E-books – royalties, production costs, and sales, oh my!

Brian Clegg – brilliant author extraordinaire and all around great gent, commented in a previous post:

What’s interesting is how does the cost of getting an ebook into the shops compare with the cost of physical book, including production, shipping and dealing with returns, on top of all the same costs as the ebook? And how does the net revenue then compare? So ultimately, taking all this into account, how does the ratio of earning per ebook to earning per physical book compare with the ratio of royalties on the two?

I thought it a great discussion, so I decided to make a separate post to discuss these issues. There is a lot of comparing apples and oranges with e-books and physical books in terms of who’s doing the publishing – authors or publishers. So for this post, I’m going to take the viewpoint of publisher and we’re trying to figure out how all e-books vs. physical royalties and advances will eventually wash out.

Of course, it comes down to cost.

Cost comparisons for the bookstores – physical vs. e-book

The eventual resting place with books is, of course, in readers’ hands. The easiest, most efficient way for that to happen is in bookstores. Brian asked how e-book costs compare to physical books in terms of getting them into the shops, using production, shipping, returns as our list of parameters. I’m adding discounting to the list as well.

Well, for starters, e-books aren’t yet being sold in physical shops [at least here in the US], so right off the bat, we’ve parted company in the comparison game. Powells.com is terribly clever in that they sell e-books on their online site. To my knowledge, they’re the only mainstream bookstore who does. I suspect that at some point physical bookstores will offer e-book sales.

Before I can break this down, I need to make a few assumptions. I’m not talking about the self-publisher, but a mainstream publisher who creates physical books and offers the e-book version as well.

Production: The production costs are established with the physical book and runs into the thousands when you consider all the elements I wrote about in my previous post about e-book costs. I’m talking about editing, cover design, ISBN, interior layout and design, distribution, marketing and promotion.

Print Runs: I’m separating this from the normal production costs in order to highlight the case that print runs vary depending on the book. For instance, we may print 2500 units for one title and 8,000 units for another because it has a wider audience potential. So our mileage varies depending on the title.

Shipping: Shipping costs are all a part of doing business with physical books. Everyone has UPS or FedEx accounts and gets discounting because we’re all shipping so much. Still, it’s an expense that rises with the number of books we’re shipping.

Discounting: Any distributor or national account like Borders, B&N, Powells, Waterstones, etc, buys publisher’s books at a discount. The normal range is between 45 -55% depending on the number of units being sold and the company doing the purchasing. So that book whose retail price is $15.95 is being sold to B&N for $7.975 per unit.

So remember, publishers are making money off that discount price, not the retail price. When you add up the production and printing costs, you can see why it’s vital to pick books we think will sell very well because while printing costs may vary depending on the units printed, the production costs are static.

Returns: Ach, the bane of every publisher’s existence and what very nearly killed many publishers a couple years ago and put thousands of editors out of work. We have to allow for the possibility that some books don’t sell within a bookstore’s sell window, and they’ll return them in order to make room for newer books. That’s why it’s so important to hit the deck running when your book comes out. If sales are tepid, they’re going to clear you out for someone else. And yes, publishers withhold a percentage of royalties in order to allow for the possible returns.

E-Books – they ain’t as free as you think

Ok, so here comes the comparison. E-books don’t have returns and they don’t have print runs or shipping costs, so the only things left are discounting – which is the same as physical books – and production. And here is where a lot of people find their biggest issue.

Production: Many people believe that the production costs are tied up in the physical books and that e-books are this marvelous freebie gift from the Great Cosmic Muffin. This is plain wrong thinking from where I sit. Yes, we expended the money to produce the physical book, but had we not done so, the e-book wouldn’t exist. E-books are simply another printing medium, so it goes to reason that our production costs bleed over as well.

E-book conversion: Almost not worth mentioning because it’s negligible PROVIDED the e-book version sells enough units to offset the costs.

Royalties: And this is where the big brouhaha rears its ugly head. Since so many people believe these e-books are free for us that they should have higher royalty rates. It wasn’t that long ago when the royalty split was 50-50, and that’s because e-book sales were negligible. But now with Kindle, Nook, Sony e-Reader, iPad, etc., e-books sales have dramatically increased and become an issue that publishers need to deal with head on.

