As a fellow litblogger and avid reader, I have been following LitKicks' symposium on book pricing. Here and there, I've left comments on various threads to add my own take on the topics under discussion. Offline, though, Levi and I have had several spirited conversations about our passion for publishing. The result of our discussions will be revealed over the next few series of posts.
Publishing is a fascinatingly complex industry. An outside observer could easily come to the conclusion that nearly everything publishers do is dysfunctional to the point of wondering how any of them stay in business. Having been an industry insider, Levi has asked me to offer up what I know about the industry as a means of unraveling some of the mystery behind why publishers do what they do.
Who Am I?
Hello, LitKicks, my name is Mary Delli Santi. During the 90s, I spent 8 years working for a Chicago-based educational publisher. I handled operations for the international division and attended dozens of conferences which included Book Expo America (BEA), Book Expo Canada (BEC), the London International Book Fair (LIBF), and the Frankfurt Book Fair (FBF). I've seen more book deals than I can count and sat through more than my fair share of sales meetings. Although I left publishing in 1999, I still love books and have filled my house and life with them. However, I am very grateful to not have worn through a pair of shoes humping cases of books through the buchmesse at the just-concluded FBF. These days, I content myself as a reader and post occasional thoughts and host book discussions at my site, BookBlog [dot net].
Welcome to Simon Collins & Random Day
As a means of providing everyone with a glimpse at how the industry operates, I am pleased to present you with Simon Collins & Random Day, an ideal publishing company with the perfect publishing program! In a perfect world, every publisher would turn a profit on every book. Of course, we all know the world isn't perfect, but there isn't anything wrong with dreaming. What follows is simply a model to give everyone an idea of what the bottom line could be.
When book deals get made, the author's advance is usually expected to cover royalties earned over the course of a year. For example, if a royalty rate is 10% and the publisher expects a book to net $250,000 in sales over 12 months, they'd likely offer the author an advance of $25,000. Keeping this in mind, I have created a sample frontlist profit and loss statement for SC&RD, our fantasy publishing company. It's one in which everything works out exactly the way the editors expect. Each book earns back its advance and provides SC&RD with a hearty 30% profit margin.
Onto the numbers...
A Guide to the P&L Statement
Although most real publishing companies' profit and loss statements tend to be much more complicated, we've simplified our spreadsheet for use in this example. After all, this is a fantasy league and we're focused on the metrics needed to provide everyone with a clearer understanding of how real publishers operate.
For those of you who aren't familiar with reading big spreadsheets, the column headings provide a brief description of what's going on in each column. Following, though, is a more thorough guide to how we've set up our company:
Format: For our frontlist catalog, SC&RD publishes in hardcover and trade paper original. In addition, we also produce paperback reprints of last year's frontlist using both mass market and trade paper formats.
Genre: We're bestseller-oriented at SC&RD because we need to make lots of money for our shareholders. We love genre fiction because it usually sells well, but we also haven't neglected to publish some literary fiction for our more discerning readers.
Royalty Rate: Most publishers offer their authors between 10% and 15% of net sales, but we prefer splitting the difference and giving them all a flat 12%.
Advance: Our advances a calculated based on what we expect our authors to earn in royalties over the course of a year. A starving artist needs to eat.
List Price: We're not too greedy. Our books range from $7.95 to $29.95, depending on format.
PP&B: In general, publishing, printing, and binding (manufacturing costs) tend to be 10% of a book's list price. Ours is 12% because we've lumped in other incidentals like plates and shipping. No point in making an already big spreadsheet bigger by adding lots of columns.
Units Printed: This is the number of books we printed during the last 12 months. Could have been one print run...could have been multiple print runs. We're not worried about the little details because our eyes are on the sum total.
Printing Cost: PP&B multiplied by the number of books printed.
Marketing: We like to budget 5% of net sales to promote our books. As a result, the most successful ones tend to get more exposure and we like it that way. No point in letting a runaway smash hit miss a single eager reader.
Units Sold: We always sell exactly the number of books we need to sell to cover the advance we shelled out 12 months ago. Remember, we're fantasizing here.
Net Sales: SC&RD has an amazing sales force that sells into lots of retailers, including independents, big boxes, online booksellers, wholesalers, and warehouse clubs. For all buyers, the average discount off list is 55%.
Royalties Earned: In our fantasy publishing league, our authors always earn back their advances.
Royalties Paid: There's no need to pay any additional royalties in the first 12 months since we just sold exactly the number of books we needed to sell. Next month, though, the checks will be in the mail.
Overhead: You know, pesky additional expenses like salaries, facilities, catering for our all-day board meetings, etc. They tend to run about 20% of our net sales.
Net Profit (or Loss): Our net sales minus all expenses. As you can see, every book at SC&RD turns a profit so, honestly, "Loss" is completely superfluous.
Profit Margin: When we divide our net profit by our net sales, SC&RD always enjoys a healthy margin of 30%. It's nice to fantasize, isn't it?
And the Point Is:
Now that you've gotten a quick education in a publishing company's financials, we'll be using this P&L statement as a jumping off point for several different possible scenarios. We've done our daydreaming, but stay tuned. Over the next few days, we plan on presenting P&L statements for a typical publishing company, one having a good year, and another having a bad year. And when it's bad, trust me, it's bad.
Please check back tomorrow for the next section of Mary's presentation of Simon Collins & Random Day's publishing program. -- Levi Asher
This article is part of the Does Literary Fiction Suffer From Dysfunctional Pricing? series. The next post in the series is Fantasy Publisher League: Simon Collins & Random Day’s Typical Year. The previous post in the series is Figuring Out the Book Business.