favorite example. Generally speaking, a book is a bestseller because a publishing company decides it's going to be one, although sometimes they are wrong.
But here's the thing. A book with those kinds of huge expectations behind it could easily end up costing the company tons more than it ever makes, gross or net. Even a bestseller can cost the publishing company money, through combinations of factors like unearned advance, marketing and advertising budgets, overprinting copies in order to make the book appear more ubiquitous, co-op stocking fees paid to the chains for placing the book on front tables etc (and these can get insanely expensive, especially during holiday season). With the exception of the author advance, all this money is money straight down the drain--totally unrecoupable.
Can you imagine? Bestsellers being huge, unprofitable money sucks for publishing companies? Yeah, it doesn't make a lot of sense, and perhaps the system will change. But we haven't quite figured out what works yet in this new world.
Meanwhile, dear reader who wrote in, it sounds to me like you actually may have made your company some profit. If the company stuck to their 5% budget for your marketing and you're working through your advance by gradually paying back royalties, they're making cash flow out of you.
Is this ok? Or did I create more questions than answers?