“How will my royalties be calculated?” That’s typically one of the first questions an author asks. At the risk of oversimplifying things, here’s a quick explanation:
Let’s assume we’re talking about a book with a $30 cover price. That’s not how much the publisher receives, however (unless they sell it direct to the consumer). The bookstore typically gets a 50% discount from the publisher, more or less. In other words, the bookstore paid about $15 to stock one copy of this $30 book.
To keep the math simple, let’s further assume the author is being paid on a flat 10% royalty rate. The 10% rate is multiplied against the net proceeds received by the publisher, in this case, $15. The result is a single-copy royalty payment of $1.50. If 10,000 copies of the book sell during its life, the author earns $15,000 in royalties (10,000 copies times $1.50 per copy).
It would be great if everything were this simple. In reality, there are two key factors I’ve glossed over: the author’s advance and copies that may get returned from the bookstore. First, the advance…
Most authoring agreements state that the publisher will pay the author an advance against future royalties. The assumption is that the author needs this money to take the time out of their schedule and write the manuscript. For the sake of argument, let’s assume the author was paid a $7,500 advance against future royalties for the book discussed above. That means the publisher has to sell 5,000 copies before the author’s advance “earns out”. (Remember, each copy generates $1.50 of income for the author, but the publisher has already paid out $7,500 as an advance – divide the advance ($7,500) by the per unit royalty contribution ($1.50) and you get the number of copies that have to be sold for the author’s advance to earn out (5,000).) In this model, the author doesn’t see any payment beyond the $7,500 advance until the 5,001st copy is sold. To sum up, let’s say this book sold a total of 12,000 copies in its life. How much did the author make in royalties? The author received a $7,500 advance, which essentially covered any author payment for the first 5,000 units, as noted above. For the other 7,000 units sold (12,000 minus 5,000), the author is paid at that same 10% (or $1.50 per copy) rate, or $10,500. Add that amount to the original advance ($7,500), and you have a total payout to the author of $18,000 for the life of the book.
Did you know that the vast majority of books sitting on shelves at your local bookstore are fully returnable to the publisher? If the publisher ships 100 copies of our example book to the bookstore and the bookstore doesn’t sell a single copy, they can return them to the publisher for a complete refund. Sounds like a consignment business, doesn’t it? Not quite, but returns make the royalty calculation much more complex. In fact, it’s so complex that I’m not going to try and cover it in this post… I’ll save those details for a follow-up post tomorrow.