Wednesday, July 9, 2008

A Story Problem for Authors and Publishers

So what makes for a good idea (as referenced in this post)? A good idea is a smart idea, and smart ideas don’t lose money.

Let’s say, for example, an author wants their publisher to hire an independent publicist for $1500. According to Thomas Woll, author of Publishing for Profit (which I highly recommend), “the current data on profitability of smaller publishing companies indicates a range of profitability from 1% to 9.3%; the midpoint, 5% profit margin, is a reasonable benchmark for profitability.” That means, on a net profit margin of 5%, we need to generate $20 in revenue for every dollar we spend, just to break even. A $1500 expense has to generate $30,000 in revenue to not lose money. And that is incremental revenue, on top of what we would generate if we didn't spend the additional money. At an average trade discount of 50%, we will sell a $20 book to our customers for $10. Therefore, a $1500 publicity campaign must yield sales of 3000 copies in order for us simply to not lose money. If you’ve been at this any amount of time you know just how difficult it is to sell 3000 copies of anything.

If you take the time to work through this math it can really help you understand why publishers often say, “No,” to seemingly good ideas, even inexpensive ones. Imagine the math to justify a $30,000 ad in USA TODAY. It’s not difficult to understand why you don’t see a lot of ads for books on television.

Many authors don’t realize that a royalty rate of say 10% of the publisher’s net represents double the average publisher’s net profit margin. In some cases, it may make sense for the author to pay for a promotion themselves. Dollar for dollar, on a ten percent net royalty/profit margin, we have to sell half as many books for the author to break even. An author may also want to gain added exposure for himself or another business and it may make sense for him to take a loss on a promotion.

Many traditional marketing activities don’t yield the sales to justify them. As good business partners, we try to examine opportunities and be as forthright about the economics as possible. Chances are, if it is not a good idea for us, it won’t be a good idea for our authors. It is our aim to provide the best information we can to make the smartest decisions we can—together with our authors.

12 comments:

Chris Bauerle said...

Thanks for sharing this, Paul. I know that this is a very common frustration for authors, and from my seat (VP of Sales and Marketing), you hate that you have to regularly shoot down what seem like great ideas. The financial realities of a publisher though dictate that we have to evaluate opportunities on their potential profitability and not on other success metrics.

I had an author recently that I feel I greatly dissapointed. Prior to her book being contracted, she had been in communication with a major national grocery chain about the possibility of displaying her books in their stores near the section of the store where most of the ingredients in her book were merchandised. Although the thought of that kind of placement (and the sales that come with it) was extremely attractive, what the author didn't understand (and would have no way of knowing without working in the business) was that in order to make that sale, the account requires a higher-than-normal discount, a $1 per book marketing fee, and for the publisher to create the cardboard display to hold the books. When you drop all of the costs and the expected revenue in a profit and loss template, that deal ($70,000 in sales) would have resulted royalties of almost $5000for the author but a total LOSS of $221 for Cumberland House. In other words, we would have shipped over $70,000 in product and actually lost money by doing so.

I hope that our authors will understand that we do take their ideas seriously. We evaluate them on their potential impact, and we are looking to say yes - we want to sell a lot of books! We do, however, evaluate their potential profitability. If they will follow the logic you've laid out, I think they can determine for themselves if they are in the ballpark.

jlmiles said...

Hi Paul,
It took me awhile once I got published to understand the principles here regarding promotion dollars. Once I did, I realized I needed to get behind myself and spend a few bucks of my own. For my last book, Divorcing Dwayne I hired Spotlight Publicity and they did an outstanding job of promoting it. In addition they secured a number of great reviews which are now posted on Amazon.com. I couldn'tbe happier and will use them again for Dear Dwayne.
All best, and keep up the good work!! Jackie Lee Miles, author of Divorcing Dwayne, Cold Rock River and Roseflower Creek.

