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Advances and Royalties – The Risk/Reward Decision

Let’s say you’re an author and you’re about to sign a deal for a $10,000 advance against a 10% royalty. Would you consider a lower advance in exchange for a higher royalty rate? You can think of it as a “share the risk, share the reward” option – I encourage editors and authors to consider it from time to time. Here’s why:

  1. It shows the author really believes in the project. Authors often come to an editor with what they think will be the industry’s next bestseller. If an author really believes that, why not take on more short-term risk (lower advance) in exchange for the possibility of greater long-term wealth (higher royalty rate)?
  2. It helps reduce the publisher’s risk of author advance write-off’s. I’ve mentioned this before but it’s worth repeating: Author advance write-off’s are painful for the publisher! The goal is to pay an advance that does not exceed the amount the author is likely to earn in royalties. If the publisher pays a $12,000 advance and sales of the book result in only $10,000 earning out, the other $2,000 must be written off. The publisher’s overall profitability just dropped by $2,000.

You might assume the publisher has nothing to lose by pushing this option on an author. Although it reduces the initial risk the publisher takes on, every royalty point the author earns comes right off the publisher’s bottom line.

To keep the numbers simple, let’s assume a $30 cover price, an average discount of 50% and a flat 10% author royalty. How much does the author earn on sales of 10,000 units?: $15,000. How much does each additional point of royalty above 10% represent to the author?: $1,500. If the publisher offers you two options, a $10,000 advance against a 10% royalty or an $8,000 advance against a 12% royalty, which would you take? The first one generates $15,000 for every 10,000 units sold and the second option generates $18,000 for every 10,000 units sold.

Maybe you figure it’s not worth giving up that $2,000 portion of the advance just for the opportunity to earn $3,000 more in the long run. But what if the book sells considerably more than 10,000 units? Although it’s easy to assume that a point or two of royalty isn’t going to make a huge difference in an author’s income, simple math says it’s all relative: At the end of the day, you’re making 20% less with the $10K/10% option than you are with the $8K/12% one…unless the book sells so few copies that the author advance doesn’t earn out. That’s where the author has to decide if they really believe in the project.

For the publisher, every percent of royalty paid above the original deal comes right off the bottom line. In the example above, the publisher makes $3,000 less on the title if the book sells 10,000 copies and the author opts for the higher royalty rate. Even though I’m making less in the long run, I appreciate the fact that the author chose to be more of a risk-bearing partner (by accepting a lower advance) and I’m fine paying out a higher royalty…sometimes! There are plenty of cases where the book is such a strong title that the author advance will easily earn out – in that case, there’s no incentive for the publisher to put an alternative advance/royalty model like this on the table.

I also realize that an author needs a certain minimum amount of money up front to justify their time investment in the project. They simply can’t accept a number below that point regardless of the upside that might come with a higher royalty rate. If the author is already at their acceptable minimum level with the advance on the table, there’s obviously no point trying to sell them on this option.

Finally, there are other ways for authors and editors to share the risk and share the wealth. For example, would you be more inclined to accept that $8K advance against a 12% royalty if the royalty jumped to 15% after 20,000 copies are sold? Or, is there some other type of escalating royalty offer that would enable you (the author) to accept a lower advance? If you’re not already having these types of discussions with your editor/publisher you don’t know how much you might be missing out on in the long run.

Comments

Bren

Wow, these are great posts, Joe! Thanks for the peek behind the curtain. Fascinating stuff...

Matt Wagner

Hi Joe,

Nice entry. I've done some books with zero advance but with a high flat royalty. Admittedly, that's with authors who have a good existing royalty stream, and are considered name authors, or have a project they strongly believe in.

In principle, it's not a bad idea to exchange advance for royalties when you can afford it, and it can be a great gamble when it pays off -- in more ways than an author might consider, the royalty basis for your first edition may well be used for all subsequent editions, and if you have a hit and you're stuck at 10% forever, consider how much better off you would be if you started at 12%.

