Writers and Money Part 1

Not to start this post off on a downer, but my husband (the Travis whom all my books are dedicated to) is in the hospital. It's no longer life threatening, but I'm spending most of my days this week waiting in hospital rooms with beeping machines and occasional massive interruptions. Naturally, this makes fiction writing challenging to nigh impossible, so, in the spirit of feeling like I'm still getting work done and to distract myself, I thought I'd do a series of posts on the non-writing author topic I get questions about the most: money.

Money is one of those gauche topics everyone is curious about but no one likes to discuss. I can understand why. In a culture where people are more likely to tell you about their sex life and medications in casual conversation than their financial situation, money talk, especially money talk in public, can feel almost obscene. At the same time, though, one of the most popular mantras in author circles is that, if you want to succeed, you have to treat your writing like a business, but how can you really do that if the most business-like aspect of the whole affair--the money--is couched behind euphemisms and shame?

So, in keeping with the open spirit of my blog, I'm going to spend the next three posts talk openly and candidly about my experiences with the money-side of being an author. Because this is such a broad topic, I'm going to be breaking the subject down into three parts: traditional, advance paying publishing, self-publishing, and how to manage taxes/writing income. For today, we're going to talk about the most obfuscated and confusing of the three, Traditional Publishing.

Enjoy, and please let me know if there's anything specific you'd like to know about money and authorship in the comments below.

Writers and Money Part 1: Traditional Publishing

DISCLAIMER: I am not a financial expert. All advice in the column is given to the best of my personal knowledge and experience and is meant for general information purposes only. Also, while all of this information is, to the best of my knowledge, accurate as of December 2014, this may not be the case for those of you reading in the future. If you're serious about writing as a career, please make sure to draw your knowledge from a wide spread of verified sources, and don't make financial decisions based off any single post you read on the internet, not even mine ;).

Before we talk about anything, let's define what, exactly, we'll be talking about. When I say "traditional publishing," I am referring to the publishing house system that has been the dominant way books have reached readers for the last century. These include the Big Five publishers (Penguin Random House, HarperCollins, MacMillan, Simon and Schuster, and my own publisher, Hachette) as well as dozens to hundreds of small and medium presses who pay their authors via the traditional advance on royalties method. When you hear authors talk about book deals or "selling their book", they're almost certainly talking about signing a contract with a traditional, advance paying publisher.

Because I myself am published by a Big Five house, that's the experience I'll be talking about today. I'm reasonably certain these experiences are similar to all advance paying publishing houses on the basic level, but if you're published by a small, medium, or even large house, and you've had a different experience than what I describe, please let me know in the comments!

So, how does the advance system work?

When a publishing house "buys" your book, also known as the coveted book deal, they're not actually buying the book. You still own all the rights to your book. Instead, what's actually happening here is that you are leasing the publishing company the rights to make your book available for sale to the public in particular format, usually paper or ebook, for a set period of time/circumstances. In return for the right to publish your work, the publisher will pay you an advance.

Note that the word here is "advance" and not "payment." An advance is NOT free money, it's advance on future earnings based on how well the publisher thinks your book, or books, will do. Every penny of that advance comes out of your royalty earnings after the book is published, which means you won't see any money from actual sales on your book until you've earned that $20,000 back.

For example, let's say you sold your novel to a big publisher for a $20,000 advance. A year later, your novel comes out to rave reviews and sells quite well, earning $15,000 in royalties (the slice of money you get every time one of your books sells) during the first six months it's on sale. Since most publishers pay every six months, this is when you'll get your first royalty statement, which is a document that shows how many books you sold and how much you got paid for them. BUT, despite the figure showing you earned $15,000 in royalties, you won't actually get any more money until you've earned back that $20,000 advance the publisher paid you at the beginning. 

This is called "earning out," and a great many books never actually achieve it. This is because you have to earn back that advance not in raw sales, but from your royalty percent of those sales. For example, if you have an 8% royalty for paperback print book sales, and your book has a retail price of $9.99, you're only earning $0.80 per book. To earn the aforementioned $15,000 in royalties, you'd have to sell 18,750 copies at $0.80 cents royalty each. 

That's a LOT of books to move in six months! Not an impossible amount, but a lot. On the upside, though, you still get to keep the advance even if you never earn out. This is one of the advantages of advances and why so many authors still covet them. Advances might not be free money, but they are guaranteed money that's completely detached from sales. If a publisher pays you a $100,000 advance and your book sells zero copies, that hundred grand is still yours to keep. The publisher eats the loss, not you. Of course, you'll probably never sell another book again since  you now represent a $100,000 loss, but hey, at least you got paid!

