If you’re going to make a living by writing books, you need to
understand how a book royalty gets calculated. That’s how the
author gets paid, ultimately, if the book becomes a successful
bestseller. What’s more, the royalties the publisher expects the
book to earn determine the advance the publisher will pay the
writer up front.
Royalty Accounting Only Starts Off Simple
Royalty calculations start out pretty simple. Royalties get
calculated by multiplying the price of a book by the royalty
percentage. Sometimes, the price used in the calculation is the
retail price that the customer pays for the book in some
bookstore. Sometimes, the price used in the calculation is the
wholesale price that the publisher receives from the bookstores
and wholesalers who buy the book.
Assume that you’ve written a book that retails for $20. Further
assume that the royalty percentage is five percent. To calculate
the royalty you earn per book sold you multiply five percent, or
.05, times $20. The result equals $1. So that’s the royalty you
earn for every book the publisher sells.
Many authors and agents prefer royalties based on retail prices.
The calculation is simple to understand. It’s simple to compute.
And there are limited opportunities for argument about whether
the calculations are correct.
Big Authors Often Do It Differently
Some very powerful authors receive a set royalty amount per
book–such as $1–which is essentially a variation of the
royalty based on a retail price. The agent, through his agent,
says something to the publisher such as, “I don’t care what you
sell it for, just give me $1.”
Wholesale-price Royalties are Common–and Complicated
Royalties based on wholesale prices–which are technically
called net royalties–get a little more complicated. Again
assume that you’ve written a book that retails for $20. Assume
that the royalty percentage is ten percent. Ten percent, in
other words, is the royalty percentage that the publisher
applies to the wholesale price that its customers pay for your
book.
Okay, so far so good. Unfortunately, calculating the wholesale
price of a book is tricky. Publishers calculate the wholesale by
discounting the retail price by some percentage. And the
discount percentage depends on the number of books that the
bookseller or wholesale orders from publisher. If a bookseller
or wholesaler buys from one to four copies, the discount might
be 46% which means your $20 book wholesales for $10.80. If the
bookseller or wholesaler buys between 51 and 500 copies, the
discount might be 52% which means your $20 book wholesales for
$9.60.
These differences affect the royalty you earn on a book, of
course. Assume that the publisher pays you 10 percent. If the
publisher sells a book for $10.80, you earn $1.08. If the
publisher sells a book for $9.60, you earn $.96.
And here’s something else to consider: Using the earlier price
discount schedule, you might assume that the only time the
publisher discounts your books by the biggest possible discount
is when the publisher receives a large order for your books. But
the bookseller or wholesaler applies the discount to the total
order they place. If Barnes and Noble orders five hundred copies
of some other bestseller that your publisher sells and three
copies of your book, the price for your books is also calculated
by discounting the retail price by the biggest discount, which
might be 54%.
You now need to understand something else that’s really
important. Publishing contracts usually don’t specify just one
royalty rate. They specify a schedule of royalty rates. Normal
sales to bookstores use the regular rate. And authors always
focus on that rate.
However, other rates come into play in special situations. If
your book sells an enormous number of copies, such as more than
25,000, the contract may say you get a higher royalty rate
(perhaps 15% instead of 10%, for example). If your book sells
through a book-of-the-month club, outside the country, or at the
biggest price discount, the contract may say you get a lower
royalty rate (perhaps 5% instead of 10%, for example).
Now at this point, you may be thinking that I’m making an
awfully big deal about a situation where we’re talking about
pennies. But the combination of these price discount schedules
and royalty rate schedules hugely impact your royalties.
Suppose you and a publisher agree that you earn a 10%
wholesale-price-based royalty on a book that wholesales for $10.
Further suppose that there are two exceptions to this accounting
treat. You get only a 5% royalty on deeply discounted sales, but
you get a 15% royalty on any copies sold after the first 25,000
units. Here the various royalties per unit amounts you might
earn:
1. If your publisher sells a copy of your book for $10.80 and
it’s not deeply discount and the book hasn’t yet sold 25,000
copies, you earn $1.08.
2. If your publisher sells a “deeply discounted” copy of your
book for $9.20, you earn $.46.
3. If your publisher sells a copy of your book for $10.80 and
it’s not deeply discounted and the book has sold 25,000, you
earn $1.62.
Those are very large differences. Take the situation where a
book becomes a big success and sells 50,000 copies. In the worst
possible case, you might earn $23,000 in royalties (calculated
as 50,000 times $.46). In the best possible case, you might earn
$68,000 in royalties (calculated as 25,000 times $1.08 plus
25,000 times $1.64).
I’ve actually had this experience. The terms of the publishing
contract prohibit me from identifying either the book or the
publisher, but in the first year of sales, my bestselling book
sold 90,000 copies. I knew the numbers would be big. The
publisher kept reprinting the book, 10,000 or 20,000 copies at a
time. When I finally received the royalty statement and check,
however, 70% of the books were sold at a big discount. Per the
terms of the contract, this meant that I earned about $.40 a
copy.
Two Practical Observations
That’s pretty much everything you need to know about royalties.
But let me leave you with two practical observations about these
royalty calculations. First, be careful about comparing your
royalty rate or rates to the rate that you hear some other
author received. The comparison is notoriously tricky. You don’t
know which royalty rate the other author is referencing. In my
experience, usually the author is talking about the best rate in
the contract. But that rate may not even ever be used. And even
if it is used, most of the books may be sold at lower royalty
rates.
Second, while as mentioned earlier some authors prefer the
retail royalty rate calculation, I’m not sure that in the end
that arrangement works to the author’s economic advantage.
Certainly some publishers abuse the wholesale royalty rate
calculation. You or your agent need to watch for this. However,
also know that a wholesale royalty rate gives the publisher
flexibility to sell your book in crazy ways that put extra money
in both your pocket and the publisher’s pocket.
