The Book P&L: How Publishers Make Decisions About What to Publish

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Note from Jane: In 2014, I wrote and published nan pursuing article in Scratch magazine. It has been edited and updated for my site.

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In a widely shared excerpt from his memoir, My Mistake, publishing manufacture seasoned Daniel Menaker described his first acquisition trying to get a book astatine Random House. His leader told him, “Well, do a P-and-L for it and we’ll see.”

P-and-L. P&L. Profit and loss. However you mention to it, nan P&L is simply a publisher’s basal decision-making instrumentality for determining whether a book makes financial consciousness to publish. It’s a substance of nan predictable (such arsenic manufacturing costs) and nan unpredictable (namely, sales). Nearly each established book patient uses a proprietary P&L that it doesn’t disclose.

When I started moving astatine a mid-size book publisher in 1998, P&Ls weren’t required before signing a book unless nan book had to past chiefly connected bookstore sales. (At nan time, this patient sold galore books done its ain book clubs and specialty retailers.) By 2001, P&Ls were required for each azygous title, partially because nan patient went from family ownership to firm ownership—and because nan book business was changing.

As an acquiring editor, it was my work to put together nan P&L for each title I projected and to make judge it would deed nan target profit separator earlier wasting nan pub board’s clip pinch a proposal. Pub committee was a play assemblage of cardinal institution players successful editorial, sales, and trading who gave nan greenish ray to statement authors and titles. When I started negotiating writer contracts, my marching orders were to guarantee nan writer beforehand didn’t spell beyond what nan P&L indicated would beryllium earned retired done income of nan first people run. (This isn’t nan lawsuit astatine each publisher, but I worked for a fiscally blimpish house.)

Things person changed dramatically successful nan 15 years since I saw my first P&L. For starters, much than half of book income now hap online—but nan underlying mathematics remains nan same. While nary writer should inquire her patient to spot her book’s P&L, knowing nan principles of a P&L tin thief you amended admit what financial pressures publishers are under, really a book tin quickly go a financial liability if nan first people tally doesn’t waste through, and why advances mightiness look debased to you, but precocious to a publisher.

Click connected nan image to position afloat size.

The pursuing P&L is my creation—a from-scratch, stripped-down type of nan shape a patient mightiness use. In nan breakdown below, I’ll constituent retired areas wherever I’ve greatly simplified to get nan larger constituent across. Ready to travel along? Visit nan Google Doc and usage nan pursuing matter to understand its components.

Title Data

For our illustration P&L, we’ll usage nan specs of a emblematic debut caller issued arsenic a waste and acquisition paperback original. An mean waste and acquisition paperback is 5.5″ x 8.5″, betwixt 200 and 300 pages (80,000 words), and retails for $14.99 to $19.99.

Why aren’t we going pinch hardcover? It’s little risky to debut an writer successful waste and acquisition paperback; readers are much consenting to effort an chartless writer if nan value of nan research is little than $20.

Author Advance and Sales Quantity

It is astir intolerable to abstracted nan chat of nan beforehand from income projections, truthful we’ll tackle these together. You should beryllium capable to make an knowledgeable conjecture astatine what nan patient thinks it will waste based connected your beforehand (with 1 caveat, to beryllium explained successful a moment).

Daniel Menaker’s chat of nan P&L wished nan publisher’s projected income by moving backward from nan author’s beforehand of $50,000. The beforehand was astir apt higher than what nan author, George Saunders, would yet gain retired done royalty payments.

Note: Authors person an advance against royalties; arsenic books sell, authors gain a percent of income for each transcript sold (a royalty), which is applied against nan beforehand they received. Only erstwhile nan beforehand is afloat earned retired do authors commencement really receiving royalty payments. Industry insiders estimate 70 percent of authors do not gain retired their advance. Authors do not person to return their beforehand if nan book doesn’t gain out.

For a assortment of reasons, it’s reasonably communal for Big Five houses to connection an beforehand they cognize won’t gain out. If you want to look astatine publishers successful an altruistic light, by offering an beforehand that won’t salary out, they’re fundamentally agreeing to salary a higher writer royalty complaint than what’s stated successful nan contract. (Put different way: they’re afloat alert they’re paying an beforehand that will ne'er beryllium earned back.)

That said, astir publishers will cipher an beforehand aft agreeing connected a projected income quantity, which is based connected respective criteria:

• past income of nan writer (or comparable authors, for a debut title)
• the caller capacity of nan book’s genre/category for nan publisher
• subrights deals (such arsenic overseas authorities and sales) aliases nan imaginable for such
• whether nan title was auctioned (in an auction, respective houses compete for a title, which often leads to nan patient overpaying).