Is a bigger advance always better?

One of my biggest gripes about the modern publishing industry is the focus on large advances. I'm sure you've read about so-and-so author selling her first book for millions of dollars. These big figures make great headlines, and given what I just said about advances being yours to keep no matter what, it might make sense to shoot for the biggest advance you can get. BUT (you knew there was a but, right?), if you're looking to make writing your career, a big advance can actually be a millstone around your neck.

Let's take the $100,000 advance, zero sales example I mentioned above. Sure, the author got to keep the money, but the publisher got burned. Not only did they have to pay the author that $100,000 advance, they also paid for the editing, the cover art, the distribution, the marketing, and all the other costs of putting out a big title, and they got nothing in return. Publishers don't forget that, and they don't keep the loss secret. That author might be $100,000 richer, but the next time she and her agent go around to publishing houses trying to sell another book, all they're going to get is doors slamming in their faces. It doesn't matter if she's written the next Fight Club, no one is going to want to take a risk on an author whose last book lost her publisher so much money.

Now, of course, this is hideously unfair. It wasn't the author's fault that her book didn't meet publisher expectations. They projected the sales, they read the book and decided to pay $100,000 for it, they decided to invest the money in packaging and distributing, why should the author have to bear the blame for those bad decisions? Unfortunately, this is one of the universal truths of money in publishing: when a book does well, it's because of everyone's hard work. Go team! When a book does poorly, it's the author's fault. You'll never work in this town again. 

I'm not saying things crash and burn to this extent every time a book performs below expectations, but it definitely happens, and the bigger the advance, the further you have to fall. So while it might be really tempting to go for the big paycheck, my advice would actually be to hedge your bets low, especially if you can negotiate to accept a lower advance in return for something that will pay off bigger in the long run, like a higher royalty rate on ebooks. This is definitely something you should at least talk about with your agent (and if you're dealing with any of the major publishing houses, you NEED an agent. More on that in a moment). 

Overall, your goal should always be to shoot for the right advance for your career. You want it to be small enough that you fell confident you can earn out. Earning out not only means you'll get royalty checks for years to come, it also shows that you're a money maker for the publishers, ensuring you more contracts as your career continues. On the other hand, you don't want to accept an advance that's smaller than you're worth, or you risk undervaluing yourself or your work.

Again, a good agent should already know all of this and be able to discuss your options with you, but it is always always ALWAYS good to be knowledgeable yourself. Leaving the big decisions of your career up to others is a huge risk you could end up paying for forever. Publishing moves very slowly. Never let anyone rush you into a contract before you know exactly what you're getting into.

Okay, so that's advances. What about these mythical royalties you keep talking about? How do those work?

Royalties is the catch all term for the portion of a book's sale that goes to the author. The exact amount varies by publisher, but generally speaking you're paid a fixed percent of a book's sales based on either the retail price (the sticker price of the book), or net (your publisher's net profit on the book after costs are taken out).

Which type of royalty you get, retail or net, makes a HUGE difference in how much money you make per sale, as shown below in a modified version of this graph I got off the publishing royalties section of Wikipedia.

	Retail Price	Net
Cover Price	$15.00	$15.00
Discount to Bookseller	50%	50%
Wholesale Price	$7.50	$7.50
Printing Cost	$3.50	$3.50
Net Income to Publisher (Wholesale Price - Printing Cost)	$4.00	$4.00
Royalty Rate	8%	8%
Royalty Calculation	0.08 x $15.00	0.08 x $4.00
Royalty paid to Author	$1.20	$0.32

The original graph had a 20% royalty, but I don't know a genre author anywhere getting 20% on anything other than hardbacks. Most paper sales in my genre, SFF, are in Trade Paperback format, and royalties for those are usually between 6-8%. As you can see, whether this 6-8% is applied to the retail price or the net cost of the book makes a HUGE difference in how much, or how little, you get paid.

Ebooks are much the same, but with a few key differences. Unlike print royalty rates, which vary from publisher to publisher (especially when you get into hardbacks, where royalty rates scale with sales, sometimes up to 30% for the really big names), ebook royalty rates are in lockstep throughout the industry at 25% of net. Now, 25% is much better than 6-8%, especially since the publisher's net revenue is much higher since they don't have to pay those printing costs. You're basically getting 25% of the wholesale cost, which, on the example $15.00 list price book above, means 25% of $7.50, or $1.87.

