How author royalties are calculated

If you are going to make a living writing books, you need to understand how a book's copyright is calculated. This is how the author is ultimately paid if the book becomes a successful bestseller. Furthermore, the royalties the publisher expects the book to earn determines the advance the publisher will pay the writer up front.

Royalty accounting just starts out simple

Royalty calculations start out pretty simple. Royalties are 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 at a bookstore.

Suppose you have written a book that sells for \$ 20. Suppose further that the royalty percentage is five percent. To calculate the royalty you earn per book sold, multiply five percent, or .05, by \$ 20. The result equals \$ 1. So that's the royalty you earn for each book the publisher sells.

Many authors and agents prefer royalties based on retail prices. The calculation is easy to understand. It is simple to calculate. And there are limited opportunities to argue about whether the calculations are correct.

Great authors often do it differently

Some very powerful authors receive a fixed amount of royalties 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 like, "I don't care what you sell it for, just give me \$ 1."

Royalties at wholesale prices 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 bit more complicated. Again, suppose you have written a book that sells for \$ 20. Suppose the royalty percentage is ten percent. Ten percent, in other words, is the percentage of royalties that the publisher applies to the wholesale price that his clients pay for his book.

Okay, so far so good. Unfortunately, calculating the wholesale price of a book is complicated. Publishers calculate the wholesale price by discounting the retail price by some percentage. And the discount percentage depends on the number of books that the bookseller or wholesaler requests from the publisher. If a bookseller or wholesaler buys one to four copies, the discount could be 46%, which means your \$ 20 book is wholesale for \$ 10.80. If the bookseller or wholesaler buys between 51 and 500 copies, the discount can be 52%, which means that your \$ 20 book is wholesale for \$ 9.60.

These differences affect the royalty you earn on a book, of course. Suppose 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: By using the price discount program above, you can assume that the only time the publisher discounts your books at the highest 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 that he places. If Barnes and Noble orders five hundred copies of some other bestseller sold by your publisher and three copies of your book, the price of your books is also calculated by discounting the retail price by the highest discount, which could be 54%.

Now you need to understand something else that is really important. Publishing contracts generally do not specify a single royalty rate. They specify a royalty rate schedule. Normal sales to bookstores use the regular rate. And the authors always focus on that rhythm.

However, other fees come into play in special situations. If your book sells a huge number of copies, like more than 25,000, the contract may state that you get a higher royalty rate (maybe 15% instead of 10%, for example). If your book is sold through a book club of the month, out of the country, or at the highest price discount, the contract may state that 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 a big fuss over a situation where we're talking pennies. But the combination of these discount price programs and royalty rate programs has a huge impact on your royalties.

Suppose you and a publisher agree to earn a 10% royalty based on the wholesale price for a book that is wholesale for \$ 10. Also, suppose there are two exceptions to this accounting treatment. You only get a 5% royalty soOpen deep discount sales, but get a 15% royalty on copies sold after the first 25,000 units. Here are the various royalties for unit amounts you can earn:

Example 1: If your publisher sells a copy of your book for \$ 10.80 and is not heavily discounted and the book has not yet sold 25,000 copies, you earn \$ 1.08.

Example 2: If your publisher sells a "deep disk with a" 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 is not heavily discounted and the book has sold 25,000, you earn \$ 1.62.

Those are very big differences. Take the situation where a book becomes a huge success and sells 50,000 copies. In the worst case, you could earn \$ 23,000 in royalties (calculated as 50,000 times \$ .46). At best, you could earn \$ 68,000 in royalties (calculated as 25,000 for \$ 1.08 plus 25,000 for \$ 1.64).

In fact, I have had this experience. The terms of the publishing contract prohibit me from identifying the book or publisher, but in the first year of sales, my best-selling book sold 90,000 copies. He knew the numbers would be great. The publisher kept reprinting the book, 10,000 or 20,000 copies at a time. However, when I finally received the royalty statement and the check, 70% of the books were sold at a huge discount. Under the terms of the contract, this meant he was making about \$ .40 per copy.

Two practical observations

That's pretty much everything you need to know about royalties. But let me leave you two practical observations on these royalty calculations. First, be careful when comparing your royalty rate (s) to the rate you've heard another author received. The comparison is notoriously complicated. You don't know what royalty rate the other author is referring to. In my experience, the author usually talks about the best rate in the contract. But that rate may never even be used. And even if it is used, most books can be sold at lower royalty rates.

Second, although, as mentioned above, some authors prefer the calculation of the retail royalty rate, I am not sure that in the end that arrangement will work to the economic benefit of the author. Certainly some publishers abuse the wholesale royalty rate calculation. You or your agent should be on the lookout for this. However, you should also know that a wholesale royalty rate gives the publisher the flexibility to sell your book in crazy ways that put extra money in both your pocket and the publisher's pocket.