more math : how royalties work

AKA Whoever Thought There Would Be This Much Math Involved in Writing Fiction

Earlier this month, I nattered about what advances are really made of and had another thought on the path of the break-down course in publishing math. It’s ironic for me because I got my B.A. to get away from math and science (mostly because back then classroom math and science did not entice me — though theoretical aspects of both did). Luckily, I inherited the math gene that is prevalent in my family so when my creative career in agenting yielded a significant financial factor, I could accommodate it. But, I digress…

In the aforementioned post, a book was purchased by a publisher for $10,000. Now, let’s assume that we’ve gotten through the revisions (including hills to die on) and gotten lucky with marvelous art and design and the publication of the book has just occurred. As you may recall, the contract money was termed an advance. It’s an advance against the royalty earnings of the book. So you have to “earn out” that advance in royalty percentages before you see any additional payments on the book.

Let’s assume, the book comes out in hardcover — this typically means the first 5,000 copies will earn a 10% royalty, and then the next 5,000 will get a 12.5% and the rest will be at 15% (for most regular trade publishers). Anne Bishop’s Tangled Webs has a cover price of $23.95, so she’ll earn $11,975 on the first 5,000 copies of this book and thus would see royalties on a 10K advance. That’s net copies, by the way. It doesn’t count returns for which the bookstore gets credit. This actually means that she will need to ship additional copies to realize that advance.

For trade-sized books, the average royalty rate is 7.5%, though this can vary depending on publisher and also have a gradiated schedule, sometimes starting at 6%. For the sake of simplicity we’ll just go with a flat 7.5%. C.E. Murphy’s House of Cards has a retail price of $14.95 so she earns roughly $1.12 per book. She’ll have to “sell through” 8,929 copies to “earn out” the theoretical 10K advance.

For mass market, there is an even wider range of royalty rates, starting as low as 4% and usually going up to 10%. Most of my clients seem to start around 8% so I’m going to use that for a benchmark. Kristine Smith’s Endgame comes in at $7.99 (oh, I remember the days when books were more often $3.99 – I can even still figure that with NY sales tax via my days at the local Waldenbooks — good times….). She makes roughly 64 cents per book. Earning out at this level with a theoretical 10K advance will require net sales of 15,625 copies.

I’m working on coming up with some numbers for average print runs for debut/midlist authors, just to put this into persepctive.

23 responses to “more math : how royalties work

  1. I remember the days when books were more often $3.99
    The first book that I bought with my own money was $0.75 for a MMPK. Then came the oil shocks of the 1970s, an event that can never be repeated (I assume), and by the end of the decade, MMPK ran $2.75.
    I remember the day when I bought a MMPK for ten times the amount I had paid for my first MMPK and the supportive eye-rolling I got from my somewhat younger exgf when I mentioned this interesting fact to the book store clerk.

  2. And that’s if there are no lower/half-royalty clauses for high discount/overseas sales, etc.
    (You might also want to make clear that you’re using the books of various clients and how much they’d have to sell to earn out a $10,000 advance, not that those authors are in that situation themselves. It is sort of obvious but open to misinterpretation…)

  3. You are radically cool. I can’t wait til you explain reserves against returns. Especially because I barely understand them myself. 🙂

  4. What happens if they never sell enough to earn out?

    • The advance is typically non-returnable. So, they don’t have to pay it back, but they will never see another cent of earnings on that edition of the book. It’s also possible (indeed, likely) the publisher will decide not to buy any more books if the sales numbers are low enough.

      • This is why (she said, putting on her old, tattered editor hat) sometimes it really is better to get a lower advance and better terms than hoooyay! money, for a long-term view. Gives Joe or Jane New Author a chance to exceed expectations, rather than trying to chase them.
        Not that we want to hear that when making a deal. :-0

  5. It’s nice of you to try to explain these things to people. Do most of the books you sell have royalty rates based on the retail price instead of net price?

    • Books are usually marked up to ridiculous levels beyond publication price. A $24 hardback is probably around $5 in production costs, I’m guessing.

      • Evenso, the book isn’t just paying for the cost of physical production. It also has to pay the salaries of the editors, among other things.

      • $5 might be a good guess. I am not a fianance person, but I took a book publishing finance class. I was told that publishers get half of the retail price for the book from retail stores (thus a $24 book would net the publisher $12). Paper, printing and binding of a book typically costs about one third of the cost of the book (about $4). That, of course, does not include company overhead like pointed out or the royalty payments to the author. The goal, the professor told me, is to make 1/4 of the retail price (1/2 the net return) in profits ($6) but such a goal is rarely obtained.

    • It an depend on the contract, but for fiction publishing with the major houses, the royalty is based on the retail price.

      • Thanks! I work for a publisher. I was always told that the 10-12.5-15% for hardcover/7.5% for trade/8-10% for mass was the average. But I’m seeing more net sales amounts now, and I wasn’t sure if it was a function of the contracts changing or because I’ve been doing a lot of Christian books and they have different standards than trade.

  6. What is a given earn out period on a novel? Fiscal quarter? Fiscal year?
    Not a fiscal?

    • With most houses you get a report every 6 months, and this continues until the book goes out of print and/or stops having any earnings to report. It can take years to earn out. Or less.

  7. I always heard that when you get the advance, you put it in the bank to earn interest while you wait, and if your book only earns, say, $8k of that $10k that you have to pay back the difference. So that’s not the case?

    • It is certainly possible that there are contracts out there that may require you to pay back an advance if it doesn’t earn out. That’s not how the major publishers work, though — it’s a non-returnable advance against royalties. Not that putting your advance into the bank to make interest is a bad idea.

  8. What I really look forward to is not an explanation of how royalties work… but when they work. The mysteries of not just returns, but the reserve against returns, release of the reserve against returns, the timing of royalty statements and payments, when and how subrights payments get credited. The interest-free loan dynamics (hint: the imputed interest on the advance bears what relationship to the imputed interest on royalties credited/paid nine to fifteen months after those royalties are booked?). The molestation of defenseless squirrels.
    I’m starting to feel like the Spanish Inquisition. “Our main means of not paying authors above the advance is to hold an ever-expanding reserve against returns. And to only credit rights payments upon exercise and not contract signature. Our two main means of not paying authors above the advance…” Of course, the editorial department is usually a mere bystander in that little dance.
    Nope. Not cynical at all. Just realistic, and all too aware that “Hollywood accounting” is a direct descendant of publishing-industry practices.
    — CEP
    http://scrivenerserror.blogspot.com

    • One of the reasons to have an agent…. they can review royalty statements and challenge reserves and so on and so forth. I’m not entirely sure how to write an article or series on that because it’s immensely complicated. But I’ll think on it.
      Thanks for stopping by — good to see you here. 🙂

  9. Thank you for the very clear explanation. It’s interesting and, especially in the case of mass market paperbacks, a tiny bit depressing. I’m showing this one and the one on advances to my husband, so he knows what he’s getting into by supporting my writing.

  10. Royalties
    So how about Kindle? What’s the royalty thing there?

    • Re: Royalties
      “Kindle” version royalties are calculated at whatever royalty rates the publisher and author have decided upon for ALL electronic versions. Usually, when you get a contract, it says what your royalty rates are going to be for each format you have given them the rights to (hardcover, trade, mass market, large print, library bound, book club edition, electronic — whatever rights you’ve sold them).

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