Now do you see why most books never earn out their advances? :P

But despite the seemingly low numbers, plenty of books (including all of mine! Thank you readers!) do sell well enough to earn out their advances and start paying regular royalties. Authors receive these payments, and all corresponding documentation, twice a year in the form of bi-annual royalty statements.

Yes, you read that right. Bi-annual.

Unlike advance payments, which are typically paid on milestones like turning in your manuscript or the day your book goes on sales, most traditional publishers pay royalties only twice per year. The reasons for this insanely slow, antiquated payment schedule are murky at best, but they usually have something to do with the insanely slow, antiquated way bookstores tally sales and pay the publishers themselves. If you have book sales in foreign countries that need to be accounted as well, it's not unusual to wait upwards of a year or more to be paid.

In addition to this insanely slow schedule, publisher royalty statements are frustratingly vague. For example, they might report that you sold 1000 ebooks over the last sixth months, but not how many you sold per month, or where, what format, or at what price. This might not sound like a big deal, unless you want to determine something specific, like how effective a promotional effort was. Further more, since the royalty data is so vague, it's impossible for you as the author to double check the veracity and accuracy of the numbers presented without demanding a full audit, which is costly, lengthy, and tends to make your publisher royally pissed at you.

Both of these are TERRIBLE options for an author. Fortunately, publishers know this, and some, to their credit, are trying to change the system. I'm not holding my breath, though.

Joint/Basket Accounting and the Reserve Against Returns
If you've paid any attention to publishing deal announcements in recent history, you've probably noticed that almost every single one is a multi-book deal. The three book deal is the bread and butter of the trad pub world. They're good for everyone--agents, authors, publishers. Everyone loves a three book deal, until we get to the inevitable Basket Accounting clause that comes with it.

Joint Accounting or Basket Accounting is the practice of accounting for multiple titles as a single unit for the purposes of earning out advances. For example, let's say you signed a three book deal with a $10,000 advance for each of the three books. If this was a normal, non-Basket Accounted deal, the advance for each book would be accounted separately. So if Book 1 sold like gangbusters and earned out that $10k in its first royalty statement, you'd start getting royalties for that title immediately regardless of how the other two books sold.

In Basket Accounting, though, all three titles are tied together, meaning that your sales have to earn out the total advance of the contract, or $30,000 for 3 $10,000 books, before you start seeing any royalties. Now, this is fine and dandy if all three books are doing well and come out quickly, but if you've got three books coming out over a period of three years and they're all selling moderately, it may take years of sales after the publication of Book 1 before you see a penny in royalties. This is especially true if the three books are a series, because the first book in a series is always the best seller (after all, who starts reading a series at book 2?). So, if a trilogy is accounted jointly, that first book could have earned out ages ago, but you still won't see royalties for it because that first title is working overtime earning money to cover the advances of the other two books, which aren't performing as well yet, or might not even be out.

At its core, Joint/Basket Accounting is just an accounting trick publishers use to cover their butts. After all, they'd still have to pay that $30k in advances for three books, but with joint accounting, they can at least make sure they get all that money back before they have to pay you more in royalties. From the authors' perspective, Joint/Basket Accounting isn't the worst thing in the world by any means--you do still get paid eventually--but it definitely slows down your income stream, which can be a bitter pill when you're broke, starting your career, have a book that's selling fantastically, and not seeing any money from it.

Finally, the last thing you need to understand about royalty payments is the dreaded Reserve Against Returns. This is a big chunk of earned royalty money that your publisher holds back in case bookstores can't sell your book and opt to return it. This is because bookstores don't have to actually buy your book to sell it. They work on what basically amounts to a consignment system. The bookstore buys a bunch of books from a publisher and puts them on the shelves. After a set period of time, they take down the books that haven't sold, the "remainder" and send those books back to the publisher for full credit (ie, they get their money back). But, because it would cost way too much to mail all those unsellable books all the way back to some warehouse, bookstores don't actually return the book. They just strip the cover off, send that back to the publisher, and pulp the rest.

This process is called "remaindering" and it sucks on a lot of levels, but it especially sucks for authors. You see, that royalty rate we just went into in detail above? That's paid when the bookstore orders the book, not when the customer buys the book. This means you have "sales" accounted that might not actually ever sell. Unfortunately, publishers don't know how many of your books will be returned until a year or more has gone by, so they keep a hefty chunk of your earned royalties back to cover the unknown return amount. This process is called the Reserve Against Returns, and if you get a print book deal, you will learn to despise it.

