Five Things to Know About Money in Publishing (Patreon)

To borrow an often-used phrase: writing is an art, publishing is a business. 

When I worked at Angry Robot, I felt like I was at my best when I could bring both business savvy and my artistic aesthetic to bear at the same time. And in business, everything comes down to money. That’s pretty much how capitalism works these days. And until we move past capitalism and/or make it drastically more humane for everyone, keeping the money in mind is important if you want a business to survive. And as an author, if you’re publishing to make money, you’re running a business.

These are my opinions, your mileage may vary, almost everything in publishing has exceptions, etc. The analysis and opinion elements of this piece reflect my biases and experience (a decade and counting of working as a professional in this field). With all of that said, here we go!

We’ll start with some basics and then get into some more advanced and thorny matters.

What Even is an Advance?

When an author sells the rights to publish their book to a traditional publisher, they tend to receive an advance against royalties – some sum of $ as a gamble by the publisher and an up-front show of commitment. Advances are usually calculated based on a projection of expected sales for the book, either using a Profit & Loss statement (a big spreadsheet of costs and expected revenue) and/or the author’s previous sales and advances. When an advance “earns out”, that means that the book has sold enough (copies sold and/or sub-rights sold) that the royalties and sub-rights advances earned equal or exceed the advance paid for that book.

The advance is doled out in two or three payments per book.

Example: You sell one book for advance of $3,000. You’re paid 1/3 of that on signing the deal, 1/3 on the acceptance of the final manuscript, and 1/3 on publication. 

Example 2: You sell two books for an advance of $3,000 per book aka $6,000. You’re paid 1/3 of that (6k x 1/3) on signing the deal, but then you get 1/6 when you deliver book 1, another 1/6 when book one comes out, another 1/6 when you deliver book 2, and the final 1/6 when book two comes out. This is likely 24 months after the contract is first signed, if not longer.

When a publisher provides an advance as part of a book contract, that money *does not have to be repaid* if the book never earns out its advance. The only times when that isn’t the case is if there’s a clause in your contract that says something like “If the author does X, Y, or Z or if they don’t deliver a satisfactory manuscript, then the author will return the advance”. Generally, you want to avoid contracts that require repayment of the unearned advance in order to regain the rights to the book. Here I add another +1 to “agents can help with this,” count, as it is one of my most common refrains in these essays.

The Profitability Point vs. The Advance

I think a lot of authors still don’t know that in many cases, their book will become profitable for their publisher dozens, hundreds, or thousands of copies sold before the author earns out the advance.

How does that happen? 

If a publisher offers on a book, their projections probably predict a certain % of profitability. 

An example: Publisher A offers an advance of $3,000 for a book. Their P&L statement projects a certain # of sales over the first 12, 18, or 24 months, with a certain amount of profitability. 

The delta between that point at which a book becomes profitable and the point at which the author’s royalties earns out the advance is usually not insignificant. The details depend on the publisher’s costs, the book’s list price, and a bunch of other factors. But part of why you might see authors continuing to make new book deals even if most of their books haven’t earned out all the way or haven’t earned out in the first year or two is that those author’s books are profitable for the publisher even before the book earns out. 

The math here is not remotely straightforward, so the important point is to know that the “earning out” point is different from the “book is profitable for publisher” one.

Wholesale vs. Agency pricing

Now that we’ve covered advances and profitability, let’s talk about how books are sold to readers. When a bookstore buys a physical book, they get a specific discount from the publisher or wholesaler. Then they can sell the book at pretty much whatever price they want. Most of the time, a normal bookstore will sell the book for the suggested retail price. It’s really the bigger chains/retailers that consistently offer discounts (more on that below).

For ebook sales, the book’s price is set by the publisher and the retailer gets a fixed 30% of that price and the publisher gets the rest (70%). That price is hard-set by the publisher.

Ebooks used to be sold using the same pricing system as physical books, aka wholesale pricing. Google’s ebook store also famously kept using wholesale pricing long after other vendors had switched to agency pricing, causing problems when Google would discount a book (which they’re allowed to do under wholesale terms) but then the other vendors would invoke their price-matching terms and lower the price to match.

Wholesale pricing usually offers retailers a larger slice of the pie (closer to 50% rather than the 30% in agency pricing), but when the retailer discounts a book under wholesale terms the book, they have to give hat discount out of their share of the sale. 

Example: Under wholesale pricing, when Google sells your ebook (list price $9.99) for $6.99, the publisher would still get the same amount from Google as if Google was selling it at full list price.

In physical sales, bigger retailers like Barnes & Noble or Borders (RIP) use that flexibility from wholesale pricing (where they pay a consistent price per copy but can charge whatever they want) to offer bigger discounts to readers. Their hope was to make up the profit through higher volume sales. Amazon took that idea and pushed it to extremes. A side-effect (or possibly the main effect) was that the perceived value of books has dropped.  

This devaluation of books continues to manifest today, especially in online sales. It’s fairly common to see Amazon discount the physical edition of a book to the point where the ebook is “cheaper” (only because Amazon can discount the physical book but not the ebook). And a retailer like Amazon can pull this trick a nearly limitless # of times because they don’t pay inventory costs on ebooks. Every time they can convince a customer to buy the ebook, they’re making money in a more scalable fashion *and* they’re further locking the customer into their content ecosystem (generating more user data and building a customer behavior of associating books with that one retailer).

