Saturday, March 2, 2013

Royalty Rates Matter. Here's Why. #math #business

Writing is a business. Many of us hope to do it full-time or be able to significantly supplement our daytime job's income. And that means you need to understand how a writer makes money. (Warning: strap in! There will be math! LOL)
Writers get money from book sales in two ways: ADVANCES and ROYALTIES. Advances are up-front payments against royalties that a publisher pays an author upon a book's sale. Sometimes they are paid all in one lump payment upon signing a contract, and sometimes they are spread out over three or four installments, for example, at signing of contract, at delivery of manuscript, upon publication. With an advance, you don't begin making royalties until you've "earned out" the advance amount. Most e-publishers do not pay advances or pay only small advances. Most New York publishers pay advances, and those can range from $1,000 to 7 figures (the average is at the lower end - see Brenda Hiatt's uber useful survey of earnings by publisher). Royalties are monies earned from actual sales of books to consumers. These are paid by the publisher either quarterly (4x a year), biannually (2x a year), or monthly (12x a year). Because online book vendors don't pay publishers anywhere from 45-90 days after a month ends for that month's sales, your royalty statement will always reflect books sold 1-2 quarters ago (self-publishers can see their sales in real time). 

The amount of the royalty received per book depends on the royalty rate. Royalty rates vary widely, especially among e-publishers, but also between New York publishers, e-publishers, and self-publishers. Sometimes royalty rates are based on a percentage of the cover price, which is advantageous because it doesn't matter what the "discount rate" is (more on that in a moment) - no matter what, 40% of cover is 40% of cover is 40% of cover. More often, royalty rates are based off of the net proceeds received by a publisher from a vendor (Amazon, bn.com, etc.). "Net" proceeds are always lower than the cover price because they reflect the "discount rate" a publisher offers a distributor or vendor so that the distributor or vendor can make a profit when it turns around and sells a book. For example, if a book retails for $2.99, Amazon takes between 30% and 45% (the exact amount of the discount rate is determined by the publisher-vendor relationship) of that for its service in selling the book and gives the remaining 70% or 55% of each sale to the publisher - those are the percentages from which a net royalty is determined. So, under the 70% discount rate, a publisher would receive $2.09 per book; under the 55% discount rate, the publisher would receive $1.64 per book. Those are the amounts from which you'd figure your net royalties. So, if an author's royalty rate was 35% of net, here's what this big paragraph would mean in practical terms:

  • $2.99 book x 70% discount = $2.09 net proceeds x .35% of net royalty rate = 73 cents per book to the author
  • $2.99 book x 55% discount = $1.64 net proceeds x .35% of net royalty rate = 58 cents per book to the author

Making sense so far??? *g*

A common New York ebook royalty rate is 25% of net. A common e-publisher ebook royalty rate is 35% of net. Again, this can vary. Many e-publishers' rates are available online as part of their submissions information.

Self-publishers generally avoid the issue of "net" royalties because they don't have a publisher middle-man taking its cut for cover art, editing, marketing, distribution, etc. Self-publishers provide those services for themselves out of pocket. Self-publishers still have to deal with discount rates, however. And, with some exceptions, they operate like this:

  • Amazon: Offers 70% of cover for books priced $2.99 and above; 35% of cover for books priced below $2.99 (Thus, using the first bulleted point above, an author would pocket the entirety of the $2.09 net proceeds per book)
  • B&N: Offers 65% of cover for books priced $2.99 and above; 40% of cover for books priced below $2.99
  • Thanks to Killian McRae for letting me pick her brain on self-publishing royalty rates!

NOTE: In all of the cases described above, there are variations in the discount rate vendors charge for books on promotion, books sold through foreign outlets, etc. So what I've laid out so far is most accurate for regular priced book sales sold within the U.S.

Your royalty rates are therefore very important for determining how much money you, as the author, receive for every book you sell. Which means that the royalty rate a publisher offers you when it offers to buy your book needs to be considered and weighed carefully. You may be super eager to make that first sale, but if the royalty rate is really low, you'll need to decide if the advantages of that publisher, etc., outweigh the disadvantages of the low rate (a cost-benefit analysis). It may not seem like there's a huge difference between 30% or 35% of net, or between 20% of net and 20% of cover, but the numbers tell a different story--one you should know before you have to decide whether to accept a contract offer.

