How does the money work? (Part 1)

An ultra simplified breakdown of how the money side works in traditional publishing - Part 1 is before the book is published

Hi everyone, and warmest welcome to all my fellow Excel nerds out there!

Yesssss never been more okay in my life!!

If there is one thing that I have to explain to authors and new publishing staffers time and time again, it’s this! This post is actually adapted from a presentation I gave to mentees and new joiners at my old job to explain how the money works in publishing. I've split this in two posts because, it was waaay too long.

While writing is a pleasure or a craft, publishing is a business and many, if not most, of the decisions made within publishing relate to money and profits — the genres publishers choose to publish, the amount of books they publish, the amount they decide to pay, the in-house resources they choose (or not) to spend, etc. Of course, one of the publishing decisions made can be ‘it might not make any money but I love the writing so much I think it's worth publishing anyway’.

Some very quick PSAs:

• This is for traditional publishing so doesn't include self publishing or hybrid publishing (though I mention them below).

• This is focused on trade/mainstream publishing meaning it doesn't consider the specificities of academic publishing or specialist publishing.

• This is mainly based on adult fiction and non-fiction publishing so won't take into account children's publishing or illustrated publishing which have their own idiosyncrasies.

• My experience is in the UK.

• This contains huge generalisations!! Not all situations will be covered but hopefully this will give you a better understanding of the process.

I briefly considered an image of bank notes but as it’s publishing, pennies are just more accurate……

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Who are the main people involved in a traditional publishing deal and what do they do?

Agented Author => Agent => Publisher

Unagented Author =======> Publisher

Agented Author

• The author writes a book and submits it to agents

• At no point does an author pay an agent or a publisher. Their only investment is writing the book.

Agent

• An agent will offer representation to the author

• An agent’s commission is usually around 15% of the money negotiated with publishers in the UK and 20% internationally (though depending on the services they offer in the UK share can be as low as 12.5% and as high as 20%)

• The agent may do some editorial work on the book and ask the author to edit it

• The agent submits it to publishers (this involves a lot more than sending an email, but that's for another post)

• The agent handles all the paperwork (contracts, invoices, royalties, etc) and author care after a deal has been agreed on behalf of the author

• In traditional publishing, an author doesn't pay an agent. And if a book doesn't sell, the agent will have effectively worked for free — this is why we only take on books we feel confident we can sell.

Publisher

• The publisher will receive the book and bring it to an Acquisition meeting

• The publisher will put together an offer looking at what they hope to sell (more on that later)

• The publisher sends the offer to the agent who will assess the offer and negotiate the terms until each party is satisfied (the author being one of them)

• The publisher then goes through each stage of the publication process

• Twice a year, the publisher will account for sales to the agent, who will take their commission on any earnings, and wire the rest to the author.

Quick note:

• An unagented author skips the Agent middle person and goes straight to the Publisher. If you are unagented, you can use the Society of Authors (in the UK) service that checks your contract in the same way an agent would do. Unless you have been negotiating publishing contracts for your day job (and no, being a lawyer in another industry isn't the same), you do not have the knowledge to negotiate a publishing contract effectively and to your advantage.

• A self-published author skips both the Agent and Publisher middle people and goes straight to the publishing. While you won't need to get your contract checked if you're self-publishing, you will need to get some knowledge on how publishing works (publishing isn't just about making a book available for sale). You can visit places like The Empowered Author to get some help.

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How do publishers work out what offer to make?

The simplified version of what can sometimes be a long and convoluted process is that each publisher makes a profit and loss document which takes into account all the sales (including rights sales) they expect to make for the book as well as all the costs (office and staff costs, production costs etc) and see how much money can be made. This is all input in a form which will work out how much they can offer as an advance while also making a profit. Publishers will always want to make a profit, though sometimes other factors may come to play which make up for low profits (hello, celebrity books).

If the publisher is keen to get more rights than the basic rights, then they should¹ offer more money. The ‘basic’ rights these days tend to be for volume (usually print rights including hardback and paperback) and ebook; and the territory is UK & Commonwealth excluding Canada². The publisher should³ ideally pay extra for every right they would like to handle above the ‘basic rights’ (which includes audio, more territorial rights in English Language, translation rights, etc.) since they are adding more earning potential.

If you are in a situation where several publishers want the book, the amount of the advance will go up because of the demand. The amounts in auctions can go up to super high levels that likely won't make the money back (more on that below). Meaning that publishers get in this gambling situation where they put money they know they will never be able to make back⁴. This is why we can't all have nice things.