At pub committee meetings, nan income and trading squad whitethorn perpetrate to circumstantial income figures by channel. Bookstores, including Amazon, correspond nan mostly of income for astir Big Five titles. Depending connected nan title aliases publisher, location whitethorn beryllium expectations for direct-to-consumer income (sales straight to readers done nan publisher’s website, for instance), specialty income (e.g., Home Depot, Anthropologie), and mass-market income (e.g., Walmart).

Note that P&Ls whitethorn beryllium done for a circumstantial clip period, specified arsenic nan first six to 12 months of anticipated sales, aliases for nan life of nan book.

Author Royalty

For our illustration P&L, we person greatly simplified nan royalty calculation. Most P&Ls use a different royalty complaint to different types of sales. Authors gain a different complaint depending connected nan format (hardcover, paperback, aliases ebook) and besides depending connected nan income channel. P&Ls besides return into relationship escalators, which are nan income thresholds astatine which an an writer earns a higher royalty rate. For example, royalties for a waste and acquisition paperback mightiness look for illustration this:

• 1–5,000: 8.0%
• 5,001–10,000: 10.0%
• 10,001–20,000: 12.5%
• 20,001 and higher: 15.0%

Hardcover royalties typically commencement astatine 10 percent.

Our P&L is for paperback and ebook sales; we’ll salary our author, G. Scott Fitzgerald, an beforehand that’s astir balanced to royalties earned from income of nan first people run.

Specific Title Costs

Any realistic P&L will see nan difficult costs progressive successful producing a circumstantial title. In our example, we’ll see basal costs for freelance (copyediting and proofreading), cover design (fees for illustrators aliases photography, arsenic good arsenic freelance schematic creation if needed), and a humble marketing budget. (If we really believed successful Mr. Fitzgerald’s book, we’d beryllium looking astatine a trading fund good into nan 5 figures.) Other costs that mightiness beryllium included present (not an exhaustive list): ghostwriting, permissions costs if not covered by nan author, indexing if not charged against nan author, and interior creation aliases illustration costs.

Manufacturing Costs

This is 1 of nan much predictable costs areas. An editor whitethorn inquire nan accumulation section for a manufacturing costs estimate for a title, aliases nan editor whitethorn usage standard charts that show nan portion costs (cost per book) of producing a title based connected insubstantial trim size, page count, and people run. As nan people tally decreases, nan portion costs increases. Most publishers person preferred trim sizes to maximize ratio and savings erstwhile printing and shipping. If your book is an different trim size, requires interior colour printing, aliases has a precocious page count, its manufacturing costs will spell up.

A bully norm of thumb for manufacturing cost: $1 per paperback and $2 per hardcover for offset printing of a black-and-white book astatine a modular trim, unless you person a very ample people run.

Freight costs must besides beryllium factored in; estimate astir 10 cents per unit, assuming home printing.

Overhead Costs

Some publishers use overhead costs to their P&Ls—either circumstantial dollar amounts aliases a corporately wished percent that applies to each titles. These costs alteration greatly, and whitethorn see costs for soul (staff) editorial and design, ineligible fees, and different infrastructure costs (expensive Manhattan rent, institution parties successful West Egg, etc.).

Profit & Loss

Here’s wherever nan magic happens! (I won’t opportunity if it’s acheronian magic aliases not.) Based connected each nan information we’ve input into our form, we cipher nan financial consequence of nan debut of The Great American Novel by our adjacent basking author, G. Scott Fitzgerald. A breakdown of nan math:

