The Myth of the Unearned Advance

The following blog post is shared by permission from the Steve Laube Agency blog.

A common myth permeating the industry is that a book is not profitable if the author’s advance does not earn out. I would like to attempt to dispel this myth.

First let’s define the term “Advance.” When a book contract is created between a publisher and an author, the author is usually paid an advance. This is like getting an advance against your allowance when you were a kid. It isn’t an amount that is in addition to any future earnings from the sale of the book. Instead, like that allowance, it is money paid in advance against all future royalties, and it must therefore be covered by royalty revenue (i.e. earned out) before any new royalty earnings are paid.

The advance is usually determined by a series of assumptions that the publisher makes with regard to the projected performance of each title. The publisher hopes/plans that the book will earn enough royalty revenue to cover the advance within the first year of sales.

A NY Times essay a couple years ago casually claimed “the fact that 7 out of 10 titles do not earn back their advance.” Of course they did not cite a source for that “fact.” But I have seen it quoted so often is must be true! (and it isn’t.) The implication then is that a book isn’t profitable if it doesn’t earn out its advance. The publisher overpaid and has lost money. The author is the happy camper who is counting their cash gleefully celebrating the failure of their publisher to project sales correctly.

Let me try to explain why that isn’t always true. And to do so means we have to do math together. This may be a little complicated, but realize that these calculations are critical and each publisher runs these kind of scenarios on your books. To dismiss this conversation and claim you “don’t do math” is to ignore the lifeblood of your profession.

Realize that this is a generic model. Each and every number below fluctuates from title to title. That is the weakness of the exercise, but bear with me.

Assumptions:

Advance paid to author: $10,000

Retail price: $13.00 (paperback)

Net price: $6.50 (this is what the publisher receives when they sell the book – to dealers, big box retailers, distributors, etc. )

Copies sold: 10,000

Scenario one: Author earns 14% of net for each book sold. ($6.50 net x 14% royalty x 10,000 sold)

Thus, after selling 10,000 copies the author has earned $9,100.

Leaving $900 of the advance unearned.

Scenario two: Author earns 16% of net for each book sold ($6.50 net x 16% royalty x 10,000 sold)

Thus, after selling 10,000 copies the author has earned $10,400.

The publisher writes a royalty check to the author for $400. The amount above the original advance.

The myth says that scenario one equates a failed and unprofitable book , while scenario two is a profitable book.

But wait! Let’s do some more math.

New Assumptions. (remember these are all estimates based solely on this scenario.)

BOTH scenarios have the publisher making the same amount of revenue. ($6.50 net x 10,000 sold.) Both scenarios generated $65,000 in net revenue for the publisher.

To determine profitability we have to subtract costs.

Fixed costs

Editorial expense: $8,000 (includes all stages of the editorial process)

Design (typesetting/cover): $4,000

Printing and warehousing:  $15,000 (the approximate cost of printing 12,000 copies)

Marketing and PR: $10,000 (an average of $1 per book)

Administrative costs: $13,000 (20% of the net revenue)

Advance paid to author: $10,000

TOTAL COSTS: $60,000

Profit for the Publisher: $5,000 (or 7.7% of revenue before tax)

or the $65,000 in revenue minus the $60,000 of total costs.

Are you with me so far?

Now watch this.

Scenario one – (with the unearned advance still on the books) has a profit of $5,000 for the publisher.

Scenario two – (pays the author $400 for earnings beyond the advance) has a profit of $4,600 for the publisher.

In this comparison it is the book that didn’t earn out the advance that actually makes more money for the publisher!

Why? Because scenario one pays a lower royalty per book sold. The advance itself has NOTHING to do with it. The advance is a fixed cost that is covered by the revenue generated by the publisher.

_____

Pause and reflect on that for a moment.

_____

The advance is a cost of acquisition. If that cost of acquisition in the above scenario were $50,000 of course neither scenario would have been profitable because sales would not have been enough to cover all the costs. And it is likely, if there was a $50,000 advance, the publisher would have spent more on marketing and PR.

So this is not an argument for bigger advances. Instead it is an attempt to show, albeit using controlled statistics, that an unearned advance does not necessarily equate the failure of a book!

So when is a book profitable if there is a bigger advance?

Let me do one more set of numbers to illustrate:

Assumptions:

Advance paid to author: $75,000

Retail price: $13.00 (paperback)

Net price: $6.50

Copies sold: 45,000

TOTAL REVENUE ($6.50 net x 45,000 sold.) = $292,500.

