The Book Deal: Royalties

.Almost all publisher contracts pay authors through a system of royalties, a certain defined percentage of revenue based upon sales of the contracted book. The concept is simple, but it can get quite complicated in practice. Let’s talk about the different formulas that publishers use in calculating royalties and how these translate in income for the author.

At the outset, it is worth noting that for the majority of authors who get published by trade publishers, royalties don’t really matter. Most books never earn out their advance, and authors never receive a royalty check.  Big time celebrity agents often like to brag that if a book “earns out” the advance, they haven’t been doing their job. And there is certainly something to be said for this argument. It means that the agent negotiated a sweet deal, and the author ended up with more money than she would have otherwise earned.

We discussed advances last week. We mentioned that advances are just that: advances against royalties. An author will never see a royalty check until the net earnings from royalties exceeds the advances paid. We also had a little fun trying to estimate he total advance on Sarah Palin’s book some hypothetical assumptions.

The royalty rate is negotiated in the “deal points” phase of contract negotiations, before the contract language is worked out.  A typical royalty arrangement for cloth bound books from a major publisher is: 10% (of retail price) on the first 5,000 sold; 12.5% on the next 5000; 15% thereafter. More important authors might be able to sweeten this deal some. But it is unusual. Royalties on trade paperbacks are less and usually start at around 7.5%. They can increase on volume sales.  Remember that these percentages are based on “list price” or “retail price” or “cover price”. All of these terms refer to the price marked on the cover of the book. Thus, if  retailers discount the price of the book to the consumer (as they frequently do), it has no impact on the author’s earned royalty. The recent price wars amongst Amazon, Walmart and Target, in which books are being sold far below their cost as loss leaders, have no impact on the royalties being paid to the authors. 

Some publishers, mostly smaller publishers,  calculate the royalty as a percentage of  the publisher’s net revenue. This is quite a different accounting method than one based on  the retail price. Net revenue will vary from publisher to publisher. But in general, publishers sell books to vendors for 50% less than retail. If your contract calls for royalties based on “net”, then you should be seeing royalty percentages that are double those of those based on retail price.” If you aren’t seeing that, than it is not a very good book deal.

The calculations can get murkier when you consider that almost all publishers have provisions in the contract to reduce author royalties on sales where the publisher has offered unusually large discounts to the retailer. Typical deep discounting language in a contract might be the following:  “When the publisher grants discounts in excess of 50%, author’s royalties shall be half of the royalties otherwise due.”

Hmm. Interesting. So this means that if a publisher sells a book for 51% discount, and receives 1% less than otherwise, the author will have his royalty reduced by 5%. This  doesn’t seem fair—at least, not fair to authors.

A lot of these deep discount deals are for bulk sales to big box stores or special sales to corporations and institutions. The discounts can be as high as 55-60%. So it is probably fair that the author should make some kind of sacrifice.  But wait!  Maybe not. Consider that these high volume sales are shipped to a single location,  packed on skids,  a single invoice to account for, no returns permitted. The publisher is making considerable profit on these bulk sales.

In my humble opinion, these deep discount provisions are entirely one-sided and have the effect of reducing author royalties on transactions that are actually more profitable to publishers. Unfortunately, these provisions are frequently difficult to change in negotiation. I try to define exactly what classes of vendors they apply to and put into the contract that the provision will only apply to sales outside of normal book trade distribution channels. Otherwise, one could find that most of one’s royalties are going to be based on rates offered in the deep discount provisions, not on the negotiated standard royalty rates.

If you ask anyone in publishing, they will tell you that all thought about the future is centered around the role of e-books. The royalty on e-books has moved to the fore and is now an element of the deal point negotiation. As of now, there is not a firm rule of thumb for e-book royalties. I have seen royalties offered anywhere between 15% – 50% of publisher revenue. Random House, the largest trade publisher, has been offering 25%. I suppose that is as good an indicator as anything else of a prevailing practice.

At the moment, e-books account for less than 2% of book sales. But this could change dramatically and quickly in the coming years. Thus a bad royalty on e-books might not mean much money now. But could be substantial as the e-book takes hold of the marketplace.

It seems to me that an author should be entitled to a much larger portion of an e-book sale than of a physical book. After all, publishers have considerably lower costs in manufacturing, distribution, and returns. But the royalties   being offered to authors on e-book sales don’t seem to account for these savings by the publisher.

Tags: advance, andy ross, andy ross agency, ask the agent, book contract, book publishing, book royalty, books, deal points, e-books, hardback royalties, literary agent, literature, paperback royalties, royalties, sarah palin, writing