The below table lays out what an author would receive in sales income from a book priced at $2.99 with a 70% discount rate (i.e., where the publisher or self-publisher would receive $2.09 per book). As an FYI, this table is meant as an illustration and does not reflect any of my books specifically. Take a look at the difference by royalty rate:



Now, perhaps the difference between receiving 73 cents for a book (35% of net) and $1.20 for a book (40% of cover) doesn't seem that great to you. After all, how important is 47 cents these days? Based on just one book's sales, not much. BUT. Look what happens to the total income once you've sold 100, 1,000, 10,000, or 100,000 copies.
  • 100 books sold at these two royalties = difference of $47
  • 1,000 books sold at these two royalties = difference of $470
  • 10,000 books sold at these two royalties = difference of $4,700
  • 100,000 books sold at these two royalties = difference of $47,000
All of a sudden, that 47 cents makes a big difference. Huge.

What about the difference between a royalty rate that is 20% of net and 20% of cover on a $2.99 book? 
  • 100 books sold at these two royalties = difference of $18
  • 1,000 books sold at these two royalties = difference of $180
  • 10,000 books sold at these two royalties = difference of $1,800
  • 100,000 books sold at these two royalties = difference of $18,000
How about the difference between, say, 30% of net and 35% of net:
  • 100 books sold at these two royalties = difference of $4
  • 1,000 books sold at these two royalties = difference of $40
  • 10,000 books sold at these two royalties = difference of $400
  • 100,000 books sold at these two royalties = difference of $4,000
Over the life of a book, even a 5% difference in royalties can impact your bottom line by thousands of dollars.

Now, I haven't tried my hand at self-publishing yet, but if you can be successful at it, the numbers are compelling. Look at the difference between a high ebook royalty rate (40% of cover) and self-publishing through Amazon (70% of cover):
  • 100 books sold at these two royalties = difference of $89
  • 1,000 books sold at these two royalties = difference of $890
  • 10,000 books sold at these two royalties = difference of $8,900
  • 100,000 books sold at these two royalties = difference of $89,000

Or, alternately between a low ebook royalty rate (20% of net) and self-publishing through Amazon (70% of cover):
  • 100 books sold at these two royalties = difference of $167
  • 1,000 books sold at these two royalties = difference of $1,670
  • 10,000 books sold at these two royalties = difference of $16,700
  • 100,000 books sold at these two royalties = difference of $167,000

Uh huh. Just soak that in for a moment.

Now, of course, self-publishers bear a lot more of the risk. They have to lay out up-front, out-of-pocket money for a cover, editing, copyediting, formatting, marketing, etc. Not only do all these activities take time away from writing, but they can cost anywhere between $2,000 and $3,000 depending on how much you hire out to others to do. So a self-publisher may have to sell between 1,000 and 2,000 books before the money they receive covers their start-up costs and becomes profit. Everyone knows of the growing number of self-publishing success stories - just look at the USA Today and New York Times bestseller lists, but it's worth saying that those huge success stories still remain a minority, at least for now.

It's also worth noting that New York's lower (often 25% of net) digital royalty rate is predicated upon the idea that their printing of paperback books, distribution of those paperbacks, and ability to get those print books shelved is a value add that gives authors sales and exposure that offset the lower digital royalty rate. Again, the results of each individual's cost-benefit analysis may vary.

The above chart also demonstrates the importance of having a backlist (multiple already published titles) to turning your writing into a reliable income generator. If you have four $2.99 books at 35% of net, let's say, each selling 1,000 copies per quarter, that means you can expect a combined royalty payment of $2,920 ($730 x 4) or $11,680 in a year. They say "backlist is king" because you've already done the work, yet those books keep bringing in money. And, generally, each new release not only creates a spike in all of your books' sales, but strengthens the selling power of your backlist in general because you're creating new ways for readers to find you with each book.

