How Books Earn Money — And How They Can Create Feasts or Famines

When you publish a book with a traditional royalty publisher, you may earn millions of dollars (if it’s an international bestseller) or next to nothing (if it sells poorly and your per-copy royalty is small). In between is a vast landscape of financial possibilities. Let’s survey this landscape together.

Book income can flow from any or all of these sources:

Advances. These are lump-sum payments made to you as loans against your book’s future earnings. It’s publishing’s version of a draw against commissions. Normally, an advance is a guaranteed payment: if you fulfill the terms of your contract but your book doesn’t earn back its advance, you still get to keep all of the advance.

Advances are often paid in parts—for example, 1/3 on the signing of a publication contract, 1/3 on the publisher’s acceptance of the completed manuscript, and 1/3 on publication (or one year after acceptance, whichever comes first). The larger the advance, the more parts it is typically broken into.

The largest book publishers tend to compete for new book projects by offering big advances. As a result, few books published by large presses ever earn back their advances. Smaller publishing houses generally offer much more modest advances; some don’t offer advances at all. However, some smaller presses compensate by offering higher royalties, especially on books that sell more than 50,000 copies. This means that publishing with a small house may sometimes earn you more money over the long haul than signing with a big one.

When you are paid an advance, your publisher creates a royalty account for your book and debits your advance against that account. For example, if you are paid $20,000, your account will have an initial balance of -$20,000. This is the amount your book needs to earn back before you begin receiving payments.

Royalties. A royalty is the percentage of a book’s price that gets credited to your account. But royalty calculations aren’t as simple or as straightforward as they look. In fact, if you don’t understand how royalties work, your lack of knowledge could cost you many thousands of dollars.

Look closely at the basic royalty rate(s) your publisher offers you in its proposed contract. Is it calculated on your book’s retail price (also called its cover price) or on its wholesale price—i.e., the price resellers pay for it (usually called net receipts)? The difference is substantial: for most books sold through retailers, the cover price is roughly twice the net receipts. Thus a $16 paperback with an 8% royalty on its retail price earns its author $1.28 per copy, but one with a 15% royalty on net receipts earns only about $1.20.

Another equally important issue is the high-discount clause, which is buried deep inside most book contracts. This clause looks innocuous and insignificant, but in fact it accounts for a big chunk of publishers’ profits—and a huge loss of income for writers.

A high-discount clause allows your publisher to pay you a reduced royalty for books sold to resellers at a high discount. Often, but not necessarily, this clause applies to orders of 250 copies or more. If the numbers in this clause aren’t right, you could lose many thousands of dollars in royalties. Here’s how.

Imagine that your high-discount clause reduces your royalty to 10% of net receipts for books sold at a discount of 50% or more. (Some publishers offer just such terms in the contracts they first offer writers.) This sounds reasonable enough, but it’s actually not reasonable at all, for two reasons. First, 90% of general-interest books are sold to resellers at discounts of 50% or more; second, 10% of net receipts is quite a low royalty, particularly for hardcovers.

Let’s say you’ve published a $30 hardcover, and its regular royalty rate is 15% of retail. (This is the most common rate for hardcovers once they have sold 10,000 copies.) Your regular royalty per copy is thus $4.50—but, under this high-discount clause, your royalty drops to $1.50, and to even less for books sold at discounts of 51% or more.

When negotiating your book contract, push hard to make sure the high-discount royalty doesn’t kick in until the discount is at least 55% (or, even better, 60%, which some publishers offer). It’s also worth asking for the high-discount royalty to always be at least half the rate that would otherwise apply. Better yet, ask to have the high-discount clause deleted entirely. (Some publishers— especially those that calculate all royalties on net receipts—will do this when asked.)

Book contracts often include other special situations in which royalties are reduced. Some of these reductions—for books shipped outside the U.S., books sold to book clubs, and Braille editions—are legitimate. However, many other reductions—for small reprintings, books with low annual sales, and books sold by the publisher to other divisions of that publisher—are not; resist them.

Subsidiary Rights. Most American book publishers directly exploit only two types of rights: North American English-language book rights, and worldwide English-language ebook rights. However, the remaining rights—reprint rights, periodical rights, foreign rights, online publication rights, audio rights, video rights, TV rights, film rights, and so on—can sometimes be worth a great deal of money. One book I represented as an agent sold about 20,000 copies in hardcover, earning its author a little over $25,000. Since then, however, it has earned nearly $300,000 in subsidiary rights—well over $200,000 in its paperback edition, and over $80,000 in foreign editions.

When you or your agent negotiates a deal with a book publisher, these subsidiary rights—known in the industry as sub rights—are usually up for grabs. You can let your publisher control and sell most or all of these rights—perhaps in exchange for a larger advance—or you can try to hang onto as many rights as possible and sell them on your own (or through an agent). Both options are legitimate and widely practiced.

When publishers keep subsidiary rights, they normally split the income from the licensing of these rights with authors. Smaller presses usually split all such income 50/50. Larger houses are typically more generous, offering these splits: TV and film, 90/10; periodical publication prior to book publication (called first serial rights or first periodical rights), 90/10; English language rights outside of North America (sometimes called British Commonwealth rights), 80/20; non-English language rights outside of North America (sometimes referred to as foreign rights), 75/25; book club, North American reprint, and periodical publication after book publication (called second serial or second periodical rights), 50/50; other rights, between 75/25 and 50/50, by negotiation.

Sale of copies. This is a huge potential source of income for writers, yet few take full advantage of it. Most book publishers allow authors to buy copies of their own books at a hefty discount—typically 40 to 50% off. But don’t settle for this. As you negotiate your contract, ask for the standard trade discount given to retailers—typically 50-60% off for books ordered in lots of 100 or more on a nonreturnable basis. You will usually get this discount.

Here’s what this small change can do for you. Imagine that you buy 1000 copies of your $30 hardcover at 60% off, and then resell them at $30 each through your website, at the back of the room after presentations or readings, through your email list, and through your personal contacts. Your cost for these books is $12,000; but you sell the books for $30,000, thus earning a profit of $18,000.

It gets better. During contract negotiations, ask your publisher to allow you to charge copies of your book against your royalty account. Many will say yes. You will then get these 1000 copies for an out-of-pocket cost of zero.

It can get better still if you negotiate for plenty of free books. Suppose a publisher offers you the $20,000 advance cited earlier. You (or your agent) asks for $30,000 instead. The publisher comes back with a new offer of $25,000. Here’s what you might say: “How about this? It will cost you about $3 per copy to print an extra 1000 books. Give me $22,000 instead of $25,000, plus 1000 free copies on publication, and we’ve got a deal.” Many publishers will accept this offer, since it doesn’t increase their up-front costs.

But look at the difference for you. The books cost you only $3000, but you can resell them at $30 each. That’s an extra $27,000 in your pocket.

And it could get still better. Those 1000 copies cost you $3000 only if your book doesn’t earn back its advance. If it recoups the full $25,000, then those copies cost you nothing, and your profit is $30,000, not $27,000. (Remember, an advance is just a loan against future earnings. So a book that receives a $4000 advance but earns a total of $30,000 over three years makes exactly the same amount of money as one that receives a $25,000 advance and earns $30,000 over three years.)

Now you know what many smart writers know: that a book can create multiple streams of significant income—but to maximize that income, you need to ask for a few important changes as you negotiate your contract.