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.

Advances
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?