Warning: This will be a general post designed to help regular folk understand some real basics in indie publishing accounting, so publishing experts and accountants, please give  me a break. This is very, very general. Thanks!

Also, this is a long one. Sorry.

The term “Margin” is thrown around in so many ways, by so many people in publishing these days, I figured it was time to try to make sense out of the word and other basic accounting issues. In fiction publishing, that is. I’m not getting into stock margins or buying covered calls on margin or anything along those lines. This is about fiction publishing and accounting and profit margins and how to figure them.

Yup, lost about five hundred readers right there.

Here we go. There really will be a point in this for indie publishers, so ride with me.

Traditional Publishing Accounting and Margins

Starting from the top and working down.

Publishers and lines of books

Publishers (for the company or for an imprint) tend to like to make around a 4% margin of profit after all costs. More, they get happy, less, they get grumpy. And every company is different and some have different numbers, but most range in that area, so that is just a basic center number for conversation sake.

An imprint’s profit margin is figured (basically) by total gross receipts minus all expenses, including office overhead and salaries and costs of production and shipping. So ideally the company stays afloat and pays all bills and makes 4% of the total gross receipts. (Yes, I know, very simplified, but live with it.)

A Book

A single book is figured on the same formula as basically the entire line. (And it’s a giant guessing game. More on that later.) After a book goes through its life, the publisher looks at the total gross receipts for the book, take away all costs, including a percentage of the overhead and salaries, to get to a desired  4% net profit or profit margin. Some books are far, far more successful than that, most books are not, and many books lose money “on paper” for the company. About a zillion factors involved in the final per-book calculation that then gets fed into the overall calculation of the imprint.

Bestsellers have a far higher profit margin because of the set costs such as staff and overhead are factored over a lot more books than a 5,000 copy print run of a small book. But bestsellers also have more upfront costs and thus are a higher gamble for the publisher. Many lines make money by having a couple bestsellers that carry all the small authors and first-time authors who are losing the company money. Midlist authors are often the ones that can sell consistently at a 4% profit margin and don’t add or drain anything from the company.

Distributors

All distributors tend to try to work at a 5-10% profit margin where possible. Closer to 5% most of the time after all costs. Distributors are basically any company from Ingrams and Baker & Taylor to Amazon Kindle or Smashwords.  All distributors, although the electronic and online paper sales have combined distributor and bookstore in many areas. But ultimately they are distributors. (For the publicly traded ones, you can read their year-end reports to see the thousand factors that are taken into account. Again, I said I am being very simple here.)

Bookstores

Bookstores like to get as high a discount as possible from publishers. Often a bookstore will pay ahead and order a certain number of copies because that savings in shipping and a few percent higher in discount can make all the difference on staying alive. Bookstores get books from 32% to 55% discount. Their overhead in buildings, employees, utilities and such make it critical that they do enough in sales to cover the costs.

For decades new bookstores have been helped by the return system and the smart owners used the system perfectly. If a book didn’t sell quickly, they returned the cover or the book for a full refund and credit against another book they were ordering and the publisher and author took the hit for the store not selling the book. So new bookstores didn’t get caught often with dead inventory. (You want to see a store with dead inventory, go into any Borders this week. Take a look at the books that didn’t sell in December.)

Barnes & Noble had a great last year, with some decent profits. Amazon, as a bookstore, also had a good year. Most bookstores, the small independents, didn’t do so well even with the no-risk inventory and considered it a good year if they paid all their overhead and salaries without borrowing money.

Writers

I typed that and started laughing. There are a few authors working with traditional publishers who actually think in these terms. Very few. But most writers don’t know enough about business to even know how to figure their own profit and loss on a book project, or even work a profit margin, let alone consider themselves an actual business. They should, but almost none do, which hurts all the rest of us.

I know for a fact that if a writer actually did do the profit and loss structure of a project, including overhead and time and so on, they would fire their agent in a heart beat. Spending 15% of all gross income on an employee is the most outlandish cost in any business model I have ever run across. But we’ve been down that road in other posts.

Let me just say that it is very possible for a writer to run a simple profit and loss on a project and also on a full year of writing.  (Again I am laughing because I have such a low opinion of writers and their business knowledge. Sorry.)

Indie Publishing

Here is where things get confusing around the word “margin” to writers who want to be indie publishers, meaning publish their own work, or join a group working to publish their own works.

