What It Takes

What It Takes

When Not “Earning Out” is a Good Thing

By Shawn Coyne | Published: September 5, 2014

Literary Agent Andrew Wylie

Here’s how big shot literary agents make a compelling living.

A client brings an idea to the agent who advises the client about its commercial possibilities. It’s important to note that this advisement traditionally means whether or not the agent thinks he will be able to sell the project to a major publisher for a compelling advance against royalties. Not whether there are actual people out there willing to pay money to read such a book idea.

The way the best sale works (meaning to the best advantage of the writer and agent) with a major publisher is to make sure that the publisher’s advance guarantee exceeds the amount of royalty that the writer will actually earn.

For the life of the book.

So for example, a new love story from Ms. Bestselling Writer will sell to a big publisher for say a $5,000,000 guarantee against an industry standard royalty that escalates to 15% of the retail cover price for a hardcover purchase and 7.5% of the retail cover price for a paperback sale and 25% of net revenue for eBook.

Let’s say Ms. Bestselling Writer’s books sell on average 700,000 copies in hardcover, 650,000 copies in paperback and 650,000 copies in eBook…for the life of the book. Let’s say also that the average retail price of is $25.00 per copy per hardcover and $10.00 per copy for paperback and eBook. So, for those 2,000,000 copies sold, she’ll have earned:

15% of $25.00 is $3.75 earned for every one of the 700,000 hardcover books sold or $2,625,000, plus,

7.5% of $10.00 is $.75 earned for every one of the 650,000 paperback books sold or $487,000, plus,

25% of the publishers net from retailers (70% of $10.00 or $7.00 per unit sold going to publisher) for 650,000 copies sold would be 25% of $7.00 times 650,000 ($1,137,500).

Or $4,250,000 ($2,625,000 + $487,500 + $1,137,500)

So Ms. Bestselling Writer has earned $4,250,000 but has been guaranteed $5,000,000. So her book does not “earn out.”  She’ll never get a royalty statement with a check in it.

So the publisher lost money on that one, right? Not by a long shot.

The publisher has made a major return on investment even though it has paid $750,000 more than the book earned. How did that happen?

The publisher gets 50% of the retail cover price for every copy sold, or $8,750,000 for 700,000 copies sold of the hardcover and another $3,250,000 for the 650,000 copies sold of the paperback. (The other 50% goes to retailers).

For eBook the publisher gets 70% of the retail price of $10.00 for the 650,000 copies sold or $4,550,000.

Let’s not forget about returns though.

To print and ship the necessary number of hardcover copies to sell 700,000 would require about 900,000. For paperback, to sell 650,000 copies would take about 800,000. So the publisher would have to pay for the printing, shipping and processing of returns for about 1,700,000 copies. This would cost about $2,800,000.

But for the eBook, the cost would be negligible. Hence the land grab to control eBook between Amazon and the Big Five.

So the bottom line for the publisher is gross revenue of $16,550,000 minus the $5,000,000 guarantee to Ms. Bestselling Writer, minus the $2,800,000 to print and ship the physical books. Or a total of $8,750,000 ($16,550,000 – $5,000,000 – $2,800,000) to their bottom line.

Even though the book never “earned out.”

Everyone wins.

But let’s say the agent was only able to negotiate a $1,000,000 deal for the writer who sells 2,000,000 copies, not $5,000,000. Then the publisher gets to keep the $750,000 that it didn’t “overpay” and the writer earns $4,250,000 paid out over time…in six-month installments attached to her royalty statements.

How far would a publisher be willing to dip into their pool of revenue to overpay for a book? This is the question literary agents enjoy contemplating. For the above scenario…if the publisher had a crystal ball and knew that the book would sell 2,000,000 in that combination of formats? I’d suspect they’d go as high as…$10,000,000.

Naturally a literary agent wants to have a lot of clients like Ms. Bestselling Writer. Clients who cannot command a competitive bidding situation (more than one publisher vying to purchase the rights to the book), they’d prefer to pass. If only one publisher wants your client’s book, you have very little leverage to negotiate.

The big books from big name writers (who don’t bleed red ink, but don’t earn out either) are the coveted ones for agents. Although it may be apocryphal, agent Andrew Wylie has been credited with having once said, “If my client’s book earns out, I haven’t done my job.”

But here’s the thing…

When I began in publishing in the 1990s, there were at least 20 “major” houses to submit a book proposal or novel. Today there are only 5 major corporations that control the trade book market. Sure, you’ll hear that there are tens of different publishing imprints within the major corps that “compete” with each other for properties. But when the time comes to put money on the table in a book auction, only one of those imprints from each of the five will end up bidding. The most big bids you’ll ever get as an agent today are 5.