This is bad, but it’s hard to fight against this practice, for a lot of reasons. One of them is a monopoly on information.

Information is Power, Power Drives Sales, Sales Give Information

In dominant US American culture, it’s taboo to talk about money. It’s gauche, it’s rude, it’s presumptuous.

Why is that so? And who does that benefit? From where I stand, the people with the most information and most money are the ones that really benefit from this taboo. Not workers, not writers, and not consumers. If you don’t have the information you need, it’s hard to know what a fair wage should be, it’s hard to know where a company is making its money and what the cost is to its workers, its community, and its industry.

We see this all over the place. NDAs and lack of clarity about salary allows corporations to suppress wages and perpetuate wage gaps (see the gap between what women make and what men make, the gap between what women of color make and what white women make, etc.). A lack of understanding about the reality of income and wealth disparity lets the super-rich continue amassing wealth without facing real consequences.

These abuses play out in every industry, and publishing is no exception. The lack of transparency about the range of advances offered, or the range of royalty rates, the range of marketing expenditures for different books and different authors. A lack of comprehensive sales data (Bookscan is better than nothing, but it’s far from comprehensive).

Every bit of that information withheld from the author by the publisher keeps the publisher in a stronger position, makes it harder for authors to know what their situation is in comparison to other authors. Some of that information does get shared, sometimes through an agent’s work, sometimes because agents collect information from a variety of deals and share that with their clients. Authors’ groups help share that information and advocate for better terms, like SFWA, RWA, and others.

But publishers aren’t the only ones withholding information to maintain their position. Online retailers utilize their treasure troves of user and customer data and only share it when they feel like it’s to their advantage. Amazon has the largest treasure trove of customer and sales data in the entire industry and they are constantly leveraging that data to sell more books/widgets/Prime subscriptions and swallow up more of every bit of the retail landscape. They take their strong results and demand bigger and bigger slices of the pie under wholesale terms, from co-operative dollars to their base discount. 

And then they also get to use that data to make even more money through advertisements, where they make money from authors and publishers, who are both their suppliers and their customers.

Amazon’s Kindle Unlimited program is all about controlling not only the data (they report page reads and then arbitrarily set the pay rate to authors) but also about controlling the marketplace (exclusivity, etc.). Kindle Unlimited adds to the devaluation of the perceived value of books by turning books into Netflix – the business model for both Netflix and Kindle Unlimited is “consume as much as you want for one low monthly price, and isn’t it easier for you to just only ever watch/read what’s on Netflix?”

And when one company comprises a plurality or strong majority of a person or household’s watching/reading habits, that company can use the data they collect to do an even better job of dominating that industry. Plus they can sell that data and get paid again. And so on.

One of the best things we can do to make a healthier publishing industry is to seek out and share as much data as possible in order to level the playing field. We can demand more transparency from major players and push back against efforts by big corporations when they try to consolidate power and/or undermine new players in the field. An example of one of these power plays. Audible recently announced a plan to illegally exercise digital text rights to offer with their audiobook content, without having those rights and while insisting it was “for the good of consumers”. Unchallenged, this move would have let Amazon (which owns Audible) increase the value they offer in their audiobook products and then further dominate the audiobook market. And with more dominance, they get more data, they can sell that data, and they’re even more resistant to challenges from new players.

The 25% Net Ebook Royalty Rubicon

As the ebook format emerged as a major part of the publishing world, the traditional publishing industry settled on 25% Net as the royalty rate for ebooks. That means the author’s share is 25% of the money received by the publisher. 

But that’s not 25% of the whole price. It’s usually 25% of 70%, since most ebooks from traditional publishers are sold under agency pricing (see above). If there’s a separate distributor, then the 25% is taken from 70% minus that distributor’s commission.

25% Net has become a contract rubicon that traditional houses will not cross. There are always exceptions here and there, but 25% Net remains The Royalty Rate For ebooks, especially in the Big Five.

Some publishers offer escalators, which is the idea that your royalty rate goes up once the book crosses over certain sales thresholds. Maybe your royalty rate Is 25% up to 10,000 copies sold, then it’s 35% on all copies up to 50,000 copies sold, and 40% above 50,000 copies sold. One way of framing this idea is that above a certain sales level, the costs associated with producing the book have been totally recouped, and publishers are more able to share the profits more equally between author and publisher.

Mostly, it seems like a way to accommodate push-back against the inflexibility of the 25% Net Rubicon on ebook sales.

Holding fast to 25% Net royalties but offering escalators on a case-by-case basis is another way in which information and power is help by the larger organizations rather than being transparent across the industry. "Everyone" gets 25% Net, except Bestseller A is really getting 35% Net because of escalators, but no one but the publisher, author, and agent know that.

Fight Together, Win Together

There’s a lot of scary stuff in publishing. Like nearly every industry, there are a few incredibly powerful players that get to set the rules everyone else has to live by, with little assistance from regulatory forces, especially in the USA. 

But as we discussed above, information is power, and you can share and build power by sharing and developing information. Connect with other authors, share information about your sales, about contract terms, about bad actors in the industry, marketing approaches that succeeded, and more. The more power authors have and can share, the better off we are when squaring off against the goliaths of publishing.