Tuesday, November 17, 2009

what's the difference between earning out my advance and making a profit for my publisher?

Got me a letter.

Dear Moonrat,

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?

Thanks,

XXX

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.

Earn Out
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?

24 comments:

Charles Gramlich said...

My head hurts.

moonrat said...

uh oh, Charles. and you're an old hat at this! sigh.

Nancy Naigle said...

Thanks for the easy to follow answer. This is really very helpful.

Jennifer said...

That was awesome! Thanks so much for explaining this.

Matt said...

Math, you say? *Eyes glaze over*

Caroline Starr Rose said...

You need to start a School of Moonrat program.

Leona said...

I was a bookkeeper in a former life, and I have to say this. I will never do it for a publisher! UGH I thought insurance commissions sucked for tracking...

S.P.H. said...

I'm very impressed by the quality of your information. I have recently become a fan of your site and look forward to continuing to come here for days to come.

Thanks, by the way, for this clarification of an obviously head-spinning topic.

Dana King said...

This is the most concise, easily understandable explanation of these two concept I have read.

Which is kind of scary.

Nicola Morgan said...

Brilliant, Moonrat

Larissa said...

Moonrat=Awesome

Thanks! :)

PaperbackWriter said...

WOW, Moonie.... That makes it all about as clear as mud.
The thought of overall loses for everyone but the author really makes me want to add a double shot of some hard liqour to my coffee and just forget the whole thing!

jjdebenedictis said...

This is a fantastic post, Moonie, and I thank you for it.

angelle said...

i'm just gonna keep my head down...

good to know though.

Rebecca Knight said...

This is much clearer than I ever thought it could be since "the math is soft and mystical like a fluffy down pillow." ;)

Thanks, Moonie!

Robert W. Leonard said...

Fantastic, one of the best blog posts in the industry I've read in quite a while! Thanks, Moonrat! :)

ella144 said...

ah! my brain, my brain! too. many. irrational. practices. urg

Actually, this is a great post. Thanks for talking about it. I've seen royalties and advances discussed a few times over the last few years, but as this is one of the most convoluted aspects of publishing that falls within an author's purview, it can never be talked about too much.

Agent Kristin goes into much greater detail about royalty statements, how to read them, what the numbers mean, what authors/agents should be checking, etc. in several of her "Agenting 101" posts. (A quick look showed 10 posts on "royalities.")

(Sorry Moonie, for directing people away from this blog. Please don't ban me. You are awesome. *holds up cake as peace offering/bribe*)

Jill Myles said...

Yeah...that didn't help me much. ;) This should be a word problem on the SATs. Instead of "Two trains were moving at 100mph", it will be "Two publishers want to promote mystery novels" and spiral outward from there.

Jess Haines said...

This was very helpful. Thank you!

Gemma Noon said...

Um. You lost me at "Streeetch".

But that's more a reflection on my maths skills that it is on you. Guess I better go do some more brain training, or something :-S

Mike Lindgren said...

You are always so helpful and kind.

Maria said...

Um. Let's go have a drink and talk about movies...

cindy said...

marry me moonie!!! THANK YOU for this post, couldnt have come at a better time. there is always space for you under our dining room table and we WILL HAVE IZAKAYA. =D

barry said...

Do paperback originals have a 8 times mark up? The 8 times mark up seems way to high to me.