And you can never discount the power of negative commentary around a book on submission.  Book publishing is so connected that if an editor at Random House didn’t care for a submission, you can count that an editor at HarperCollins who also received the submission will get that information before his having to make his own decision.  No one likes being the only one to like something.

Just as book fever can escalate if multiple editors pursue a particular project, so can “negative” feedback kill a book before it’s ever had a chance.  Talk to any agent and they’ll talk your ear off about a submission of theirs that got killed by a single snarky comment.

What all of this comes down to is the fact that becoming one of those coveted major bestselling writers who can garner $1,000,000 plus advances is as likely for a fresh faced young actor to become Brad Pitt.

As for literary agents, the notion that they’re going to build a stable of these unicorns is just as likely.

If only there were a way for writers to do their work, find people who like it, and then offer the book to them directly through free distribution networks as well as their own…  Instead of having to curry favor with a big shot literary agent, then hope the literary agent is able to drum up enough interest from the Big Five to make a good deal, and then wait 12 to 15 months for their work to reach the public and then another month to learn whether the book “worked” or not and then hope that their next book will be embraced by their publisher, all the while never knowing who actually bought their book or why…

Big corporate book publishing will always have a place for Ms. Bestselling Writer.  But if you aren’t her, wouldn’t all of the time you spend hoping to magically become her be better spent learning how to become Ms. Master of Permission Marketing?

And guess what?  Once you do master permission marketing and build your own platform to speak directly to your book buyers, guess who’ll come knocking on her door?

Big Literary Agent and Big Publishing, that’s who.  But by then, you may find that what they’re offering isn’t such a great deal.

Posted in What It Takes

24 Responses to “When Not “Earning Out” is a Good Thing”

  1. September 5, 2014 at 6:36 am

    Great post. Despite my moniker of “extremely famous author” (a joke) I gave up the hope of being a unicorn after being tossed about a bit in traditional publishing. Had to examine why I wanted to be published at all. Turns out its not for riches or fame (money never did me much good and fame is terrifying) really, I just want to connect to people like me. I want to find my tribe.

    I am a tribal-based organism and all of my evolutionary needs for happiness are met by mingling with those of the same stripe as me. We are born into this world wandering, looking for ourselves in other people. Its painful when we have to wander for too long.

    My writing is a code, a wolf-call for others. I compose it slowly and carefully and hope that someday my tribe will hear the call and come back to me.

    I’ve had money, I’ve lost money. I’ve had renown and power and I’ve lost renown and power. Both those things are just chimeras. The real world is internal. None of the chimeras will distract you from yourself for long.

    I look at the traditional publishing game (some of it) a little like being a duck at a flamingo party. You just keep trying to stand on one leg and look pink but they aren’t buying it. They aren’t your tribe. I have met some really great people in publishing too (my agent) who thinks just like me and we have a great relationship. My wolf call worked with her. I hope both of us can keep howling in the night and perhaps find more like us.

    Alright, I’ve exhausted my animal metaphors for the day. Time for coffee.

    • September 5, 2014 at 8:36 am

      Erika, I LOVE your duck at a flamingo party, I so know what you mean! Here’s howling back at you!

      • September 5, 2014 at 9:54 am

        Marvelous phrase indeed.

        Though, obviously, I’m a flamingo at a duck party, folks.

    • September 5, 2014 at 9:44 am

      This is the outlook that most writers should have. Kudos Erika!

      The impression I’m getting from the publishing world is that it’s similar to a lot of other situations in life: Once you stop worrying what they think and start working on yourself, THEN they’ll chase after YOU haha.

    • September 5, 2014 at 8:36 pm

      Erika,
      I love it. Totally agree. Life is hard. A life well lived is harder. It is better to do it with your tribe.

      Tribes are small, and in many cases elite. That is part of the appeal.

      Love the wolf call analogy. I was nodding my head for your entire post.
      Well done.
      bsn

  2. September 5, 2014 at 7:05 am

    As always, insightful and informative. And somewhat depressing. Rather like the economy – a very few very rich/successful and a huge number of small “long tail” niche-success, with almost no bump in the middle.

    Shawn, how do small independent presses fit into this? There are many out there, I think, that take direct submissions (doesn’t Tor still do this, for example?), focus on a genre, and seem to work with the author in terms of permission marketing and platform building – because the small independent publisher’s market/platform parallels that of the author. Of course, the author still has to become a “master of permission marketing” – but are these small, independent, genre-specific presses a useful (functional?) alternative (addition) to the self-publishing Amazon thing?

