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How Author Royalties Are Calculated
by: Stephen L. Nelson, CPA 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. 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 Sometimes, the price used in the calculation is the wholesale price that the publisher receives from the bookstores and wholesalers who buy the book. 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: Example 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. Example 2: If your publisher sells a “deeply discounted” copy of your book for $9.20, you earn $.46. Example 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.
This article was posted on November 26, 2005
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