The royalty print-run calculation

So, how does a publisher work out how much to offer? Usually in an ideal world, the advance should match the author's share of earnings (not all earnings) on the first print run (while also giving the publisher some profit). This is an extremely oversimplified way to calculate things and is becoming less and less realistic based on printing costs and high discounts (more on these later).

This calculation, which we sometimes use in Rights to see if a foreign publisher's offer is fair, is called the royalty print-run calculation.

The formula is relatively simple:

(Print run x Published Price) x Royalty rate = Author's share

This is what the author (pre-agent commission) would earn for the first printing of the book sold at the published price.

Example for a hardback: (2,000 copies x £18.99) x 10% = £3,798

Example for a paperback: (3,000 copies x £9.99) x 10% = £2,997

PLEASE NOTE: I have used 10% as a rate for ease, these are not accurate rates for these formats⁵. I did use average published prices for hardback and paperback and also average print runs for these formats if not super big titles. I should say that publishers reprint books, this is for initial/first print run only!

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What does an offer entail?

An offer doesn’t only have the level of the advance — it also has what royalty rates the Publisher would like to use (which as you saw above is relevant), the sublicense rights (subrights) splits and other terms relating to the delivery of the book, the publication, the permissions etc.

When it comes to the financial side of a contract, yes of course, agents negotiate the advance, but we also focus on royalty rates and subrights split as these things will make the difference between earning out (and therefore being seen as profitable by the publisher) and not earning out (meaning the publisher may use the unearned advance to offer less on the next contract).

An advance will likely be split:

• in the best case scenario as half on signature, half on publication (every now and then a shining angel offers all on signature but that's pretty rare or because it’s a very low advance);

• (medium?) case scenario as a third on signature, a third on delivery and acceptance of the manuscript (which is inclusive of edits and sometimes copyedits, so not first draft)

• worst case scenario (for small advances) in quarters with the three above and the last quarter on publication of the paperback advance. (If you get a big advance, you may get split in more but since it may help you to spread the payments over several tax years, you will be delighted for them.)

• Yes, it is deeply tedious publishers insist on these split payments and sometimes don't agree to weigh the advance more towards signature (so half on sig, quarter on del, quarter on pub). Their argument being that they don't get money from retailers until after publication and it puts them out of pocket.

While I can't discuss specifics, royalty rates will usually be as per below:

Every format of the book will have different rates and rules:

• Hardback (usually based on published price = the price printed on the book)

• Trade paperback (usually based on published price unless export)

• Paperback (usually based on published price)

• Ebook (based on net receipts = the money that the publisher receives from the retailer and after taxes etc)

• Audio (on net receipts for digital, physical audio is much rarer)

Where you sell the book will also impact which rate is applied:

• There will be different rules if the copies are sold in the UK (or the Home Market which sometimes includes Ireland or Europe) or for export. Export sales are calculated on net receipts.

• There will also be a different rate applied depending on retailers. Each retailer who buys from a publisher has a specific discount⁶. These discounts are called High Discount (and usually have thresholds wherein the publisher will pay a certain percentage of the Home royalties, not the full rate). Yes, high discounts are the absolute worse things and this is why we tell people to buy from indie bookshops. They are another reason why we can't all have nice things.

Rates can evolve:

• You can include in a contract what we call an escalator: where the rate goes up after a certain amount of copies sold. This means that the more successful the book is, the more the author receives.

I hope this makes sense (and if anything, shows how essential it is to have an agent / industry expert review your contracts!)

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Part 2 of this post will focus on what happens money-wise after the book is published!

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I hope this all made sense, do let me know if anything is unclear! I will do separate posts on Rights and one on how to check a royalty statement in due course as well.

Until next time,

Caro

1. ‘should’ being the operative word here.

2. I will shout this from the rooftop but the Commonwealth is composed of 56 specific countries which does include Canada. Most US publishers are keen to publish in Canada, therefore agents usually withhold them from the UK publisher for the book to be more attractive to US publishers. Actual geography and geopolitics have no bearing on publishing territories which is why the territory breakdown (or territory schedule, as we call it) within a contract sadly doesn't often reflect the rights given. Yes, we really should discuss decolonising book publishing territories.

3. See footnote 1

4. This is the difference between investing in an author and gambling on an author. If you're the author gambled on and you only want to write one book, then you're fine, take the money and enjoy it. If you want a long career, bear in mind that if sales don't match the advance, you're unlikely to get the same level unless you use a different name (differentiating your new book from your track record), change genre, have an outstanding hook, etc.

5. Royalty rates are different per format, per publisher and agency so there isn't one rate that everyone uses.

6. Don't bother asking, these are different between each publisher and retailer but the bigger the retailer, the bigger the ability to negotiate a higher discount.