Now you’re seeing more contracts that have a 80-20 split, and it has agents and authors howling. On one hand I can see why. Publishers were once willing to offer a 50-50 split because sales were weency, but now we’re getting all greedy like because e-books are making a much bigger impact on sales. In other words, publishers saw e-books as a throwaway, but now we want a bigger piece of the pie.

As a publisher, I can’t apologize for that. We fork out thousands in production costs for each title. E-books are quickly becoming a viable reading option, and it goes to reason that we will use those sales to recoup – and make money – from those sales.

Brian asked: So ultimately, taking all this into account, how does the ratio of earning per ebook to earning per physical book compare with the ratio of royalties on the two

Because publishers don’t have to worry about print runs, shipping, and returns [which are the only real costs that can’t be tied to e-books], royalty rates are generally increased from 8-10% to 20% or higher for authors to reflect the decreased risk.

In the end, who knows where and how all this will shake out? We’re in a transitional stage where ideas are being tossed about. And just like the old argument of Beta or VHS? this, too, will have an ultimate winner. The important thing is to always keep the lines of communication open and understand there are always reasons why we do things the way we do.

22 Responses to E-books – royalties, production costs, and sales, oh my!

  1. NinjaFingers says:

    Good post. Thank you.

  2. Brian Clegg says:

    Thanks, Lynn, that was really interesting (as always!)

    I’m glad you covered returns as they often seem to be ignored when authors think of the cost of a book, but obviously are significant, particularly as I was told by one publisher they were usually pulped rather than reused (is this generally true?)

  3. Brian: Heh, no one wants to think about returns because everyone believes that their books will sell out rather than make a return trip. Truth is returns happen for all kinds of reasons.

    We’ve seen cases where corporate chains wanted the books, but a store, for whatever reason, decided not to unpack a box and put them on the shelves. Or the the corporate warehouses never distributed them. Sometimes this is due to simple forgetfulness or a computer glitch.

    We had this happen to us – as I’m sure has happened to all publishers at one time or another. The book was in big demand, and corporate either forgot or lost the stock they had, so they kept ordering more books. At the end of a year, they discovered the unopened boxes – probably because my distributor was insisting on payment – and sent them back.

    So in those cases, no, they aren’t pulped. But if the books have been on the shelves, they usually can’t be sold again. Instead of pulping them, we have our distributor send them back to us and we donate them to Wounded Warriors.

    The idea of pulping a book makes my teeth itch.

  4. Barnes and Noble also sells eBooks through their website, as does Chapters-Indigo (the #1 chain in Canada). (If people want to get technical, Chapters-Indigo partners with Kobo, which I think was a spinoff project of theirs. However, the link to them is right on their front page.) I suppose if you ignore Amazon as not being a physical store, you don’t have to count them also, but don’t they hold a huge chunk of the “physical books” sales market? Borders has an announcement on their website that they’re also pairing with Kobo and the reader is for sale on the site now with the books coming soon. I’m pretty sure that brings our count of major book retailers in North America selling eBooks on their website from “just Powells” to “all of them”, pretty much, doesn’t it?

  5. allen parker says:

    I think royalties will all shake out about even in the end. I have a publisher that does physical and ebooks and pay me the same rate on both, 10% on cover price.

    I have another ebook only that pays me 50% net.

    The average royalty is the same book for book. An honest 50% of net is about equal to 10% cover, in my market, in my niche, and in my experience.

    The trick is going to be whether Print publishers will be able to market ebooks like those who have been doing this for years. I can see a scenario where ebook rights will be with one company and print with another. It may complicate things, but it might make more money for everyone.

    awp

  6. Allen, print publishers won’t let those e-book rights go without a serious fight. That is a deal-breaker. Print publishers market and promote their books with physical stock – which is easier to do – and the e-books are a natural extension of those efforts.

