Thread by @samroebuck

Ok, BUCKLE UP twitter. I'm about to take you to SCHOOL on a RIDE so STRAP IN cause it's going to get WILD.
Let's talk ACCOUNTING IN PUBLISHING.
/thread

First:

This thread will demonstrate how a book can be "unearned" but still be profitable to publishers. Please read the caveat. Some terms:

Advance - Money the publisher pays an author upfront before the book is on sale.
Royalty - Money an author earns per book sale. The rate depends on the agreement, format, etc.
Earned/Unearned - Advances are "paid back" from royalties earned. It's a 'debt' to the publisher

con't - however, you don't have to pay back the advance (in most cases) if you don't "earn out" your advance. Once you earn it out, you'll start getting royalty checks from the publisher. But until then, you're considered "unearned."

Ok, let's say you get a $100k advance. Congrats! That's awesome and you're amazing and your skin looks radiant.

Now the fun begins.

Publishing is a business and you have to spend money to make money.

Where do publishers spend money on your book? I'm going to discuss five areas:
-Printing the book
-Cover
-Marketing
-Audio production
-Overhead

Guess what! Publishers actually publish books. That's means they print them. But that also means they have to buy the paper, then print them, then bind it, then ship them, and yeah. It adds up.

Let's say it costs $2/book to print. And your publisher prints 20k copies.
That's $40k they've already dropped on you. Including your $100k advance.

Gotta have a dope cover. This is your biggest marketing tool. Gotta get it formatted and pretty and juuuust right. This'll run you about... $10k.
Already up to $150k spent on your book!

Publishers gotta get the word out. Marketing means getting this book in front of as many eyeballs as possible. Let's say they drop... $10k on you.
$160k on you! This better be a good book.

Audiobooks are booming! Everyone and their mother listens to podcasts, might as well listen to your book too. Getting someone who does the mouth words talk good ain't cheap ($250/hr) and producing a 9 hour book isn't either.
Toss in another $10k!
$170k spent on your book.

Overhead! There are other factors involved too. Gotta pay office rent, pay your editors, copy editors, shipping and storing the books, the sales team, and all the other factors involved with publishing a book. Let's say overhead for your book is... $20k.

That's a grand total of $190k spent on your book.
When publishers are figuring this out, they call this the Loss.
Now we get to talk about the Profits.
(They compare these in statements called P&L's - ain't that clever?)

Your book comes out and it's a decent hit! A lot of people buy it! Hooray! But you check the royalty statement and it's still unearned. Your publisher must be so mad! Incorrect!
Let's look at the ebooks, hardcover, and audio formats.

Your ebook royalty rate is 25% of the publishers net receipts. This is a quarter of whatever the publisher makes from ebook vendors.
Your hc royalty rate is 10% of cover price. That's from the MSRP that's printed on the inside of the jacket.
Audio is 25% of net receipts.

You move 15k ebooks! Congrats!
They were sold for $10. Ebook vendor get's 30% so the publisher receives $7. You get $1.75.
In total you earned $26,250.
Publisher: $78,750

You sell 15k hardcovers! Congrats!
Publishers sell them on a discount to retailers, so they're not going for the full $25 msrp. Instead, let's say they earn... $8/book.
You earn: $37,500
Pub earns: $120,000

You do another 15k in audio! Wow, you're even across the board. That's impressive.
The net receipts pool is a little weird, but let's say it averages out to you getting $1.5/book. Therefore...
You earn: $22,500
Pub earns: $67,500

Don't want to go back in and add all that up?
I got you.
You've earned a total of $86,250.
Oh nooo but your advance was $100k! You're still $13,750 unearned!

Your publisher meanwhile has brought in $266,250.
Now, keep in mind, they already spent $190k on you.
So what's their profit so far even though you haven't earned out and are thus a terrible author?

Chill, I'll do the math for you.
The publisher's profit is a fun $76,250.

That's $76k they didn't have before and it's all thanks to your little unearned book.

So congrats. You earned that for everyone. That's your book.

Again, these are conservative numbers and they can be pushed up or down depending on the situation. It's just an example to show the basics of how accounting in publishing works. Your experience may be different/better/worse - this is just an example!

Anyway, go buy @JoeZieja's book which came out today:
amazon.com/System-Failure…

@JoeZieja ADDENDUM TIME!
This was literally my worst fear - that I would get something wrong. Turns out, I did!
I totally underestimated the publisher's profits.

@JoeZieja See - when you're earning royalties, but still unearned, the publisher is keeping that royalty. Because they paid you the advance. This is cool. How it should be.

@JoeZieja But, I forgot to take a macro look at the revenue and cost associated with this example.
Yes, you earned $86,250 against your $100k advance.
But the publisher still gets that $86,250.

@JoeZieja So their bottom line is actually $162,500.

@JoeZieja There was $352,500 in the receipts. They spent $190k. That leaves $162,500.
You got $100k. They got $162k.
Thems the breaks.

I’d like to sincerely thank @SciFiAudiobooks for patiently pointing out the flaw in my logic! Almost left $86k on the table!