Whether you’re working with print or digital products, the royalties system is much the same, and it’s important to understand how the numbers work.
In most publishing contracts, an author’s royalties are calculated as a percentage of the book’s sales. Royalty percentages usually range from 6% to as much as 25%. Most settle around 10%. So if 10% of sales goes to the author, then other 90% goes to the publisher to cover costs and leave a small profit. (More on this later.)
That’s the short story.
Primary rights and subsidiary rights
Naturally, things can get much more complicated. Even for a single title, publishers and authors can agree to have various royalty structures in place for different variables, such as
- format (e.g. hardback, paperback, ebook, website, etc.)
- accumulated sales quantity or value (e.g. royalties rise after x copies sold)
- discounts offered to resellers (e.g. lower royalties where resellers get huge discounts).
These royalties refer to sales of book products that the publisher makes. To let the publisher make and sell these products, the author has granted the publisher a bunch of ‘primary’ rights. In most cases, these primary rights cover the products we associate with publishing companies: printed books, ebooks, and sometimes audiobooks. Things with ‘book’ in their name, mostly.
There are entirely separate royalty structures for splitting income from ‘subsidiary’ rights deals. Subsidiary rights are the rights to make other versions of the book, versions that the publisher can’t make themselves because they don’t have the capacity (e.g. they lack the expertise in-house to make subscription-based websites) or the reach (e.g. they have no presence in Germany). These products are usually not things we associate with book publishers: movies, toys, radio broadcasts, branding on food packaging, games, and so on. They usually also include translations into other languages.
In a subsidiary-rights deal, the publisher sells the right to produce a spin-off of the book to someone else, a ‘licensee’. The licensee usually pays the publisher a royalty on sales of their spin-off (say, 10% of turnover), including an advance against those royalties up front (say, half of the royalties they expect to pay in the first year).
When it comes in, the income from subsidiary rights deals is usually split 50/50 between the publisher and the author. Sometimes even 75/25 in favour of the author. This is because the publisher incurs fewer costs managing a rights deal than they do producing, selling and managing a primary product. All production, infrastructure and marketing costs of the spin-off are borne by the licensee.
That doesn’t mean the publisher has no costs to cover. It costs a lot to run a slick subsidiary-rights-sales business. You have to have rights experts on staff, send them to book fairs (mostly London and Frankfurt), promote your rights to potential licensees (producing catalogues and making lots of pitches), keep thorough records of all your contracts and the money they make, pay for rights-management software, and manage financial risks. When signing with a publisher, authors should find out how well they run their rights business, because good subsidiary rights deals can bring in far more money than primary product sales.
So, to recap:
- royalties on primary rights are around 10%
- royalties on subsidiary rights sales are usually split 50/50.
When defining the basis for calculating royalties, publishing contracts usually refer to ‘net receipts’. Note, this is very different to ‘net earnings’. Net receipts refers to payments actually received from customers; that is, turnover, which is the top line on an income statement. Net earnings, also called net income, refers to the bottom line.
To illustrate, here is an example:
- Retail price: R200
- Less 14% VAT: R175.44
- Less discount if any (in this example, we’ll assume 20% discount): R140.35
This amount, R140.35, is the ‘net receipts’ on which royalties are calculated. If the royalty is 10%, then it’s divided into:
- Royalties: R14.04
- Publisher’s gross profit: R126.32
The gross profit then needs to cover all the publisher’s running costs, and if possible leave a net profit. Most publishers aim for a 10–20% net profit. Running costs might include:
- Printing and ebook conversion
- Warehousing and ebook storage
- Shipping and ebook distribution
- Packaging and handling
- Reseller distribution systems (getting the books into stores’ catalogues)
- Website and technology costs
- Sales and support staff (including travel)
- Marketing staff and costs
- Premises and associated costs (utilities, insurance, telephone, Internet, supplies, stationery, equipment etc.)
- Bad debts
- Ongoing and new book/product development
- Management staff
If anything is left as net profit after that, it’s then taxed, and the remainder is the bottom line, or net earnings/net income.
Note: older contracts, particularly in the UK, calculate royalties as a percentage of list price, not net receipts. In other words, royalties are a percentage of the price that the publisher sets as the recommended retail price, no matter what the actual income from a given sale is. This was sensible and manageable in the days when all books were printed and book prices were fixed by law. Today, royalties based on list price are extremely rare.