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ePublish a Book » Resources, The Legal Corner » The Dangers of Royalties on Net

The Dangers of Royalties on Net

November 2nd, 2011 | 12 Comments

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When signing a publishing contract, the amount of money that is due to the author is a percentage of the sale price of the book as defined by the publisher. This percentage is called royalties and the system applies both to print books and digital books.

At first sight, this seem straightforward enough, if a book sells for $10 for example, a 25% royalty should be $2.5.

This of course depends on the wording of the contract. If the contract stipulates 25% of gross, or retail price, or cover price, then indeed the royalty for a $10 book would be $2.5.

However, and that is when studying the contract is crucial, if the contract stipulates 25% of net, it is much more complex to establish the amount of a $10 book’ royalties.

Net could mean only after deduction of payment charges, such as Credit Card, check clearance or money wire charges. Let’s take an example where payment charges amount to 6% of the book cover price. Our $10 book net value in that case is $10 – $0.6 = $9.4.

In that case, the royalties due to the author would amount to $2.35 instead of $2.5. Still reasonable

Yet, net could also mean that the publisher intends to deduct from the gross price not only the payment charges but any other charge incurred during the publishing process. That could be the price of producing a cover, the editor’s payment, storage cost, marketing cost or any other cost defined by the publisher.

So let’s examine our $10 book. It has now sold 20 000 copies, not bad at all….

That is a sale figure of $200 000. So 25% of the gross amount would come to $50 000, which would make the author happy. Now, from this, we deduct the 6% for payment charge, the net amount comes down to $188 000 of which the authors royalties, 25%, will amount to $47000, still nice.

That is in the case the publisher did not include other costs in his definition of “net”.

Let’s have a look at what an unscrupulous publisher could include in the cost to be deduced from the gross to obtain the net.

Book cover price:        $   2500

Editing:                       $   2500

Formatting:                 $     500

Layout:                        $     900

Promotional material:  $10 000

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Administrative cost:    $   1000

Packaging:                   $   5000

Printing:                      $60 000

Mailing:                       $30 000

Distribution:                $10 000

Total                           $122400

Of course, the payment are also deducted, which means the royalties for the author would be reduced to 25% of 188 000 – 122 400 = 65 600, or a paltry $16 400 That is $30 600 less that if had signed with the honest publisher above who only subtracts payment charges before calculating royalties. The publisher, on the other hand, would get fat, all his costs being paid for by the author, so he cashes in almost 100% of the sales revenue, leaving only crumbs to the author, and all very legally.

Why did this happen to the unfortunate author? Simply because he neglected to verify the meaning of the word “net” in his contract … It is nothing much, just a three letter word. Yet the financial implications are considerable.

So, when signing a publishing contract where the royalties are based on the “net”, it is critical to verify what expenses are included in the definition of “net”. As a large part of ePublishers do pay royalties as a percentage of net,  always demand a clear definition of all expenses that the publisher intends to deduct from the gross amount, keeping in mind that a ruthless publisher could actually end up having all your royalties written off as expenses.

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12 comments on “The Dangers of Royalties on Net”

  1. Julie Trelstad on said:

    Publisher’s perspective here: As Ilaria mentioned about, the practice of “net royalties” is calculated on the “net amount received by the publisher,” not the “net amount after expenses.”

    Typical distribution/wholesale distribution cost for a printed (not e-book) is 55% of the cover price. Which means if they sold 20,000 copies at $10, they “netted” only $4.50 per book, or $90,000, which means the publisher is still underwater (if they spent $122,400). In this scenario the publisher would still owe the author the contractual “net royalty” amount, most typically 10% or $9,000. In this case the author makes $9,000 and the publisher still loses over $41,000. I don’t know many fat publishers…

    I’ve never seen the model you describe above. If you can find me a way to get only 5% distribution fees – I want to know!

  2. Ilaria Meliconi on said:

    Patricia, your post can be misleading: in non-fiction the vast majority of serious publishers offer royalties on net not on cover price, which is clearly defined in the contract (always) and again in the vast majority it is the net of booksellers’ discount: so if a book has a cover prive of $10, the publisher sells it to the bookshop at e.g. $6 and the royalty is calculated on that amount. It is not misleading if this is specified clearly in the contract – and it has to be for the contract to be valid.
    It all boils down to being able to read and interpret the contract clauses (which is why agents are important).
    Calculating “net” as net of publishing expenses is vanity publishing in my view, and I am not aware of any “traditional” publisher who does that.

    • Patricia on said:

      Ilaria, No-one begrudges publishers the right to offer royalties based on net, nor the sound logic behind it. Unfortunately, some are taking advantage. This post is simply a warning against those who abuse that right and trick the unwary writer by not defining in the contract what is included in the definition of net.

  3. antonio angelo on said:

    it should be pointed out that all though those costs are legitimate expenses it is entirely unfair for a publisher to take 75 percent of sales entirely as profit while all expenses come out of your 25 percent share. i don’t think anyone begrudges a publisher for making money and covering expenses because they are taking a risk by publishing your book.

  4. Cary Caffrey on said:

    Another reason to never (NEVER!) sign without an advance. There’s a whole new crop of ePublishers out there eager to sign anyone and everyone. Be cautious.

  5. Rasana Atreya on said:

    Thanks for sharing this. Scary. I’ll be posting a link to your article on my blog for writers (http://rasanaatreya.wordpress.com). I’ll also be tweeting it. Thanks much!

  6. Sherry Gloag on said:

    That is totally scary. Thanks for sharing.

    • Patricia on said:

      Well, Sherry, Better safe than sorry and, in the excitement of being offered a book deal, it is so easy to miss this little three letter word so a reminder every now and then cannot hurt, can it? :-)

  7. Noah Murphy on said:

    “Keeping in mind that a ruthless publisher could actually end up having all your royalties written off as expenses.”

    Have there been cases of publisher writing all royalties off as expenses? Or doing what you mostly talk about(docking publishing expenses out of royalties)?
    If so, they should be run out of business.

    • Patricia on said:

      Well Noah, on Absolute Write forums, there have been reports of ripoffs by certain publishers – that shall remain unnamed in view of their reported tendency to sue -that did not quite get to 100% of the royalties, but close. So, to answer your question, I do not know about a 100% scenario, but over 90% is bad enough.

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