  7. […] where I saw it) however this two links cover it – in the UK eBooks attract VAT too, paper doesn't: E-books – royalties, production costs, and sales, oh my! Behler Blog BookFinder.com Journal: Breakdown of book […]

  8. Behler Blog, you said, “Well, for starters, e-books aren’t yet being sold in physical shops [at least here in the US]…”

    Why in the heck would ebooks be sold in physical stores? The purpose of an ebook is that you don’t “have to” go to a store, you download it.

    @Allen Parker: How can you be the creator of the material and earn lower than everyone on the totem poll (at 10%)? Wow, even literary agents get 15% somewhere, don’t they? Bwahahaha! I bet the man driving the truck delivering your books to stores is getting a higher percentage than you are Thanks for the laugh, Allen! Whew!

  9. Gee, snide much? Actually, ebooks are being sold in some physical stores. I agree that the idea of ebooks is ease of shopping, but bookstores want to remain relevant, so you need to sell what is being offered.

    While we see if Allen answers, I’ll take a stab at this. You’re forgetting that publishers buy the rights to publish an author’s work. It isn’t chump change. Additionally, publishers assume all costs of production, which also isn’t chump change. The average expenditure for a book is about $10k, and you can be certain that the guy who risked the most (the publisher) is going to get in line first to make back his investment.

    Note I said RISK. That means there are no guarantees the book will earn out, so that $10k outlay may never come back. Authors sign with publishers because they are in the business to sell books. Lots of them. Authors are in the business to write. Publishers have a much bigger footprint in the marketplace than your average author and can sell far more books. It’s simply good business sense.

    If you care to comment on our blog, you may dispense of the attitude and comment in a polite, respectful manner. Otherwise, there are other blogs you can troll.

  10. David Stripp says:

    Rather than a comparison between beta and vhs, isn’t there the chance things could be done similarly to how movies are now handled? When you buy just about any movie on blu-ray, it also comes with a digital copy as well. A system like that would mean we are not watching as books disappear and become replaced with digital media, but at the same time we are not giving up the ease of our e-readers.

    Lets take the idea a step further and say a paperback and and e-book both go for around $12-$15 and the bundle is sold for $18-20. The vast majority of people(myself included) will not buy both copies separately. Many would be drawn in by the bundle though. There’s still the matter of splitting the profits up, but in the end the bundle is more money for everyone involved at essentially no increase to production cost.

    (Yes, I know I’m over a year late in commenting.)

  11. No, David, you’re only a month late in commenting, not a year. I’m not too sure there’s a large market to offer a bundling package that includes the physical book and the ebook, but it would be easy to make that option available. People either want one or the other. But sure, there are families where one person prefers their e-reader and their mate prefers physical books.

    This is the case in our household. I preferred my e-reader, while hubby read physical books. When he finished a book and ran out of things to read, I put the Kindle app on his cellphone just to tide him over until he went to the bookstore. He now reads e-books exclusively – even though he swore he’d never do so.

  12. Brian Clegg says:

    I can see there might be a market for the bundle, just as you can currently buy packs with both DVD and Blu-Ray, on the theory that you are using one now, but may use the other in the future, or may have both in different rooms of the house.

    It’s also a model that people are becoming increasingly familiar with. If you buy an App for an iPhone, you also get the same App on your iPad, for instance. I think it could be something people would pay a small increment for. That way, for instance, I could read a real book in bed, but if I’m stuck in Starbucks for an hour, I can pick up where I left off in the ebook.

  13. Brian Clegg says:

    P.S. I love the way every time I get an alert about comments on this post I get sent a quote that has highlighted ‘Brian Clegg – brilliant author extraordinaire and all around great gent’!

  14. Brian, here in the States, the Kindle apps are free. And I’m glad you are notified of your brilliance – because you are, y’ know.

  15. Brian Clegg says:

    – Kindle apps are free here too. I meant there is a model for paying iPhone apps that if you buy one for your iPhone you can also use it without paying more on your iPad.

  16. R Spangler says:

    Here is are my problems with the “ebooks cost more than you think” argument:
    1) Ebooks only incur production costs one time, there are no second or third runs like in paper.