Fixed costs

Editorial expense: $8,000

Design (typesetting/cover): $4,000

Printing and warehousing:  $55,000 (the approximate cost of printing 50,000 copies)

Marketing and PR: $75,000

Administrative costs: $58,500 (20% of the net revenue)

Advance paid to author: $75,000

TOTAL COSTS: $275,500

Profit for the Publisher: $17,000 (or 5.8% of revenue before tax)

If you are an experienced person from the publishing side of the table it is obvious that this is a very generic scenario that has only an echo of reality. For example, the net revenue for a publisher is usually less than the 50% of retail that I used above. That is because distributors and specialty vendors (like the book racks you see in the airport) command a much higher discount off the retail. Thus the true picture is highly complex. And we don’t even touch on ebooks or ebook sales or royalties here. This exercise is merely to show a business model where the advance is a fixed cost. Not a cost that has to be earned out for the book to be profitable.

In the above case, a book with a $75,000 advance makes money after only 45,000 copies are sold.

So what do you think? Is the math realistic? Does it make sense? What are the implications (either to the publisher or the author)?

Steve Laube, a literary agent and president of The Steve Laube Agency, has been in the book industry for over 31 years, first as a bookstore manager where he was awarded the National Store of the Year by CBA. He then spent over a decade with Bethany House Publishers and was named the Editor of the Year in 2002. He later became an agent and has represented over 700 new books and was named Agent of the Year by ACFW. His office is in Phoenix, Arizona.

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Today is a Great Day to (re)Write

Steve Laube, a literary agent and president of The Steve Laube Agency, has been in the book industry for over 31 years, first as a bookstore manager where he was awarded the National Store of the Year by CBA. He then spent over a decade with Bethany House Publishers and was named the Editor of the Year in 2002. He later became an agent and has represented over 700 new books and was named Agent of the Year by ACFW. His office is in Phoenix, Arizona. The following blog post is shared by permission from the Steve Laube Agency blog. 

James Michener, the bestselling novelist, once said, “I’m not a very good writer, but I’m an excellent rewriter.” And today is your day to follow suit.

No one knows your work or what you are trying to accomplish better than you. In that sense you can be your own best editor.

In a 1958 interview with The Paris Review Ernest Hemingway was asked,

“How much rewriting do you do?”

Hemingway replied, “It depends. I rewrote the ending to Farewell to Arms, the last page of it, thirty-nine times before I was satisfied.”

The stunned interviewer asked, “Was there some technical problem there? What was it that had stumped you?”

Hemingway said simply, “Getting the words right.”

Roald Dahl, the author of Charlie and the Chocolate Factory, said, “By the time I am nearing the end of a story, the first part will have been reread and altered and corrected at least one hundred and fifty times. I am suspicious of both facility and speed. Good writing is essentially rewriting. I am positive of this.”

It is the same for both fiction and non-fiction since the principles are similar.

Overall Structure

Does your book have a natural flow? Do things build toward a goal or do they flit about like a confused rabbit?

Recently I heard from a number of professionals who have started having someone else read their work-in-progress out loud. This is better than reading it out loud yourself because an objective read could but the wrong emphasis on the wrong word and change the meaning of the paragraph.

Could you rearrange things better? Recently I suggested a client remove three chapters from their non-fiction proposal to bring the total to 13. Thirteen weeks equals a typical quarter of a year which fits many small group and curriculum requirements.

Consider “numbers” when structuring something like a devotional. 365 days. 90 days. 60 days. 31 days. All work. But remember that 40 days is the number of days in Lent. But having something with 112 readings doesn’t add any sort of marketing hook to the project.

Word Choices

Look for repetitive words of pet phrases. Recently I noticed a client’s proposal talked about the number of years they had been doing something in consecutive chapters. Most likely the repetitive sentence crept in during some previous cuts and text rearrangement, but when I read it the first time the information jumped out as being completely unnecessary.

Years ago I worked with a great writer who loved to use the word “very.” I crossed nearly every instance of the word. After sending him the manuscript I received an email with the word “very” repeated 500 hundreds times. He said he was trying to get them out of his system.

In a recent interview with The New York Times Magazine, captured on YouTube, comedian Jerry Seinfeld discussed how he can spend up to two years developing a joke. No matter what you think of him as a comedian you must admire this attention to craft. The seeming simplicity of finding the right “funny” word consumes his creative process.

One of my favorite tools for word choice is The Synonym Finder by J.I. Rodale (the hardcover edition). Often looking for the right word spurs new inspiration.

Today is Your Day

It is quite possible to tinker with something until it no longer works. But today release that fear and tinker away. Insert a different anecdote into your presentation. Try a different opening to your story. Give yourself a few hours of dedicated revision.

What are your favorite methods for effective self-editing?