    • Mary Doyle
      September 5, 2014 at 7:19 am

      My thoughts exactly – insightful, informative and somewhat depressing. I’d be interested in Shawn’s thoughts on the small independent presses too. Permission marketing, here I come…traditional publishing via the Big 5 sounds too much like the odds of winning the Power Ball.

      • Shawn Coyne
        September 5, 2014 at 7:43 am

        Hi David and Mary,

        Well I think it best that I follow this up with a “small press” alternative post. I’ll try and cook something up for the next post. As George Clooney playing CIA agent Robert Baer in SYRIANA liked to say “it’s complicated.”

        There is a major opportunity for a small press in today’s marketplace. But I don’t see any single press doing it the way it could work best. Obviously building your own private Idaho takes a lot of time and effort and a deep dive into tech which a lot of writers really don’t want to do. I’m doing it now for THE STORY GRID and it’s daunting. Not impossible. It just requires patience and hard work with the understanding that it will not return investment for years. What fun right? Hard work and no income for years. Everyone wants to do that.

        Thus the open space available for a small press to come in and do it for people. Tor is a division of Macmillan, one of the Big Five. When I worked at Macmillan, we used to refer to Tor as “Planet Tor” because it was run by a wonderful guy “Tom Doherty” who artfully stayed within the machine, but did his own thing. I still think they do their own thing there, but I’m not so sure anyone in the small press world really gets the permission marketing concept…building and serving a subscription list of like-minded people.

        And whether or not a company can form the tight bond with a wide audience in the way that an individual writer can is certainly up for debate.
        If I were forced to start up a small press from scratch, I would do something like this…

        Figure out a plug-in platform that I could easily drop individual writers into. I would not agree to publish a writer unless they delivered far more content than just their latest book. They would have to agree to post stuff that would interest their target markets on a weekly basis. Like Steve’s Writing Wednesday’s column. The small press itself would only serve as the “hub” of the operation…with an online bookstore etc.

        And the small press would have to have a very clear WHY… The press would essentially be driven by one or two editors with similar sensibilities who would also be helpful to that particular world. Editors are anonymous today, which is the way the Big 5 likes ’em to be. That should change.

        I’m rambling, but there’s definitely a way to combine publisher and writer and editor in a way that is far more human than the Big 5 model. It’s not sexy start up work, but there’s a profitable and sustainable model no doubt.

        There will be no overnight sensation. What will happen is someone who can’t stand the present situation anymore will throw caution to the wind and spent five years building a small press that actually puts the writers in the front of the bus. Over those five years, the company will lose money the first four. But then it would gain enough momentum to break even in year five and then it will never cease to be profitable thereafter. If it uses the state of art POD and eBook tech available and does not get in a pissing match and try and break bestsellers.

        Shawn

        • Mary Doyle
          September 5, 2014 at 7:49 am

          Many thanks Shawn — really looking forward to “The Story Grid!”

        • September 5, 2014 at 9:07 am

          What you say here is encouraging, and I’m looking forward to the follow-up post. The author’s share will have to change, especially for ebooks. But a publisher serving as a “hub” with editors doing important work and authors investing in community/subscription – the slow build – sounds rather exciting, actually. The focus on content. It reminds me in a way of the old fanzines and how people would write letters to authors – and get responses! Thanks.

        • September 5, 2014 at 9:58 am

          Marvelous post, Shawn, and meaningful follow-up comment, to which I respond:

          1. I want to be that publisher, but not enough to give up my writing time. I envision the person who does it right making it a mission, a calling, an all-consuming life. Which is right and proper.

          b. Question: Will an existing small press morph into that ideal publisher, or will it be someone starting from scratch? I think the latter, but you probably know a wee bit more than I.

          last. Will you please for crying out loud finish Story Grid so I can read it? I’ll help, if it’ll help.

          • Shawn Coyne
            September 5, 2014 at 10:05 am

            Hi Joel,

            Steve’s given me his notes (he was ruthless but spot on) and I’m editing it now. Should be ready early next year. You know what they say…Resistance is worst at the very end of the project. Thanks for the support. I can’t tell you how great it is to know that you guys are interested…
            Shawn

  3. September 5, 2014 at 8:21 am

    There is an apocryphal story making the rounds of an indiepublished author who came to the attention of a tradpub house, who sent them an offer to publish their book and pay a $15,000 advance. (Which is quite respectable, in tradpub, for a “debut” author in that genre.)

    The response: “Thanks, but I made more than that last week.”

    • September 5, 2014 at 8:32 am

      Thanks for this story, Marc. I will definitely cling to it for inspiration!