    2) Ebooks have no shelf life, they can be sold forever where as paper books have a limited window in which they can actually make money.

    Basically this means that ten years from now, when all production and marketing costs have been paid and the book is still selling 50 copies a year, the creator of that work is still only getting 10-20%. While sales will obviously drop over time, publishers can’t forget that we are talking about FOREVER here, and forever is a very long time…

  17. Publishers can’t keep an e-book forever any more than they do with physical books. Those contractual stipulations are spelled out very clearly to avoid the very thing you mention.

  18. R Spangler says:

    Well, perhaps my understanding of a standard book contract is incorrect then. I believe that the current verbiage says something like: the publisher holds the rights to the book until that book is out of print. If that is the case, an argument could be made that since an ebook can never be “out of print” then the publisher can holds the rights indefinitely…

    Perhaps my understanding is a bit out of date though… I don’t know that I’ve seen a clause that states that the rights revert back to the author in [insert number] years…

    But that aside, aren’t the costs to produce an ebook significantly less than the costs to produce a paper book? While the author is gaining 10-12% on the digital edition, isn’t the publisher gaining something like 25-30% or more over the paper costs?

    Plus, since ebooks don’t go out of print, they can, and many will, sell more copies during its lifetime than the print counterparts which means more money is being made overall.

    Either way I look at it, a 3 to 1 split for digital royalties seems awfully steep. And considering authors are able to skip the publisher completely, doesn’t there need to be a reevaluation of publisher’s policies regarding ebooks?

  19. It depends on what kind of publisher you’re with. If you’re with a commercial trade press, the ebook would probably be tied to the physical book – so when/if the physical book goes out of print, the e-book rights would also revert. I know lots of publishers are re-negotiating older contracts that were signed before the advent of ebooks, so your mileage may vary.

    I’m not familiar with the contracts of e-publishers, but there has to be an escape clause for both parties whereby conditions are met in order for rights to revert. In other words, no publisher can keep your ebook rights forever.

    With respect to production costs of an ebook, the only difference is the print run which, when compared to all the other costs, is somewhat negligible.

    You mentioned ebooks will make more money, overall, since they don’t go out of print. I’ve already stated that, yes they do go “out of print,” based on contractual stipulations.

    Authors are more than welcome to skip the publisher, however, authors need to be aware that they are up against companies who have a far bigger marketing and promotional footprint. CreateSpace users, or other DIYers have only themselves to rely upon, so it’s a matter of numbers. Would you rather work full time to promote your ebook – which is more difficult if you lack a platform or established readership – or would you rather rely on a company who have several dozens of people working on nothing but getting your book out to market?

    This is the very argument that has been going around for awhile now. It’s no accident that Amanda Hocking signed a 3-book deal with a major publisher – she readily admitted that while she made good $$ on her own, it was a huge chunk of work. Most authors will never achieve this.

    In the end, it’s a matter of being fully informed about how the industry works, then making a decision that is the most appropriate for you. There is no right or wrong…just understanding the hills we all face and who can navigate those hills with the most ease.

  20. R Spangler says:

    “With respect to production costs of an ebook, the only difference is the print run which, when compared to all the other costs, is somewhat negligible.” – What about distribution costs for paper books? Printing? Discounts? Returns? These are costs that you have pointed out and that ebooks don’t share. And, if I’m not mistaken, represent a rather large portion of the total paper book cost. When those costs disappear and the royalties remain negligibly changed, who gets the biggest benefit, the author or the publisher? Wouldn’t a split of 60-40 be a bit more fair and realistic to costs?

    With regard to marketing, isn’t that one of the major sticking points with authors? They are expected to have their own following and online presence well before many publishers will even consider their work. They are expected to blog and maintain a website, a Facebook page, etc… then once they get the deal, they do book signings and reading along with guest appearances on blogs, radio shows, TV (if they’re lucky), and the publisher does the minimum to help the book along (unless they already know it will be a bestseller, ie. Stephen King/James Patterson). I’m not trying to say that the publisher does nothing, but if I’m an author and I’m expected to do all this stuff any way, why would I want to sign away my rights to a publisher that may or may not help my sales?

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