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The Story We Bring to the Story

Steve Laube, a literary agent and president of The Steve Laube Agency, has been in the book industry for over 31 years, first as a bookstore manager where he was awarded the National Store of the Year by CBA. He then spent over a decade with Bethany House Publishers and was named the Editor of the Year in 2002. He later became an agent and has represented over 700 new books and was named Agent of the Year by ACFW. His office is in Phoenix, Arizona. (www.stevelaube.com)

With all the discussion about the craft of fiction and the need to write a great story there is one thing missing in the equation. The one thing that is the secret to great fiction. And it is the one thing the writer cannot control.

That one thing is the story the reader brings with them to their reading experience. As a reader I have the life I have lived, the people I’ve met, the books I’ve read, and the places I’ve been that I bring with me into the world your novel has created. This makes the reading of every story unique. No two people can read the same story the same way. This is why one person’s favorite book is another’s thrift store giveaway.

In the new memoir The End of Your Life Book Club author Will Schwable writes about the books he read with his Mom during the last years of her life. In his introduction he wrote something profound:

We all have a lot more to read than we can read and a lot more to do than we can do. Still, one of the things I learned from Mom is this: Reading isn’t the opposite of doing; it’s the opposite of dying. I will never be able to read my mother’s favorite books without thinking of her—and when I pass them on and recommend them, I’ll know that some of what made her goes with them; that some of my mother will live on in those readers, readers who may be inspired to love the way she loved and do their own version of what she did in the world.

This is the secret to the greatest novels of all time. They were written in such a way that my story, the essence of who I am, merged with that story and it became something new. Something unique. Something inexplicable. A new story. And then became a part of who I am…and a part what I bring to the next story I read.

That’s the story I want to read. Can you write it? I can’t wait to read it.

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The Dreaded Conference Appointment ~ by Steve Laube

Steve Laube, a literary agent and president of The Steve Laube Agency, has been in the book industry for over 31 years, first as a bookstore manager where he was awarded the National Store of the Year by CBA. He then spent over a decade with Bethany House Publishers and was named the Editor of the Year in 2002. He later became an agent and has represented over 700 new books and was named Agent of the Year by ACFW. His office is in Phoenix, Arizona. (www.stevelaube.com)

You snagged one of those valuable 15-minute appointments with an agent or an editor at the writers conference. Now what? What do you say? How do you say it? And what does that scowling person on the other side of the table want? What if you blow it?

Many excellent posts have been written on this topic (see Rachelle Gardner and Kate Schafer Testerman for example) but thought I would add my perspective as well.

What advice would you give to a beginning writer about attending a writers conference and meeting with an editor or an agent?

Go in with realistic expectations. The biggest mistake is thinking that this is the guaranteed method for getting a book contract and that you have one chance to make or break your entire writing dream. Modify those expectations. Instead see it as a learning experience and a place to listen and absorb the sights and sounds around you. It can, in some ways, be a safe place to fail.

Over the years it is estimated that you’ve conducted nearly 2,000 of these appointments. What are you looking for in a new author or client? Is there an element in a pitch that you look for?

This a VERY difficult question. Reading anything is an extremely subjective experience. If I like the pitch I may not like the writing. And sometimes the pitch is weak but the writing is great. And furthermore, what gets me excited may cause another agent’s eyes glaze over.

In the appointment I’m looking at the person as much as the pitch and the writing. It is the connection made with their personality and their passion and their overall presentation of themselves. That is as much a part of the pitch as the actual words in the manuscript. It is one of the reasons why agents and editors go to a conference…to see firsthand that “snap” or “spark” which makes that person stand out. Hopefully the execution of the writing delivers as well.

Understand that I’m not saying that someone has to be a “bigger-than-life” personality. That would be a rather shallow perspective. Instead it is reading the person behind the page. It is hard to explain and impossible to teach to someone else. But those of us on this side of the table know what I mean. The successful agents and editors have the ability to pick those few from the crowd..

So, please understand I’m not talking about a song and dance routine. But instead I’m talking of the internal fire, that God given spark that says, “Steve? Pay attention.”

What is the one thing that drives you crazy about people when they pitch? What is the one thing you wish they would do?

On the one hand is the person who tries to tell their entire novel or book idea with excruciating detail. That is either a case of nerves or a case of failing to practice ahead of time.

On the other hand is the person who is so precise that they sit down, smile, and hit me with their 25-word blurb. Then they close their mouth and expectantly wait for my august pronouncement, as if that is considered a conversation. That “interview” has lasted for all of two minutes at that point…. and the silence is rather awkward. (Realize I haven’t read anything yet.)

The key is a strong balance between being over eager and talkative and the sterile precision of a practiced speaker. Remember, this is a conversation. I am not only listening to your pitch, I’m also listening to you. I am also meeting you.

But if I say “No. This doesn’t work for me.” That doesn’t mean I don’t like you. It is like the sidewalk vendor who shows me their turquoise jewelry and I say “No thanks. Not today.” I am declining a business proposition not crushing your soul.

