Sunday, April 4, 2010

Definitions for the Perplexed: Royalties, Advances, and Earning Out

Royalties on List
The more common book royalty, this is a percentage of the list price. If you are earning a 10% list royalty on your novel (eg), which retails for $15.99 (the list price), then for every book sold you are earning $1.59 in royalties.

Royalties on Net
More common in non-book items like games, stationery, calendars, this is a percentage of the price at which the publisher sold the product. Which takes into consideration the discount at which the publisher must sell products. If you are earning a 10% net royalty on your fancy journal (eg), which retails for $15.99 and is sold to one retail account at 50% off (eg), then for every journal sold you are earning $0.79 in royalties.

The system of royalties and advances is one often criticized. There are many people on either side of the desk (authors, illustrators, agents, publishers) who would like to see a system in place that would benefit themselves more.

Alas, figuring out how to reimburse everyone fairly in an industry like publishing is an impossible feat. Most books don't earn out, and are a loss for the publisher. If the publisher doesn't profit, does that mean the author shouldn't either? Most authors would say no: even the profitless books should profit the author. However, as soon as many authors appear on a bestseller list, their thinking changes. Clearly they're making a bunch of money for the publisher; shouldn't their cut be larger?

Well, there's the thing. If you think that the author should profit even when the publisher doesn't, then you must also be comfortable with the idea that the bestselling books (those desperate few) will profit the publisher more than the author, so that that money can bankroll the failing books on the publisher's list.

Publishers wouldn't mind at all if authors were willing to only profit if the book does well, but since the vast majority of books don't profit, no author or agent who knows the industry is going to agree to that. Which is where advances come in.

An advance is an approximation of what the publisher thinks your book will earn you in royalties in (perhaps) a year. It is an advance payment on those earnings, thus the name. Essentially, an advance is a loan that you don't pay interest on (and would only pay back in cases covered by the contract). It's the publisher gambling that there will eventually be money in that book. As we know, mostly the publisher is wrong. But at least this way the author gets some money out of the deal, even if they never see a dime in royalties.

Advances are subject to the publishing industry's full range of hallucinatory optimism and depressive nihilism, so don't be expecting any kind of "standard range" here. Ha ha! "Standard." Hilarious.

Because an advance is a sort of loan, you won't start earning royalties until your accrued royalties have earned back that advance. Which is where we come to:

Earn out
Joyous earn out. If your book has "earned out", then it has earned back the advance, and the author is starting to get royalty checks. In some wonderful cases, the book may earn out even before publication, based on foreign rights sales alone! Ah, then everyone is happy. Right?

No, of course not. There's nothing like publishing to gather egomaniacs with unrealistic expectations. Which is why you hear some crazy people online saying that if your book earned out, then you should fire your agent because clearly you weren't paid enough. (We pause here for painful laughter, and mild hysteria.) If the book makes money, and the publisher is glad they published it, then you're unhappy? You can only be sure you got enough money if your advance made the book's bottom line negative? Who are you crazy idiots?


Christi Goddard said...

"Advances are subject to the publishing industry's full range of hallucinatory optimism and depressive nihilism"

Best line ever.

Mari said...

This is the clearest post I've read about royalties and the expectations of all parties in the publishing industry. Thank you!

By the way, I sympathize with your frustration. People usually look only to their own bellies (I'm being nice with the word choice here, mind), especially when it comes to money.

Deb Salisbury, Magic Seeker and Mantua-Maker said...

Great post! Thank you!

It's funny, in a sad way, how some people are never happy. I don't know if the present system is fair, but it's the best hope for new authors in their search for a publisher.

Jill said...

Great overview of what all the terms mean. I hope to get huge advances and royalty cheques with several digits and earn out and and and ...

Thanks for the info.

Liesl Shurtliff said...

Thank you! I've think I've read novels on each of these subjects, but you condensed it all in chewable pieces.

Claire Dawn said...

I love your comments on earn out. There are crazies everywhere.

Christine Tripp said...

The only time you would wish you had a larger advance after the book has sold FAR past it is when the publisher is a creep and hasn't sent a statement in 2 years, nor the royalty cheques owed! (don't even ASK how big the can of whoop A-- is that I would like to open on them:()
I know the best idea is to take a lower advance to begin royalties earlier but.... when you go through something like the above, it colours your view on the value of royalties (not to mention contracts)

Bethany C Morrow said...

I heart the last line of this entry. Actually laughed out loud. Hilarity.

Moll said...

"Which is why you hear some crazy people online saying that if your book earned out, then you should fire your agent because clearly you weren't paid enough."

Dude, that is nuts.

Nobu said...

I would note here that a publisher can make money on a book that hasn't earned out its advance. Just because the author never sees a royalty check doesn't mean the book is a loss for the publisher. It's a common misconception that publishers *always* lose money on books that don't earn out. I'm not sure you actually meant to say that, but it is implied, so I figured I'd make the point that this isn't always the case :)

Editorial Anonymous said...

That's true, Nobu. Although I don't have a clear idea of how much that happens, and explaining how it happens is more than I can handle, mathematics-wise.

Literaticat said...

I definitely think earning out is AWESOME (yay earning out!!) - but the publisher does start making money well before the author earns out... no?

I was under the impression (quite possibly mistaken) that the publisher started earning money right around the point of royalty escalation, which is I think generally well before earn-out proper. (Of course you'd know better than I)

Anonymous said...

What Nobu said... none of my books has earned out yet. But the publisher seems perfectly willing to keep buying them. Knock on wood. So I have to assume that they're not losing money on them.

Natalie J. Damschroder said...

"If the publisher doesn't profit, does that mean the author shouldn't either? Most authors would say no: even the profitless books should profit the author."

Except royalties aren't profit for the author, they're income. Most authors, given an hourly rate that doesn't factor in any expenses at all, are working for far less than poverty wages. :)

But I'm probably taking that deeper than you meant to go, math-wise.

Susanna said...

Just curious - any idea what percentage of books DO earn out?

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Unknown said...

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