    • September 5, 2014 at 8:49 am

      Marc, I’m not sure it’s just apocryphal. Pretty sure I’ve heard such stories from those in the know who are self-pubbed in my romance writing community. 😉

  4. September 5, 2014 at 8:30 am

    Great post and follow up, Shawn. I see how writers can feel depressed about the prospects on the current publishing landscape as you laid them out. But there are solutions to the quandary. They may not amount to “profits” but will validate us for conquering “Resistance.” As long as we continue to work on our passions and take clear intentional steps towards marketing our creative products once we’ve finished, I think that amounts to a victory.

    • September 5, 2014 at 8:51 am

      Pheralyn, I so agree. In this world of more noise than ever it’s a success when i show for my writing in the regular and intentional way that I do.

  5. September 5, 2014 at 8:35 am

    Shawn, thanks for the insightful post as always. I was confused by this phrase: “Bit of you aren’t her”. A typo perhaps?

    I was curious about the cost of labor and if it was factored into your numbers. What about the salaries for the editors, proofreaders, marketing, publicity, etc.?

    And, I’m a self-published author, so the only attraction to traditional publishing for me is the possibility of wider distribution and a bigger marketing reach than I currently have But I’m not running after traditional publishing at this time I’d rather be writing and developing my own platform.

    • Shawn Coyne
      September 5, 2014 at 9:14 am

      Hi Beth,
      Yes, that’s a typo. I’ll fix it.

      All of the stuff you mention…costs for marketing staff, publicity staff, editing staff etc…

      Here’s the thing.

      Publishers always tack all of that stuff on to every single profit/lost projection and final report at a flat rate percentage. In the example above they’d charge about 39% of their gross revenue to cover those costs or about $6.45 million on the P/L sheet. Now does that make sense? Did they have to pay $6.45 million to their employees to get that one book out there? No.

      All of that said, the marketing dollars spent out of house on that specific title should come out of the gross revenue or any other advertising costs that were directly linked to that single title. But all of the other stuff (utilities, pensions, employees etc.) that is the cost of doing business and should not be dropped onto a single title p/l report no matter what the big five say.

      To judge the contribution of a single title to a company’s bottom line based purely on what it actually cost for that one title to be sold versus the revenue it brought in is a fair accounting. Dropping in flat percentages to cover “overhead” just muddies the waters. They Big 5 do this so that it discourages editorial departments from buying smaller titles, ones they can’t say will sell a ton of books…non bestsellers. An acquisition P/L won’t work unless the editor can foresee at least a 10,000 unit sale. I could go on and on…

      I know too much inside baseball…

      Shawn

  6. September 5, 2014 at 8:39 am

    Oh, Shawn, will you write a post on Permission marketing? I’d love to hear your take on this specifically for fiction authors. Thanks for all you and Steven and Callie do!!

    • September 5, 2014 at 10:01 am

      Beth, do you know of Seth Godin, who originated the phrase and wrote the book (literally) by that title?

      And then a dozen (at least) more.

      I’ve written extensively about Permission Marketing for authors. I’ll not clutter this thread with links and such, but feel free to give me a shout if you’d like more free reading than you can possibly get through.

  7. September 5, 2014 at 8:47 am

    Thanks, Shawn, for a very helpful run-down of the numbers. Though the whole thing changes somehow if the case is for the average traditionally published author, rather than the superstar.

    A writing conference speaker cited $2500 as the average advance across the industry, looking at fiction and non-fiction together–and the average sales of a book across the industry as 500 copies.

    OUCH!

    Your vision is brilliant: permission based marketing, along the idea in your comments on a recent post for a one-stop webstore for authors to market their books, and putting them in contact with their buyers via email to build that relationship base with a tribe.

    Combine that with the kind of productivity envisioned in Platt and Truant’s “Write, Publish, Repeat” and it just might work.

  8. Paul C
    September 5, 2014 at 10:57 am

    There must be growing demand for editors outside the corporate sphere of the Big 5. As with trainers in boxing, or coaches/caddies in golf, charge a percentage for the life of the book. I also wonder how many people actually track their reading habits to prove/dispel some of these these publishing theories. I read around 75 books a year. So far this year, 50% have been from writers long dead. Only 20% have an active media presence, either blogging or writing for the media. Obviously Robert Gates doesn’t have to start blogging to sell his book. As with the first five pages for agents, I use the sample pages on Amazon to screen out new and the unknown, unless the book is recommended by an “expert” in the area. Some of the best books come from those “egg profiles” on social media with followers in the hundreds. Shawn, maybe you could do a Nate Silver like survey of Steve’s readers (and maybe Seth’s) for the Story Grid or a future blog post.

  9. September 5, 2014 at 8:34 pm

    Shawn,
    I love the inside baseball as this is all totally foreign to me. Great insight, great analysis. Your posts are always a look behind the curtain, and love it.
    bsn