Fortunately, these days printing and inventory management technology has advanced enough to allow publishers to do both smaller print runs and to restock bookstores more quickly, which vastly decreases the amount of orphaned books left on shelves, vulnerable to being remaindered. This means that far fewer books get returned now than even five years ago. Unfortunately, Reserve Against Returns accounting remains in place as firmly as ever, so while you might not actually have to give up as much of the money they're holding back due to the now much smaller percent of remaindered books, your money is still tied up for a long, long time while the bookstores sort everything out.

Other Sources of Author Income - Subsidiary Rights
Despite the insane amount of pixels I just spent talking about print and ebooks rights, those are only two of the ways your book can earn money. If your agent is on the ball, there are all sorts of other rights they can sell to bring in both advances and additional royalties, including audio book rights, foreign translation rights, book club rights, even film and television rights. These rights can also be sold for self-published books, of course, but it should be noted that having your story traditionally published, and the implied prestige that goes along that, makes these other rights much more valuable to these secondary markets. Everyone wants to buy the rights to the lastest Big 5 blockbuster book. Indie books have to work a lot harder to get that kind of market recognition.

Agents
You probably already guessed this from the number of times I mentioned them above, but having a literary agent is VITAL to the traditional publishing process. The stuff I talk about here is only the surface of the vast and complex world that is the publishing industrial complex, and your agent's job is to help you come out on top of the confusing morass. Ideally, your agent is your champion. They vet your contracts, drum up hype about your upcoming titles, and handle all your legal stuff. They also help sell those subsidiary rights I mentioned above.

For all of this work, your agent takes 15% off the top of your advances and royalties, and a good agent is worth every penny. The key, however, is that you have to find a GOOD agent.

When you're looking for an agent, it's easy to get desperate. After months of waiting and rejections, I know the desperate urge to just latch on to whomever says they want to represent you. For you own good, though, you must resist.

Agents are not uniformly awesome. There are plenty of people out there who'll sell your book and take their cut, but won't actually act as your representative if push comes to shove. You want an agent who will fight for you, an agent who wants what's best for your career in the long term, not just what will earn them the biggest cut now. Ideally, you'll want an agent whose clients not only have great deals with choice publishing houses, but also have tons of other subsidiary rights sales. You want an agent who understands that publishing is changing and wants to take advantage of that, not someone with their head in the sand.

In short, you have to be picky. Even though the query process makes it feel the other way around, the truth is that you're the one hiring the agent. They make their money off the sale of your work, which means they are your business partner. "She's the only one who would have me" is a TERRIBLE reason to start any relationship, including a business one. So even though it's hard, when you get that call from an agent offering representation, don't say yes right away. Instead, ask them questions. If you can't think of any questions right then, tell them you have to think about it, schedule a call for later, and research like crazy. This is a great list to get you started.

Also, it's not rude at all for you to ask them if it's okay for you to contact one of their current clients as a reference. Remember, even though they called you, YOU are actually the employer here. Be polite and respectful, of course, but don't roll over and say yes to everything right away. Just like authors, not all agents are created equal. Even though it can feel like pulling teeth at the time, doing your due diligence to make sure you've found a good one is one of the smartest choices you can make for your career in the long term.

ETA: I forgot the best part! Can you making a living in Traditional Publishing?
In the flurry of tests and doctors, (Travis is going to be fine by the way, thank you all so much for the well wishes!), I completely forgot to add the entire point of this post, which is that, contrary to what some critics of the industry might have you believe, it is entirely possible to make a perfectly good living as an author with a traditional publishing contract without being a big bestseller. I, myself, have made my living off my Orbit books since 2009, and I am by no means a big name.

That said, it's not easy. Publishing money doesn't pay monthly. Sometimes it comes in in huge lumps, other times you'll have months of nothing. That's a very different pay structure than the rest of the world, and you have to have a lot of discipline and forethought with your money to make sure the fat months cover the lean. I won't get into more than that since I'm actually doing an entire post on this exact topic for the third part of my Writers and Money series, but I hope this helps calm your fears and answers some questions about the viability of getting a publishing contract and making a living.

For what its worth, I've very much enjoyed being part of a big publishing house. Thanks to Orbit, I've worked with great people and gotten to meet a huge host of talented and sometimes very famous authors, and while that doesn't actually have anything to do with Writing and Money and therefore doesn't belong in this post, not everything's about money, There are some opportunities money just can't buy, and getting to publish through a big, flagship SFF publishing house is one of them. The dream of being published by the Big Five is still a worthy one, and if it's yours, don't ever let anyone tell you different.

And that's about it for Traditional Publishing! 
I hope I haven't bored you all to tears. Tune in next time when I talk about money and Self Publishing!

Until then, happy writing!

Yours,
Rachel