Margins for Indie Publishers

Very few indie publishers, because they are writers, have set themselves up in any kind of business structure. Or treat indie publishing as an actual publishing company. I have a hunch, as time goes on, we’ll see more and more that do. The ones that survive at least. An indie publisher is a publisher, just as any company in New York is a publisher. Same rules apply. And same basic accounting can and should be run.

An indie publisher needs to know costs and keep sharp track of them. Time spent, cost of production, cost of covers and proofing and so on. But more importantly, time spent by the writer on the creation of the project and time spent on the publication of the project should both be assigned amounts. Base costs. What is your time worth writing and indie publishing?

All those facts and figures are needed to figure out any real profit margin for an indie publisher.

For years I have done a profit and loss and figured profit margins for myself in my writing. I calculated that including everything, my time, my mortgage, my expenses, I needed to make $500 per day of work to cover everything. (Reverse calculation is $500 per day is 5,000 words per day times 10 cents per word.) For me, to make it simple, I use the $500 per day to cover my time and all my costs. And I figure ten hours in a day.

So figure your own. Add up all your expenses for a month, figure out how much your time is worth, and take the total from your money brought in (after the outlandish 15% agent fee) and that’s your profit margin for your writing. Or loss.

So using my way of calculating, which is very simple, a 30 day month has a base cost of $15,000. I subtract $15,000 from my income and get my profit or loss for the month. Then I also do a calculation for six months and for a year. Some years I have made a nice profit. And remember, my time is also worked into that $500 per day. So when my writing business makes a profit, it’s money earned above my hourly time wage.

Indie publishers have to do the same thing in some way or another. They have to figure all costs, including time, and then keep track of all income over a year and determine a profit or loss for the business. If your business is not earning at least a 4% profit margin, you are doing something wrong. (Maybe your pricing structure is off, which I will talk about in a moment. Or your expenses are too high, or you don’t have enough product out to actually carry the expense costs.)

Notice: It would be wise to get an accountant to help you set up your books to start with, especially if you plan on growing your indie publishing business as the years go by.

By the Story or Book: An Example

Notice I know pretty close how much time I spent when I put up a challenge story. (I am used to keeping track.)

My $500 per day is figured on 10 hours of work, or $50.00 per hour. Remember, that includes all my overhead including my share of our mortgage and so on. So if a challenge story takes six hours, it needs to make me $300 over the life of the story to break even. And more to give me a profit margin.

So let’s do a Profit and Loss Calculation on a simple challenge story to see if the work I am putting in is worth my time. And when can I expect a profit.

Story Costs: $300.00 total. (All overhead and employee hours worked into that number. No cover or proofing costs.)

Projected electronic sales: (5 sales total across all sites in one month for each state of the story.)

Selling the story as a single story for 99 cents.  $1.75 per month for five sales (net income after each site fees).

$2.99 5-story Collection: 1/5th of $10.00 or $2.00 per month allocated to the story.

$4.99 Larger 10-story collection 1/10th of $17.50 or $1.75 per month.

Total income $5.50 per month for the story. Or $66.00 per year. Projected profit in under 5 years.

Of course, I would need to track the story sales. But that calculation seems pretty reasonable in most publishing business structures.

(For a publisher doing a profit and loss in Traditional Publishing, a book is bought, but expenses have already been spent on the book before the author is offered a contract. Book comes out in two plus years, book might hit profit status in just under four years after first money is spent.) So under five years seems pretty reasonable to me, especially since after that five year period, in theory, the story will continue to sell and just increase my profit margin.

So that’s a profit margin and figuring a profit and loss for a story in indie publishing. Few indie publishers do that simple math.

PRICING OF INDIE BOOKS

I hate to go back into this area, but indie writers need to start thinking about pricing of books like a real publisher.

So here we go:

Electronic Pricing

99 cents at 35% = $.35

$1.99 at 35% = $.70

$2.99 at 70% = $2.10

$3.99 at 70% = $2.80

$4.99 at 70% = $3.50

You have to sell ten times the number of copies at 99 cents then you do at $4.99 to earn exactly the same amount of money.

So doing a simple profit and loss calculation on a novel that took 100 hours to write, the cost I would have into the book would be $500 x 10 days (at 10 hours per day) or  $5,000.00.

To make a profit selling the book at 99 cents, I would need to sell 14,285 copies.

If I priced the novel at $4.99, I would be in profit status at 1,429 sales.