All of this is a very long way (I know, I know!) of saying that royalty rates matter. So do your homework, know your business, and may you have many, many sales!

Thanks so much for reading! Please feel free to share or link. I'll do my best to answer any questions. And, if I got something wrong here, don't hesitate to let me know!

Laura

26 comments:

Timitra said...

Oh wow! My mind was just blown I honestly had no idea about of this so thank you for sharing! I will be bookmarking this post for future reference!

Deborah Blake said...

Argh!Math!

But seriously, thanks for this post. Too few people are willing to talk about the practical financial nuts and bolts of this business, and that can make it tough for an author who is just starting out.

Next up...contracts! (Argh!)

Donna Hosie said...

Which is why more and more traditionally published authors are now choosing to self publish. They are in control and they receive more money.

Carolyn Jewel said...

One crucial thing to note about royalty rate that's a percentage of net is that costs get deducted first. Contracts will often list examples of those costs. But those costs include the cost of eBook distributors (which ALL the Big 6 use) and those distributors are paid 20% of GROSS. (This information came from an industry webinar I attended where the presenter was a distributor.

In other words, the company that distributes your eBook file to the various vendors gets their cut before the author. And that means that those percent of net rates are likely to be much much smaller than shown here.

Ellie Heller said...

I think the other area which needs to be taken into consideration is quantity of sales. Yes, you could sell 1k of your self pubbed book, but are you more likely to sell 5k of your epubbed book, which will net you more money? While there are many stories of author making a bundle, there are also many authors who take a long time to earn back their investment, particularly new authors who don't have a back list, or don't have a series ready to go. I'm not saying that this isn't useful information, IT IS _very_ useful, I'm just saying look at the whole package before you look at the numbers and jump in thinking you're going to make a mint.

Ebony McKenna. said...

Thank you very, very much for crunching the numbers so that I dont have to. I appreciate this list so much. I'm about to launch a couple of backlist titles into the USA and then follow up with new novels, so Its good having a ballpark figure.

Rashda Khan said...

Thank you! Thank you! Thank you for doing all this hard work and sharing it in way that makes sense. You are awesome!

Anonymous said...

Thanks - I knew a little of this, the part about the print royalties, but not the epub portion.

Could I comment a bit from a librarian's point of view about self-publishing? If you want to sell to libraries, please, please, get good editing done, not only on the book itself, but on the promotional material you send out. I have received so many flyers/emails in which the first sentence convinced me not to purchase.

Also, do not send out emails claiming to be a library patron who would like to see your title in the library. It seems to be a common self-pub marketing ploy. We do check, and if the name on the email is not a patron, the book will go off our list forever!

Laura Kaye said...

Really good points, Carolyn and Ellie. Thanks for sharing them! And thanks for commenting everyone!

Kelley said...

I've agonized over not taking a contract for my novel, after getting low-balled by a publisher last year, No doubt it would be in print by now had I taken it, but the contract was awful, if not insulting. The numbers are something to think about, even if it means waiting longer to be in print.
Thanks formaking this info available!

Liana Brooks said...

The problem here is the amount of sales. Self-publishing royalties are great, but the chances of selling over 1000 total let alone per quarter are very low. Some authors do manage that, they're career savvy, good with marketing, and generally write good books (or buy sales - but that's another rant).

Let's say you self-pub, you put roughly $2000 into the book before it's published (original cover art, editing, ect). You don't earn a dime until you sell 1000 books. Half of self-pub authors who are doing well have less than $500 worth of sales a year. Roughly 250 books sold a year.

Self-pub authors are looking at four years of steady sales before they earn out what they put in. In that same four years a small press author will have published 4-8 books with no upfront expense with sales either equal to or better than self-pub. Yes, the self-pub author is going to be putting more books out, but they're going to take the loss up front.

As for the Big 6 author? They earned that $2k the self-pub author spent as an advance. They are virtually guaranteed better sales (there are always outliers), and will make more because they have more sales.

This chart is nice. It looks good if you figure equal sales across the board. It falls flat when you look at your chances for breakout success in each format.