J. L. Miles said...

Hi Paul,
When I first got published it took me awhile to understand the concept of advertising dollars spent versus dollars gained. I decided I best get behind myself and expend some dollars of my own. When Divorcing Dwayne was released I hired Spotlight Publicity to supplement all of Cumberland House's efforts. Spotlight did an outstanding job and was able to generate a good number of reviews which are now posted on Amazon.com. I intend to use them again when Dear Dwayne debuts. Keep up the good work!!
Jackie Lee Miles, author of Divorcing Dwayne, Cold Rock River and Roseflower Creek.

Rose Keefe said...

Great post, Paul. Authors seldom realize that where their books are concerned, you have to spend money to make money. You don't even have to spend that much either- I'm going to New York at the beginning of October to promote my upcoming release, "The Starker", and am looking into giving talks at the local history museums and tour groups, as my subject matter concerns Manhattan gangster history. No need to rent the Apollo Theater.....

Know who your target audience is, figure out the best way to reach them, and then go for it!!

Patrick Downey said...

Hi Paul,
I'm enjoying your blog. Wikipedia is an excellent marketing tool. It's free and your target audience comes to you. My website jumped from around 40 hits a month to over 1000. An author can list his/her book under an articles FURTHER READING heading and a link to their website as well. A Myspace page doesn't hurt either.

bowerbird said...

chris said:
> When you drop all of
> the costs and the
> expected revenue
> in a profit and loss
> template, that deal
> ($70,000 in sales)
> would have resulted
> in royalties of
> almost $5000
> for the author but
> a total LOSS of $221
> for Cumberland House.
> In other words,
> we would have shipped
> over $70,000 in product
> and actually lost money
> by doing so.

whoa. you mean your house
declined to get an author
five thousand bucks because
you would have lost $221?

well that speaks for itself.

all i can say in response is
"thank goodness for your
profit and loss template!"

-bowerbird

Paul Mikos said...

bowerbird, thanks for chiming in. A perspective we try to foster with our authors is one of business partnership. Making decisions to lose money is one way to insure we won't be here very long, which is not good for a book, its author, or us.

Chris Bauerle said...

bowerbird-

Thanks for your reply - sarcasm and all. It represents frustration that I have heard many, many times.

In response, I would ask if I wanted to make a deal work but my margin requirement was $5000 and the only way I could make it work would be for the you (the author) to write me a check for $221 and make no royalties on the sale, would you be up for it?

The bulk of the revenue that results from a sale (less a 5% net profit margin) goes to paying the salaries of the team, distribution expense, the cost of sales and marketing, rent, utilities, etc. On a $70,000 sale, Cumberland House should net $3500 after all of the overheard allocations mentioned above, and the author should make roughly $5000 in royalties. You message suggests that we should have been willing to take a loss of $221 BEFORE overhead and that the author should make $5000. I would love to hear how that math makes sense to you. Respectfully and truthfully, I think a non-sarcastic answer would fuel a great discussion.

At Cumberland House, we treat our authors as business partners. There are occassions (we worked on such a deal this week) that are in the long-term best interest of the book (in this case a book club sale) and we ask the author if he/she is willing to make a long-term investment with us by agreeing to take a lower royalty rate while we take a significantly lower gross margin than our financial models dictate (in this case the author is taking a 5% royalty reduction, and we are taking an 18% gross margin reduction). We approach our author with the math, explain the benefits, and we make the decision together. We don't make very much money (after overhead is allocated) but we don't lose any either. In the case of the story that you responded to, the math was SO bad that it couldn't be fixed by even requesting an adjusted royalty rate.

This is a very important point you bring up. If a prospective author is reading this and views publishers as a source of endless investment, Cumberland House is not the place for you. We are looking for business partners,and our most successful authors approach their books that way.

I look forward to your response.

bowerbird said...

chris said:
> Thanks for your reply - sarcasm and all.

there was no sarcasm there. unless you wanna read it that way.


