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How Author Royalties Are
Calculated
By Stephen Nelson
If you’re going to make a living by writing books,
you need to understand how a book royalty gets
calculated. That’s how the author gets paid,
ultimately, if the book becomes a successful bestseller.
What’s more, the royalties the publisher expects the
book to earn determine the advance the publisher will pay
the writer up front.
Royalty Accounting Only Starts Off Simple
Royalty calculations start out pretty simple. Royalties
get calculated by multiplying the price of a book by the
royalty percentage. Sometimes, the price used in the
calculation is the retail price that the customer pays
for the book in some bookstore.
Assume that you’ve written a book that retails for
$20. Further assume that the royalty percentage is five
percent. To calculate the royalty you earn per book sold
you multiply five percent, or .05, times $20. The result
equals $1. So that’s the royalty you earn for every
book the publisher sells.
Many authors and agents prefer royalties based on retail
prices. The calculation is simple to understand.
It’s simple to compute. And there are limited
opportunities for argument about whether the calculations
are correct.
Big Authors Often Do It Differently
Some very powerful authors receive a set royalty amount
per book—such as $1—which is essentially a
variation of the royalty based on a retail price. The
agent, through his agent, says something to the publisher
such as, “I don’t care what you sell it for,
just give me $1.”
Wholesaleprice Royalties are Common—and
Complicated
Sometimes, the price used in the calculation is the
wholesale price that the publisher receives from the
bookstores and wholesalers who buy the book.
Royalties based on wholesale prices—which are
technically called net royaltiesget a little more
complicated. Again assume that you’ve written a book
that retails for $20. Assume that the royalty percentage
is ten percent. Ten percent, in other words, is the
royalty percentage that the publisher applies to the
wholesale price that its customers pay for your book.
Okay, so far so good. Unfortunately, calculating the
wholesale price of a book is tricky. Publishers calculate
the wholesale by discounting the retail price by some
percentage. And the discount percentage depends on the
number of books that the bookseller or wholesale orders
from publisher. If a bookseller or wholesaler buys from
one to four copies, the discount might be 46% which means
your $20 book wholesales for $10.80. If the bookseller or
wholesaler buys between 51 and 500 copies, the discount
might be 52% which means your $20 book wholesales for
$9.60.
These differences affect the royalty you earn on a book,
of course. Assume that the publisher pays you 10 percent.
If the publisher sells a book for $10.80, you earn $1.08.
If the publisher sells a book for $9.60, you earn $.96.
And here’s something else to consider: Using the
earlier price discount schedule, you might assume that
the only time the publisher discounts your books by the
biggest possible discount is when the publisher receives
a large order for your books. But the bookseller or
wholesaler applies the discount to the total order they
place. If Barnes and Noble orders five hundred copies of
some other bestseller that your publisher sells and three
copies of your book, the price for your books is also
calculated by discounting the retail price by the biggest
discount, which might be 54%.
You now need to understand something else that’s
really important. Publishing contracts usually don’t
specify just one royalty rate. They specify a schedule of
royalty rates. Normal sales to bookstores use the regular
rate. And authors always focus on that rate.
However, other rates come into play in special
situations. If your book sells an enormous number of
copies, such as more than 25,000, the contract may say
you get a higher royalty rate (perhaps 15% instead of
10%, for example). If your book sells through a
bookofthemonth club, outside the country, or at the
biggest price discount, the contract may say you get a
lower royalty rate (perhaps 5% instead of 10%, for
example).
Now at this point, you may be thinking that I’m
making an awfully big deal about a situation where
we’re talking about pennies. But the combination of
these price discount schedules and royalty rate schedules
hugely impact your royalties.
Suppose you and a publisher agree that you earn a 10%
wholesalepricebased royalty on a book that wholesales
for $10. Further suppose that there are two exceptions to
this accounting treat. You get only a 5% royalty on
deeply discounted sales, but you get a 15% royalty on any
copies sold after the first 25,000 units. Here the
various royalties per unit amounts you might earn:
1. If your publisher sells a copy of your book for $10.80
and it’s not deeply discounted and the book
hasn’t yet sold 25,000 copies, you earn $1.08.
2. If your publisher sells a “deeply
discounted” copy of your book for $9.20, you earn
$.46.
3. If your publisher sells a copy of your book for $10.80
and it’s not deeply discounted and the book has sold
25,000, you earn $1.62.
Those are very large differences. Take the situation
where a book becomes a big success and sells 50,000
copies. In the worst possible case, you might earn
$23,000 in royalties (calculated as 50,000 times $.46).
In the best possible case, you might earn $68,000 in
royalties (calculated as 25,000 times $1.08 plus 25,000
times $1.64).
I’ve actually had this experience. The terms of the
publishing contract prohibit me from identifying either
the book or the publisher, but in the first year of
sales, my bestselling book sold 90,000 copies. I knew the
numbers would be big. The publisher kept reprinting the
book, 10,000 or 20,000 copies at a time. When I finally
received the royalty statement and check, however, 70% of
the books were sold at a big discount. Per the terms of
the contract, this meant that I earned about $.40 a copy.
Two Practical Observations
That’s pretty much everything you need to know about
royalties. But let me leave you with two practical
observations about these royalty calculations. First, be
careful about comparing your royalty rate or rates to the
rate that you hear some other author received. The
comparison is notoriously tricky. You don’t know
which royalty rate the other author is referencing. In my
experience, usually the author is talking about the best
rate in the contract. But that rate may not even ever be
used. And even if it is used, most of the books may be
sold at lower royalty rates.
Second, while as mentioned earlier some authors prefer
the retail royalty rate calculation, I’m not sure
that in the end that arrangement works to the
author’s economic advantage. Certainly some
publishers abuse the wholesale royalty rate calculation.
You or your agent need to watch for this. However, also
know that a wholesale royalty rate gives the publisher
flexibility to sell your book in crazy ways that put
extra money in both your pocket and the publisher’s
pocket.
©
Copyright Stephen L. Nelson. All Rights Reserved.
Bellevue WA accountant and author Stephen L. Nelson (http://www.stephenlnelson.com) has written more
than 150 books, been a book publisher, and been a book
packager. The Wall Street Journal once called him the
Louis L'Amour of computer books. He also edits the
limited liability company formation web site (http://www.llcsexplained.com/)


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