But this is the reason many authors will negotiate for a lower advance and a higher royalty. Big 6 is not fixed at 15%. Authors with agents are getting better royalties because of this math, they sacrifice some advance money up front, but it pays off in the long run as long as the book sells well.

If you think you're book is going to tank, take the huge advance and run. :)

Gabrielle Bisset said...

I don't think I sell a lot of books (maybe I'm undervaluing myself LOL), and I've sold well over 1000 copies of every book I've indie pubbed. I don't think the chances of selling 1000 copies of a book in a year is that low. I do it all the time.

Does this mean that I'm a cheerleader for indie publishing? Not exactly. I have to deal with issues that traditionally published authors don't. But when indie is compared to small press, indie wins for me. The numbers and money I'm seeing now mean that the only choice for me other than indie is NY Big 6.

In the end, whichever way an author goes, they have to go with their eyes open. :)

Laura Kaye said...

Yes, precisely, Gabrielle, which was my thinking behind this post.

I'm guessing some of you feel I didn't put enough of a caveat on the possible challenges of self-publishing. I agree, the big success stories remain a minority experience. And that there are other challenges of time and resources that self-publishers have to confront and be aware of. My point wasn't about the OVERALL pros and cons of each publishing choice available for authors to make, but about this one part of the cost-benefit analysis. There are lots of other things besides royalty rates to consider. But I was hoping laying out the numbers would help authors think through that part of their decision...

Laura Kaye said...

I also want to say that I think any author's chance for breakout success in ANY format are not guaranteed. The number experiencing true "breakout success" is probably a minority whether self-published, small press published/epublished or traditionally published. I don't think that negates the usefulness of understanding what the numbers mean, though.

Donya Lynne said...

I am self-published and, for the most part, I love it. I am fortunate enough to be a good editor with an editor friend who is strong where I am weak, and who edits for me for free. I am also well-educated in writing and story crafting, and able to do my own formatting, so the only costs I pay are for covers.

After reading the comments, I feel quite fortunate. I won't share how much I make, but it's well above the figures listed here for average self-pubbed authors. I would love to be with a big six publisher someday, though, because I feel like it's a natural progression for my writing. And I think working with professional editors would provide an incredible education beyond what I've learned so far. For me, it's all about continual growth, and I feel that as long as I always strive for that goal, the royalties will take care of themselves. Because having twenty books on a backlist doesn't mean much if they're poorly written. I'd rather have five books that are written well.

Donya Lynne said...

Btw, this was a fabulous, informative post. Thank you for sharing it. :)

Laura Kaye said...

You're welcome, Donya, and thanks for your thoughts!

Ruth Kriner said...

Nice post. I kept on smiling while I'm reading this. Keep coming for more.

Denny S. Bryce said...

Thank you, thank you. This kind of information is so rarely shared and i love the math! As the industry continues to change, it will become even more important for all of us writers to learn about or at least to have some point of reference on this topic. I am pre-published :) and very much appreciate your candor and willingness to share.

Regan said...

Laura, thank you so much for going to the trouble of carefully setting this out. Your hard cold facts remind me why eBook only published authors (not self-published)take a century to get PAN status with RWA, that dinosaur of organizations that should really re-vamp its policies. Meanwhile, it makes self-publishing look very attractive, at least to me.

Kate Worth said...
This comment has been removed by the author.
Kate Worth said...

I mean Laura! :) It's hell getting old!

Laura Kaye said...

You're welcome everyone! Glad some of you are finding it useful! :)

Paula Millhouse said...

Thanks for doing all the MATH, Laura! (Four letter words strike again).

I'm at the beginning of my writing journey, longing for that backlist.

I self-pubbed my first two novels, and I've seen very modest success with the amazon 70% royalty rate in my first year. Now I've contracted new stories with an e-publisher, and I'm looking forward to success in that arena.

I believe one of the biggest issues for Indy authors is EXPOSURE (once you work on craft, good storytelling, and all the other responsibilities you mentioned).

I hope those of us who are lucky enough to do both will find numbers we like, and enjoy the business side of this adventure as much as the creative side.

Great post, Laura!

city said...

thanks for share..

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