If I managed to sell one per day total over all sites (30 average per month) the book would be profitable to me in under four years. Nice. And that’s assuming nothing went bigger. Having a $3.50 gross profit margin per copy sold helps me hit an overall book profit much sooner than a gross profit margin per book sale of 35 cents.

POD Publishings

Here where it gets really, really tricky for indie publishers. They want to keep the price of their book as low as possible. Duh, every traditional publisher wants the same thing. But unlike electronic publishing, you have more choices and more factors with POD publishing.

I hate the idea of short discounting bookstores. Short discounting is only offering a 20% discount on your book. That simply cuts off all sales for your book to bookstores and even special order counters. Bookstores will not order books with that low a discount. It really is that simple. Bookstores barely make it when they get full returns and 40% discount. They won’t bother with 20% (or short) discount.

So using a standard discount and CreateSpace’s nifty calculator and Pro Plan, here are some numbers. (Lightening Source is fine as well, just don’t short discount even though they offer it.)

Details of the Book: A standard 6 x 9 inch trim, 300 page book.

$12.99 cover price gets you a $1.14 gross profit per book in expanded (special orders from stores you don’t ship to) and $3.34 through Amazon and you can buy them for about $4 per book for direct sales to bookstores at 40% discount, so you make about $3.70 or so direct sale to bookstores. Those numbers are your gross profit margins per sale depending on how and where the book sells.

Now bump the price to a more logical $15.99 trade paper price. You know, about what traditional publishers charge for that size book. The expanded distribution jumps to a gross profit margin of $1.94 and the Amazon sale gross profit jumps to $5.14. And you make almost $6.00 per book on direct sales to bookstores.

So setting price is a cost calculation for a business to figure out depending on costs of the book, the amount of time and number of sales calculated to return the costs in a set amount of time.

A dirty secret: New York does the same guessing game, granted with more practice, but the same game. I’m not going to tell you which way to go, but doing the math for your costs will help you set a price which will eventually allow a profit margin in a decent amount of time.

Act Like A Business

I just shake my head at writers who set low prices for their books because of some unknown thing they heard on a blog post like this one. Or because another author used that price and it sounded right. Or because “everyone on the Kindle Boards is doing it.”

If you are jumping into being a publisher seriously, start acting like one. Track your costs to produce a product. And set a cost figure on your writing time. And your time to do covers and so on. And any other real costs. And if your computer lasts two years and you write four novels in two years, then each book needs to carry one quarter of the cost of the computer. And so on.

Get a real expense number, a real cost of producing a product. Then set your book price keeping that number in mind.

If you are planning for your book to hit a home run to make your money back, you aren’t being very real. I plan for everything I put up to bounce along the bottom, selling a minimum number of copies per month. Then I take my costs and work out at each price point how many copies I will need to sell to return my investment and start making me a profit in a decent amount of time.

I like to make a profit. I like to know when I will make a profit, and how many books have sold and so on.

Just like any publisher, I am setting up cash streams from older books repaying my costs to pay the costs of my overhead and the investment costs for new books.

It’s called business.

If you like the idea of this, but don’t understand it, it would be worth your money to hire an accountant to help you set up the systems for your business. It might be the best expense you will ever spend on your indie publishing business.

And you can expense that accountant’s bill out over all your books for a year.

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Copyright 2011 Dean Wesley Smith

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Okay, I admit it, I had issues at first with putting in a tip jar in the Magic Bakery. It was one of the “I have it made, why do I need to support my writing with tips.” A minor myth, sure, but still one that took me a few days and some talk with Kris to get past. And also, why put a tip jar in when I’m just trying to help people. But I figured I needed to get past that as well, so here it is.

And I also needed to start treating these chapters as part of my writing business instead of just a hobby.

And  speaking of the Magic Bakery, this chapter is now part of my inventory in my bakery. (Confused on that, read the Killing the Sacred Cows of Publishing post about making money with writing.) I’m giving you this small slice as a sample. I’m giving you a taste, but not selling any of the pie.

If you feel this helped you in any way, toss a tip into the tip jar on the way out of the Magic Bakery.

If you can’t afford to donate, please feel free to pass this chapter along to others who might get some help from it.

And I would like to thank all the fine folks who have donated over this last year. The donations and the comments both after the posts and privately are really keeping me going on this. Thanks!

Thanks, Dean