> It represents frustration that I have heard many, many times.

i'm not frustrated in the slightest...

of course, i'm not under contract to you, either... :+)


> In response, I would ask if I wanted to make a deal work
> but my margin requirement was $5000 and the only way
> I could make it work would be for the you (the author)
> to write me a check for $221 and make no royalties
> on the sale, would you be up for it?

to be honest, if i was your author, and you put this to me,
i would feel like my publisher was trying to shake me down.

and that would make me squirm... quite uncomfortably...

and resolve that i would _never_ever_ sign with you again...

but -- to answer your question -- after squirming very badly,
why, yes, i would indeed write you a check for $221 to move
$70,000 worth of books, because selling _some_ books is
_the_ best way to sell _more_ books. marketing is the name
of the game that you guys play, and shelling $221 to move
a considerable number of units would be a wise investment,
from my perspective. indeed, i can't imagine _anything_else_
that i might do with $221 that _might_ sell that many books.
and this bird was not just in your hand, but sitting in your lap.

heck, maybe you could take up a collection for your author,
see if you can raise $221 online, to do your author a favor...
i'll pledge you $21 to get the ball rolling...


> The bulk of the revenue that results from a sale
> (less a 5% net profit margin) goes to paying the salaries
> of the team, distribution expense, the cost of sales and
> marketing, rent, utilities, etc.

ok, and here we go with the tap-dance with your accountants.

and as much as i'd like to sit this one out, i just have to ask:
did your _rent_ go down when you passed on this deal?

i'd guess that it stayed the same.

so, if you're not willing to parcel out your _fixed_ costs from
your _variable_ ones, but just want to skim your percentage
off anything that goes out the door, which then causes you to
pass on deals like this one, then... well... well then i guess
that you're just like every other publisher, aren't you? :+)


> On a $70,000 sale, Cumberland House should net $3500
> after all of the overheard allocations mentioned above

oh man, you want to pay your rent and your utilities and
your salaries and all your other costs _and_then_ take out
5% more? and if you can't, you take your ball and go home?

hey, i'm not criticizing _you_. because we both know full well
that's the normal way to do business in the publishing world...

which is why you guys are in fade mode, soon to be tumbling.

look at the market for music cd's. you're 5 years behind 'em...
but you will catch up to them. at the bottom of the big slide...

wasn't pirates that killed 'em. it was their own corporate greed.


> You message suggests that we should have been willing to
> take a loss of $221 BEFORE overhead and that the author
> should make $5000.

well, you didn't really specify that it was "before overhead"...

but even if you had, i would've asked whether it was _really_
a good decision to pass on a deal that would have helped pay
down your "overhead" -- all except for that $221 and your 5%.

just precisely how much _is_ your overhead on a $70,000 sale?

if you really want me to comment on the economics of all this,
i need to know that number too. but i'm guessing you can't say.
because if you did, then i might come to know just exactly how
inefficient and badly-run your business is, assuming that it is,
and how much your "management" is milking the operations,
assuming that they are. (i'm not making any accusations here.)


> I would love to hear how that math makes sense to you.
> Respectfully and truthfully, I think a non-sarcastic answer
> would fuel a great discussion.

i think it would "fuel a great discussion" too.

but like i just said, i don't think you'll give me the information
that's required for me to give you a straightforward answer...


> This is a very important point you bring up.
> If a prospective author is reading this and views publishers
> as a source of endless investment, Cumberland House
> is not the place for you. We are looking for business partners,
> and our most successful authors approach their books that way.

so you are looking for business partners, eh? fair enough.

and what you've said here -- do please correct me if i'm wrong --
is that, on this $70,000 deal, you need $5,221 to cover "overhead"
(not including author royalties), and another $5,000 for royalties.

i hope it won't surprise you if some authors were to conclude that
they don't particularly need a "business partner" of that type...

-bowerbird
(bowerbird@aol.com)

Anonymous said...

I look forward
to your response.

-bowerbird

Paul Mikos said...

Bowerbird,
With the example in play the deal wouldn't cost $221. It would cost $70,221 (in cash not counting other resources) and the net result is that we'd lose $221. It's just not smart business for a publisher to tie up that much cash to lose money in the end, but I don't think I could convince you of that. The world needs poets. Thanks for reading. Paul.

Anonymous said...

chris didn't do a very good
job of explaining it, then...

but at any rate, if your house
can't make a decent profit on
a bulk sale of $70,000, then
i understand. and feel sorry
for you.

-bowerbird