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.

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Pause and reflect on that for a moment.

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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.