Does the publisher lose money if my book doesn't earn out?

Brynn asked, "Does a publisher lose money if a book doesn't earn out?"

I get this question a lot, and to answer it I need to beg your forebearance… Let me answer this with hard numbers, so that I can make my case. It will take a couple minutes to run the numbers.

Remember, every business can lose money. Retail shops, service business, even publishers. I mean, if you own a shoe store, you order in shoes that don't sell, and you have to drastically reduce prices, you can lose money on each pair of shoes sold. Publishing is no different. The publishing house pays out advances, they pay an editor, hire a cover designer, buy ink and paper, then pay a printer, and cover overhead such as the light bill and the editor's long distance phone calls. A lot of expenses are involved in every book. I like and respect publishers, and as a longtime agent, I WANT them to make money and stay in business. So I'm just answering a question, not writing a polemic. 

That said, the argument put forth that an unearned advance equals a loss for a publisher just isn't true. (Or at least not the whole truth.) All you have to do is look at some math…

Let's take some big book the publisher is doing with a celebrity. She's created a $25 hardcover book, and the publisher has paid her a $100,000 advance. The average discount a bookstore gets when ordering a book is roughly 50% — so they're paying the publisher $12.50 for that book. (In reality, it could be less, and there are a thousand factors determining that amount, but let's use a conservative 50% for the sake of clarity). From that amount, you have to subtract the author royalty on the first 5000 copies (the author will be paid $2.50 per book), the next 5000 copies ($3.125 per book), and thereafter ($3.75 per book). Of course, the publisher has to pay for the actual hard costs of the book (ink-paper-binding). That $25 book probably cost about $3 to produce. The more copies they printed, the cheaper each copy becomes. And there are plenty of things, such as cover features, that can boost the price of a book. But somewhere around $3 per book is about right. Some of the publishers state right in their contracts that anything sold at an 85% discount is considered "at cost," so they're assuming a hard cost of $3.75 for a $25 book. At several publishing houses, they have a standard "overhead" charge of about $2 per book, or $50,000 per title. So take the $12.50 the publisher received for the book and subtract author royalties ($2.50), hard costs ($3.75) and overhead ($2). Conservatively, the publisher is left with $4.25 per book after paying all the bills. In essence, the publisher is making more money per book than the author is making. (And no, there's nothing wrong with that.)

Still with me? Okay, since this is a big book, let's say the publisher printed fifty thousand copies and sold half of them. They received $312,500 from bookstores ($12.50 x 25,000 copies sold). They credit the author her royalty of $84,375 ($2.50 x 5000; $3.125 x 5000; $3.75 x 15,000). The author hasn't earned out — she's still in the red $15,625. The publisher is left with $228,125. Out of that they pay $150,000 on printing ($3 x 50,000) and $50,000 in overhead. So the publisher is left with a profit of $28,125. Even if they write off the rest of advance, they're sitting on $12,500. Maybe they remainder the rest of the books for a dollar each , so they just got in another $25,000 (and royalties aren't paid on remaindered books), so now the publisher has $37,500. Did you follow that? The book did NOT earn out, but the publisher still made money.

Oh, and they also sold the e-book, which didn't have any ink/paper/binding costs, or shipping, or warehousing. The royalty they pay on the e-book will be greater, but the lack of costs means the publisher actually makes MORE per book sold. If they sell foreign rights, they're keeping half that money as well. Over time, the overhead number shrinks considerably, so the per-book profit increases. And this model was created for a book with a relatively high advance — if we'd looked at a $25,000 advance, these costs would swing toward the publisher's side of the ledger. (Just to make sure you know I'm not pulling numbers out of a hat, I used to be an associate publisher with one of the Big Six in New York, and I had to fill out a P&L form for each book we acquired — so I know what the numbers look like.)

A couple years ago, a publisher paid huge money to the Clintons for a book. The advance was in the millions, and the book never came close to earning out. The publisher still made money — and admits having done so. Why? Because they sold a bunch of books. So don't accept the  myth that a book must earn out or the publisher is losing money — it's just not true. I have a good friend who works for a publishing house and has pointed out on my blog before that the publisher did indeed lose money — they lost the outstanding $15,625 in unearned advance. I think that's semantics. They didn't actually LOSE money on the book… what they did was MAKE LESS money. Does that make sense? 

Another publishing friend likes to point out to me that the author made $84,375, while the publisher only made $28,125. But that's a skewed way of viewing it… Because the publisher also made enough to pay all their bills and keep themselves in business. The $28,125 is purely profit — the money left over after everyone has been paid. A better way to view it is to say the author made $84K, and the publisher made $228k. And I'd be glad to compare the hourly rate of any writer, who sits in her chair for days on end, trying to crank out a good novel. Let's face it — the hourly pay for any writer sucks. 

Again, I'm not saying a publisher should lose money, or that I'm opposed to publishers making money — I'm not. I am ALL FOR publishers making a profit, so that they stay in business and keep buying books from our agency. And, in fairness, I should add that publishers DO lose money on some projects. If they paid a huge advance and the book tanked, they lost money. If they spent a fortune on full-page ads in USA Today and nobody bought copies, they lost money. But my point is simple: the majority of books do not earn out their advance, yet publishers stay in business… that alone should help you realize that "failing to earn out" does not equal "the publisher lost money." I hope that helps clear up the question.