Is there any sort of unwritten protocol to which you can clue us in?

Use your common sense. The jokes about slipping a proposal under a bathroom stall door are based in fact. Imagine my surprise while standing in the bathroom doing my business when a fellow comes up to me and starts pitching his book idea. I turned my head and sternly had to say, “Not now! Do you really want me to associate your book idea with this experience?”

At one conference a woman followed me into the men’s room while making her pitch. I had to ask her if she would mind waiting outside for a moment.

I’ll never forget another lady who came up to the appointment table, stood over me, and shook a finger saying, “Now you be nice to me!” And then gestured aggressively at another editor in the room, “Because that man over there made me cry.” I timidly asked her to take a seat.

Once a writer was so nervous about the appointment that the moment she sat down she burst into tears.

My advice to every writer is to r-e-l-a-x. Be yourself. The editor/agent is not necessarily an ogre. (However, after watching me at a writers conference in Oklahoma City Thomas Umstattd gave me the title “The Harbinger of Grim Reality” or “ogre” for short. Gee, thanks Thomas.)

If you run into an editor/agent in the hall or the elevator, it’s okay to talk to them! We are not “rock star celebrities” for goodness sake. We have come to the conference with the goal to find new talent and to nurture relationships.

Try not to argue with the editor/agent. It’s okay to disagree and state your case, but if you let it devolve into a snit you need to apologize…and so does the editor/agent. Civility should reign. If I make a statement regarding the receptivity of the market to your book idea, I’m not asking for a debate (“But mine is so much better than Harry Potter!”), I’m merely expressing my observations about the marketplace.

It’s been said that some editors and agents request everything pitched to them at a conference. What is your take on this, and how often do you make requests?

There can be the problem of the “false positive” at a conference. By “false positive” I mean the editor/agent says, “Send it to me” only to later send a stock rejection letter. It is a problem of which there is no real solution. Editors/Agents cannot fully evaluate a project in a 15 minute meeting or over a group dinner table. Back in the office they can weigh your project against the others they are considering. But at least you are being considered! If you had not gone to the conference you would not have had that chance. I can name numerous times in my past where I contracted someone after reading the proposal in the office. Of course the majority receive the “no thank you” letter. Just because the faculty member says, “send it” doesn’t carry with it a guarantee of a sale.

It is especially difficult with fiction because the reading is more of an experience than an evaluation. I’m not afraid to say, “This needs work” to any writer and many of you reading this blog have heard those words from me. But at the same time our agency’s door is always open. We are always in the hunt for the “next best.” I can’t know if that is the “next” unless I get it reviewed and read it myself in a different context outside the conference.

Have you ever signed an author after meeting with them at conference?

Many times. Both as an agent and back when I was an editor at Bethany House. It does happen. Most recently it happened at the Mt. Hermon conference in March 2010. This first time author made her initial pitch during dinner. Her non-fiction idea was great and the pitch was dynamic. We then met later one-on-one to discuss the idea further. Then I spent time with the sample writing back in my office. We decided to work together and spent a few months developing a top-notch proposal. After sending it around we have had interest from five publishers with two wanting face-to-face meetings at their headquarters. Ultimately it turned into a high value multi-book offer from a major publisher…for a first-time non-fiction author. And it all started with a short meeting at the conference.

I can safely say that every editor or agent would agree that if they find one (only one) new talent from a conference it is considered a success.

I’ve had many times where nothing specific came out of that conference but years later it bore fruit. For example, Paul Robertson attended a conference where I spoke in the late 90s. He said he sent something afterwards that I rejected. Eight years later he sent me a proposal that is now a published book (The Heir) with Bethany House. So while I didn’t necessarily see anything at the time it had results nearly 10 years later.

Have you ever rejected someone who later became a successful author?

Of course! Ask any editor/agent about the “one they let get away.” They’ll be “happy” to tell you their story.

At the Florida writers conference a few years ago we had a faculty meeting prior to the event. Each faculty member stood up and introduced themselves. The first turned and said, “Hi, my name is ____ and here is my new book….which Steve Laube rejected.” We all laughed. Then the next person stood and said, “Hi, my name is ____ … and Steve Laube rejected me too.” There were over a dozen published authors in that room who claimed the “Laube rejection.” So when it came to my turn, I stood and said, “Hi, my name is Steve Laube and I’m the key to your success.” Hilarity ensued.

A lot of writers deserve their initial rejections! Often they start out with a half-baked pitch or with an idea that just landed on the bestseller list written by another author. Jack Cavanaugh went to writers conferences for ten years before he sold the first of his 25+ novels. During those years he learned the craft, he learned the industry, and he became friends with editors. And when the time was right his novel was accepted and a career was born.

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