Publishing Basics—What Are They Thinking?
I said in my last blog about Author royalties that I’d address how the bookstores factor into the publishing equation, but it makes more sense to talk about how publishers figure out the numbers for their acquisition decisions first, because that gives a good perspective on Author royalties.
Some major publishers use sophisticated computer algorithms to tell them how many books they must sell at what price to break even on their preparation costs. Other publishers have enough experience that they can guesstimate at what point a book will lose money or make a profit for them quite accurately. For every publisher the initial “P&L” (Profit & Loss) statement arouses anxiety, self-delusion, and a classic never-ending tension between editorial instincts and marketing experience. The editorial instinct is attracted by the new; the marketing instinct is attracted by what they know has worked. This dynamic gets played out in the mind of the Publisher, and between the Editorial and marketing departments.
When I started in publishing, we editors hardly spoke to the sales people. We selected the titles, went through a nominal P&L exercise, and the sales department sold the books to the bookstores. There was no real “marketing.”
Now in most houses the Editor’s positive response is just the beginning of the acquisition process. The Editor has to research the record and the genre. All acquisitions must be thoroughly vetted and approved by Marketing, and a book goes through an elaborate often year-long preparation before the salespeople take it out.
But for now, let’s stick to the basic arithmetic here. It’s not hard to see why there’s such anxiety over the initial buy. These are the fixed costs your Publisher has to take into account for the first edition:
10% Author royalty
15% Production: editing, copy-editing, proofreading, cover and interior design, production-editing (i.e. converting the design into actual pages, in a digital program that a printer can work with)
15% Paper, Printing and binding
5% Shipping: from the printer; to the distributor
10% Marketing/promotion: Website; catalogs; press releases; signings; book events
15% Distribution: warehousing; distribution to bookstores; handling returns; bookkeeping
15% Overhead: Rent; accounting; staff wages & benefits; taxes
4.5% GET (in Hawaii only)
10% Profit
Because the theoretical profit margin is so slim, one of the main challenges for the Publisher is to chip away at each of these costs when he can. He knows that any one of these costs can quickly get out of hand. For example, “crashing” a book to make up for lost time can devour the budget.
The Publisher doesn’t have a lot of maneuvering room. All these costs have to be paid for from the net receipts, the income, paid by the bookseller. The bookseller will take between 45 and 50% of the list price, so for a $20 book the publisher has $10-$11 dollars to fit all those costs into. After distribution, his net income on a $20 book is about $8.
The temptation is to price the book higher, but price resistance is severe in the bookstore. Only textbook publishers seem to be able to get away with high pricing—but they have captive customers. And now it looks like that pricing strategy is being rtapidly eroded by ebooks.
Some of those fixed costs will go down with volume, i.e. the larger the edition the easier it is to spread the cost, and the unit cost of the printing will also go down quite significantly.
Some fixed costs disappear: further printings do not require editing, only need minimal production time, receive much less promotion, and don’t need the same set-up expense at the printer. That’s why every Publisher treasures his backlist.
Other costs rise with success: royalties for starters. And then, if the book is particularly successful, it will be aggressively discounted by the chain bookstores, and similarly by the big box stores and warehouse stores, which may mean bigger sales, but lower net receipts per book.
National publishers have to contend with the huge problem of returns. Booksellers only buy books from the distributor or publisher on a consignment basis. If a book doesn’t sell within a few weeks, it may be returned by the bookseller. The average returns rate on the Mainland is said to be about 30%. That’s the average. I was involved with a book, H. R. Haldeman’s memoir about Watergate, which we managed to hype into what was then an unheard of edition of 200,000. No bookstore dared not have it in their window. It wasn’t a great book, and over 100,000 copies came back…
In Hawaii, bookstores have the same return privilege, but one of the best things about Hawaii publishing is that the books often stay on the bookstore shelves for a long time.
So how does the Publisher rationalize his P&L? He’ll spread the P&L over two or more years; he’ll include both hardcover and paperback editions; he’ll factor in income from subsidiary rights; today he’ll start thinking about ebooks; he’ll think about derivative and revised editions.
So next time you grumble about rapacious Publishers, remember what they were thinking.
Tags: Acquisition, Add new tag, discounts, E ditorial, Marketing, net receipts, P&L, pricing, profit margin, Publishing, returns, royalties