• Retail price. Pulled straight from title data.
• Gross units sold. Pulled straight from income quantity. These numbers are only arsenic reliable arsenic nan personification giving nan estimate, and are sometimes based connected comparable income of different title successful nan publisher’s list. (This is why it tin beryllium difficult for an writer pinch a bad income grounds to get different deal.)
• Returns %. Any bookstore tin return a book to nan patient for a afloat refund, whether nan waste was made 1 time agone aliases 10 years ago. Every patient applies its ain mean percent present based connected humanities return rates by category. The mean manufacture return complaint utilized to beryllium 30 percent. This percent has declined arsenic ebooks income person increased, arsenic Amazon income person grown (Amazon doesn’t return), and arsenic concatenation bookstores person decreased their orders.
• Net units sold. How galore books are sold aft returns are factored in.
• Average discount. Our illustration P&L has tremendously simplified nan discount field. Publishers discuss circumstantial discounts and co-op costs pinch each relationship aliases retailer. Co-op costs are nan fees that retailers expect from publishers for in-store trading and promotion of books. (Not agelong ago, location was a prolonged kerfuffle betwixt Simon & Schuster and Barnes & Noble astir these fees.) We’ve applied a reasonably modular 52 percent, since our caller is chiefly a bookstore-driven book, and astir bookstores person astir a 50 percent discount, successful summation to co-op (if any).
• Gross sales. How overmuch money nan patient makes from book income (with our 52 percent discount), earlier returns.
• Returns. Subtracts money mislaid from returns.
• Net sales. How overmuch money nan patient makes from book income aft returns.
• Manufacturing costs for nett units. How overmuch it costs to nutrient nan books that are sold, including circumstantial title costs.
• Royalty. What nan writer earns, assuming he receives 8 percent of each people book sale, based connected unit price. Some authors person a percent of each waste based connected nett receipts, aliases what nan patient receives after discounting. For ebooks, astir authors gain 25 percent net. In this example, if we intend for our boy G. Scott to gain retired his beforehand from nan first people run, he should person an beforehand of astir $8,000.
• Total costs of sales. Totals nan writer royalty and nan manufacturing costs connected nan people side.
• Overhead. Directly pulled from information above.
• Net net $ and nett net %. This is really overmuch profit nan book will gain for nan patient (in some people and ebook formats), expressed successful some dollars and arsenic a separator percentage.

Does the Great American Novel Pass nan P&L Test?

It each depends connected nan publisher’s measuring stick. Let’s opportunity our editor successful main refuses to statement immoderate book that doesn’t make astatine slightest $20,000 aliases a 45 percent margin. This book mightiness beryllium rejected unless we could find grounds that a higher amount will beryllium sold, aliases unless we could someway trim costs.

A bully patient will typically look astatine each title arsenic portion of a larger play of titles. If your imprint releases 20 titles each season, you should person a operation of higher-earning titles and “quieter” books that are much financially risky. If an editor acquires thing but books that nett nan patient $14,000 each, she mightiness not support her occupation for very long. But 1 aliases 2 low-earning books tin beryllium subsidized by better-selling titles. That’s why you often perceive astir nan personage aliases blockbuster titles subsidizing nan different titles a patient produces.

At this point, it’s some nosy and depressing to play nan what-if game:

• What if bookstores return a little amount than projected?
• What if nan first people tally has to beryllium lowered erstwhile nan book goes to property because nan Barnes & Noble purchaser doesn’t for illustration nan cover?
• What if location are unexpected editorial costs?
• What if this becomes a breakout title and nan book goes backmost to property for different 20,000 copies?
• What if a mass-merchandiser takes 10,000 copies, but astatine a higher discount of 75 percent?

What About Ebooks?

A fewer important notes astir ebook sales:

• The discount connected ebooks is 30 percent if you’re a Big Five publisher.
• The ebook royalty astatine a Big Five patient is 25 percent of net receipts, not unit price.
• There are nary manufacturing, returns, aliases freight costs associated pinch ebooks; immoderate publishers whitethorn use conversion/formatting fees aliases overhead associated pinch ebook production.
• Pricing varies, but $12.99–$14.99 is communal for a recently released work.

Our illustration P&L assumes our Great American Novel sells 1,500 copies successful ebook form, which is nan manufacture mean of 30 percent ebook sales. Note that a important information of nan total costs of sales successful nan people file is simply a shared costs crossed some formats (the circumstantial title costs positive overhead, which adhd up to $16,000).

Last year, a descent from a HarperCollins position connected hardcover-versus-ebook profitability was leaked and made its measurement astir publishing blogs (see below). The descent makes clear what agents and authors person been arguing: nan patient has a higher profit connected ebooks, chiefly because nan writer royalty is lower. (You’ll besides announcement nan profitability is being calculated connected a hardcover, not a paperback; hardcovers person ever been much profitable than paperbacks owed to precocious markup.)

Try It for Yourself

Would you for illustration to tally your ain P&L? To sphere nan formulas moving successful nan background, only modify those cells highlighted successful yellow. The spreadsheet will recalculate everything automatically. Don’t hide to alteration nan manufacturing costs erstwhile changing income quantities. Estimate $1 for each paperback portion and $2 for each hardcover unit.

And don’t hide to prime up a transcript of The Great American Novel. G. Scott Fitzgerald could really usage nan royalties.