Authors need to understand royalty calculations

Over the past few weeks, I have been asked to take a look at three contracts my clients have been sent by other publishers. Normally I would not do this, and I do not and cannot offer any legal advice, but I was curious about what was happening in my industry and what other companies were doing. So I had a little look. In addition to several other worrying terms and conditions in the contracts, one thing stood out.

I was shocked to see that in every case, the publisher was offering the author royalty payments based on Net Profit. I believe very strongly that Net Profit is not the right way or a fair way to compensate the author for his/her efforts. Let me explain.

The difference between Net Profit and Net Sales Price

Net Sales Price is simply the retail price, minus the discount given to the store that sold the book.

Net Profit means the retail price minus all direct costs pertaining to that book. This is dangerous because it means that the publisher could subtract a lot of costs before arriving at the profit figure. Some publishers have been known to lower the profit figure used for their calculations by taking out all of the following:

* Print cost
* Shipping to warehouses and retailers
* Storage fees
* Insurance and even
* Marketing and Promotional Costs

I believe paying based on Net Sales Price is a much more transparent way to pay royalties, and I advised all three authors to take the issue up with their publisher. One publisher agreed to look at paying the author in a different way. The other two, as far as I know, are still only willing to pay royalties based on Net Profit.

When I first started as a publisher, we also paid authors based on Net Profit. We used to pay the author 50% of Net Profit and that sounded like a really good number. People are used to hearing about royalties at 5% or 10%, but remember, those are based on Net Sales or even in some cases Retail Sales Price. So we’re not comparing apples to apples at all.

Within about a year, we looked at the way we were calculating our royalties and felt that we could improve the profit and consistency of the calculation. It is fairer and more transparent when the author knows what they will be getting for each book sale to the trade (online and offline stores).

For most print sales, we now pay our authors a royalty of 20% of Net Sales Price. So, for example, if a book sells for $15* and the retailer/wholesaler gets a 60%* discount (quite common here in the UK), that means the Net Sales Price is $6*. So the author’s royalty would be $1.20* for that sale (20% of $6*).

If, however, we paid the author 50% of Net Profit, first we would need to get to the Net Profit figure. From the $15* retail price we would take off the following:

Retail discount: $9*
Print cost: $3*
Handling fee: $1*
Total: $3*

This leaves $2*. If the author’s royalty were 50% of Net Profit, then he/she would make $1* on that sale. Not so bad, although it is already worse than the previous scenario. And there is nothing to stop that publisher adding other costs to the equation, as listed earlier: shipping, storage, insurance, marketing and promotion costs. This could make the Net Profit as low as 1, earning the author only 50p* on that book sale.

If any authors are offered royalties based on Net Profit, they want to be very wary and ask the publisher exactly how the calculation will be made, and exactly which costs are going to be taken off the retail price, in order to arrive at the Net Profit figure.

Authors provide amazing value and insights in their books, and they deserve to be compensated fairly. The above does not constitute advice, legal or otherwise. It is just my observation about a worrying trend in the publishing industry. Be vigilant and be wealthy!

* All starred figures mentioned in this article are hypothetical, for the purposes of the examples. Authors need to look at real prices and costs for their book and their industry.