The Catholic Writers Guild

Your Author Toolkit: Introduction to Royalties and Advances

Royalties are one of those weird publishing terms that sometimes make people go cross-eyed when I try to explain. (Like my tax accountant. Sorry, Peggy…) They’re relevant to consumers as well as authors, however, and since I’ve gotten a few questions lately I thought I’d work up a quick guide. 

Note: This is specifically for traditional publishing, since that’s what I do. To my understanding, self-publishing is essentially the same, except that the author essentially functions as the publisher and incurs all the costs themselves, and the print-on-demand process produces the royalties. Kindle Unlimited is its own beast. Someone else write a follow-up article on that.

Costs

In traditional publishing, authors get paid based on an agreed-upon percentage of the publisher’s profit on each book sold, and that payment is called the royalty. But before we get to profit, let’s first talk about the costs that the publisher incurs:

• Man hours and salaries for the various individuals and teams required to edit and design the book
• Man hours and salaries for the marketing team
• Cost of marketing (ads, gratis copies, etc.)
• Cost of printing (varies based on specs of books, number of copies ordered at one time, etc.)
• Warehousing and distribution (shipping)

Let’s say J. Alfred Prufrock’s new book, Coffee Spoons and Mermaids, costs $3 to print. Aggregated internal costs like salaries and marketing are looped into the annual budget of the publisher, Michaelangelo Press (MPress). While we could work up a formula for how these costs break down per book, let’s just assume they are included in how MPress uses their profits.

Price, Profit, and Percentage

Coffee Spoons and Mermaids costs $3 to print, is from a well-respected author on a popular topic, and MPress has data on the sale price of similar books in its line and similar books on the market. Based on these and other factors, MPress determines a sale price or list price for the book; for Prufrock’s new title, they’ve settled on $19.95.

Now, while Coffee Spoons and Mermaids will be listed at $19.95, MPress’s profit is at most $16.95, and as we’ll see, usually significantly lower. In their contract, Prufrock and MPress have agreed on a royalty percentage of 13%.

But the platform on which each copy is purchased affects the total profit, and therefore how much the royalty percentage gives the author:

• Amazon gets deep discounts from publishers because they buy in bulk, so usually an Amazon purchase nets the author much less. For example, Amazon probably purchased our $19.95 book for only $9.95, leaving $6.95 as Michaelangelo Press’s profit, of which $0.90 will be sent to J. Alfred to go buy a candy bar at the gas station.
• Brick-and-mortar bookstores also receive a discount on books they buy from publishers, though their discount is less than Amazon’s, meaning the publisher’s profit is bigger and the author’s royalty is also bigger. Ordering through a bookstore also means that a small business is making a profit on each book, so the author, bookstore owner, and publishing company all benefit. (Also, free shipping, because most bookstores will order for you and you can just swing by and pick it up.) For our example, Bookstore A purchases our $19.95 book from MPress at a 30% discount ($13.95). Bookstore A then sells the book at list price, getting a $6 profit for themselves. The publisher gets an $11 profit, and the author receives about $1.42 from MPress. Yay, J. Alfred Prufrock can have a bean burrito at Taco Bell!
• Not every publisher offers this, but if they do — since there’s no middle-man, ordering directly from the publisher allows for the biggest profit margin and therefore the biggest royalty cut for the author. In this case, a purchase through MPress’s online store gives MPress the full $16.95 profit, and the author receives $2.20. J. Alfred might walk to the local coffee shop and splurge on a hot tea.
• Authors generally receive a steep discount on purchasing their own books. Say Prufrock buys a case of 200 copies of his book at a 50% discount. MPress has only made $6.95 profit/book, and therefore Prufrock will only receive $0.90/book. But if he sets up a stall on the beach and sells directly to a batch of sunburnt tourists at list price, he will receive an additional $9.95/book which comes directly to him in the form of cash.
• Ebooks are…weird. Yes, they do have a production cost, because all the same editorial, design, and marketing work goes into them, and there’s also the cost of the software to produce the ebook. Usually authors get a higher royalty on ebooks, but the cost at which the ebook is sold often varies from full list price.
• Audiobooks are even weirder and I don’t fully understand them, but typically the publisher contracts with an outside company to create and host the audiobook; the publisher then gets a cut of the production company’s cut, and the author gets a cut of that.

Okay, so now we’ve established that the royalty percentage remains the same but can vary in what it produced — J. Alfred will receive anywhere from $0.90 to $2.20 in our test case depending on Michaelangelo Press’s net profit — let’s throw in another curveball. 

Advances

An advance is the lump sum that an author receives before the book releases. Usually this is paid half at contract signing and half after the manuscript is received and edited. An advance is, literally, an advance on royalties. Say the author agreed to a $3000 advance and a 13% royalty. That means that the publisher is giving the author $3000 before actually making any profit on the book, based on the anticipated sales forecast. The author is also gambling on being able to sell enough copies to earn back the advance. After the advance is earned back, then royalties start accruing.

Let’s plug this information into the earlier examples based on various sales platforms.

• Amazon: At a $0.90/copy, Prufrock has to sell 3333 copies of the book before royalties start accruing. He’s a melancholic introvert and the thought of this sends him into a nervous breakdown.
• Bookstore: At $1.42/copy, Prufrock has to sell 2113 copies of the book before royalties start accruing. He convinces a beach side retailer to stock his book, and they even add the incentive of a fresh peach with each copy. 
• Publisher: At $2.20/copy, Prufrock has to sell 1364 copies of the book before royalties start accruing. He’s pretty sure the mermaids will buy at least a few hundred, which will put him well on his way, which is good since he spent his advance at the local coffee shop while writing Coffee Spoons and Mermaids.
• Author: Prufrock will have the same royalty situation as the Amazon example, even though he will make $9.95 cash from each sale at list price.

After the advance has been earned back, the author will then start accruing royalty payments. Usually royalty checks are sent out a few times a year, aggregating all the author’s earnings for that chunk of time.

Obviously these are all extremely rough numbers, and not based on any specific data. At first glance, royalties can seem very complicated, but once you get the basic idea, it’s just a matter of math. I hope dear J. Alfred has helped you understand, both as a buyer of books and a writer, a little more about this important piece of publishing life! (And do go read T.S. Eliot’s Love Song of J. Alfred Prufrock.)

All opinions are my own, and are not endorsed by Our Sunday Visitor, Chrism Press, the Order of Preachers, NaNoWriMo, or the Catholic Writers Guild.

 

Copyright 2023 – Rebecca Martin