On the flip side, and legitimately, many professional authors see the advance as a measure of the publisher's commitment and belief in a book, and a low advance, to them, implies low expectations. If your publisher says we're not going to sell more than 10,000 copies, and the publisher has control of the sales and marketing apparatus, the publisher is not necessarily going to be sending a message that the risk reward equation favors the author at all, so you're relying on the kindness of the author to take the hit here.

I know that advance write-offs are the bane of your existence -- be happy that you're not in the business of publishing those big celebrity bios that sell for millions and then are returned by the millions (Rosanne's, Whoopi's, and Nancy Regan's books apply here).

Frankly, publishers like to delay income to authors. That's one reason publishers hold onto reserves for so long rather than declaring long dead books out of print, or decide to pay royalties on a semi-annual basis, or try to co-account royalties and advances across multiple books.

Some publishers in this space can and do deal with this by treating reserves differently, or by paying royalties on a quarterly or monthly basis, or by investing in great authors with both strong advances and strong royalties and no co-accounting. Authors with a great idea and a great track record always have options.

Another issue you don't touch on is price point. While it may be tough to go above 10% for a book that's priced at $20, the publisher's margin increases greatly at higher price points.

Once an author has a proven royalty stream, an established public, and a very big hit, the importance of the advance diminishes quite a bit, and the reward of a higher royalty is quite tangible indeed. I only wish we had more books in that category.

Joe Wikert

Hi Matt. I hadn’t really thought much about the notion of an advance reflecting the publisher’s commitment level. I guess it’s because I’ve managed a number of zero-advance titles over the years and I don’t think I was any more or less committed to those books than I was committed to the ones with $10K advances or $20K advances, for example. OK, I’m sure I was more committed to ones with advances of well over $20K, but those typically represented the top few titles for the year...and they were going to get extra attention regardless of the advance levels on the other books!

Is it easier for a publisher to cancel a project if they didn’t pay an author advance? Probably. But if that were a concern, would it be possible to incorporate some sort of non-refundable termination fee for the author as some insurance? That would probably serve as a deterrent to make the publisher think twice about canceling, don’t you think? Now, before you try and hit me up for language like this, keep in mind that I’m talking about zero-advance projects. Additionally, I’d have to give some thought to this and figure out what a reasonable termination fee would be…

I’d have to respectfully disagree with you on the comment about better margins on higher priced products. You’re only considering one variable in the equation. The volume variable is often as important, if not more so. If volume is consistent, yes, you’d obviously have better margins on a higher-priced product, but that’s not the case in most situations.

Brad Hill

First comment from me--thank you for your careful and determined work in this blog!

I find your emphasis on the author's belief in the project to be curiously ephemeral. After 10 years and about 25 books (at least half for your companies), it's clear to me that nobody can predict sales of a standard midlist title. Least of all me! I've worked with your top AEs, and everyone seems to be guessing. We are frequently surprised, to the upside and downside. We have collided powerful brands on the cover to no avail in some cases; we have issued questionable titles into smallish markets and earned fat royalty checks.

My belief in a book is irrelevant, and should be viewed that way. I believe in every book during the flush of development, and I assume the same belief on the other side of the table. I would view an AE's offer of lower cash with suspicion--an alarming warning that advance commitment couldn't be raised. If sales are always unpredictable, as I believe they are, then I always attempt to divest as much risk as possible, while assuming as much self-marketing responsibility as possible.

Of course, none of this addresses the generally declining advances and back-end structures since 2000. That's another issue, just as intractable.

I'll read regularly. Many thanks.

Joe Wikert

Hi Brad. Thanks for the comment. I realize everyone's going to interpret an offer of a lower advance and higher royalty rate differently. I can definitely see where this offer might raise author suspicions, but keep in mind: it’s simply a second option. If the author prefers to stick with the higher advance and lower royalty rate they should do so. I just think it’s worthwhile to look at both sides and consider more than one possibility.

Tom Britt

The economics of publishing coupled with the Internet have driven a lot of people to self-publish for these very reasons. Not only do authors sign away their rights for a $10k/10% (which is generous anymore), they also end up doing all the promotion, book signings, and offline work to generate sales. Companies like AuthorHouse and iUniverse are accounting for a large percentage of all books published these days for this very reason. Oh yeah, a lot of authors never get the $10k/10% offer to begin with.

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