How do advances and royalites work?

M.A.Gardener said:

advances are just that - they are taken out of the author's royalities.

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Kind of. "Advance" is actually "advance on royalties"--the advance is part of your royalties, the part paid up front. When your book "earns out" its advance--earns royalties in excess of your advance--you get the additional monies.

But what do the percentages mean? How much does the author really get?

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That depends on the terms of your contract, like whether your royalties are paid on gross (cover price) or net (sales price).

And if the book doesn't sell, does the author have to pay back the advance?

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If by "doesn't sell" you mean "doesn't earn out its advance," the answer is no, you don't. If you mean something like you don't ever quite get around to turning in the finished manuscript so the book never goes to print, the contract will specify what happens then.

Commercial publishers typically pay royalties based on a book's cover price. But there are also some pretty well-established independents that pay on net (net is what the publisher actually receives for the book, which, depending on who's buying, may be 45% of cover price or even less), and most of the little indie and hobbyist publishers on the Internet pay on net. Obviously it's very much to your advantage to get a royalty paid on cover price.

(Royalty arrangements can be very complicated, especially with the larger houses, which have all kinds of special circumstances designed to reduce your royalty rate. For domestic sales, though, which will likely be the bulk of your sales, they do pay on cover price.)

Royalty percentages depend on the format of your book and, to some degree, on your agent's clout and your own track record.

- Mass market paperback--6% to 8% for the first 100,000, 8%-10% thereafter. I know one writer who is getting 10% to start, but she's a NYT bestseller who sold her series at auction.

- Trade paperback--7.5%-10%.

- Hardcover--10% for the first 5,000; 12.5% for the next 5,000; 15% thereafter. Smaller publishers may start at 8%, and use higher escalation points.

You do NOT have to give the advance back if your book doesn't earn out. This is a common writers' myth, but it isn't true.

Most books don't earn out. This doesn't mean the publisher doesn't make a profit, however.

- Victoria

What they said... But I would also add that the term "net" can ALSO include costs associated with producing the book. So, the cover price, less any discounts, LESS the cost of paper and ink and cover art and salaries, etc., etc. Seek out contracts that offer royalties on "list" price, "cover" price or "gross."

And while we're talking about royalties and advances, let's talk a bit about some other stuff that often confuses people. First, more and more publishers are starting to stagger advances, doling them out in sections until the book comes out. It used to be that an advance was paid when the contract was signed. But then some authors didn't turn in the work and the publisher realized that they'd (horror of horrors... ) actually spent the money to live on. So, a lot of the big houses are beginning to offer the payment in half or thirds. You get a chunk when you sign, and another chunk when they accept the manuscript (which is NOT, by the way, when you first send the manuscript to the publisher. It's AFTER edits are completed satisfactorily), and another chunk when the book hits the shelf.

Now, once the book hits the shelf, you have some waiting to do. Most publishers work on a twice-yearly reporting schedule, meaning that they will tally sales and returns for credit over a six month period and report the ACTUAL sales. On a January-June reporting period, you'll probably see the first statement about the sales come September or October. For July-December, it'll be March or April of the next year. IF a book "earns-out" or "sells-through," you'll get a check in the FOLLOWING reporting period, because most publishers will hold out a period of time for bookstores to report back on unsold copies.

So, let's say you published a book in January. Come October of that year, you'll get the first statement about how many copies were sold from January-June. But you won't see any money, even if they all sold and you earned out. The publisher will hold a "reserve against returns" until the NEXT pay period. So, if no other books sold from July-December, and no extra ones were returned from the sales on the first period, then come April of next year, you'll see the royalty money.

In addition, if you published in May, often there's a contract clause that says they don't have to report AT ALL during the first royalty period (because it's too much bother to accumulate sales for only one month -- May-June). So you won't see even a statement until April of the next year.

It's frustrating for an author, because we have no way of knowing how the book is doing until we see it on paper months and months from the date of release. Sigh...

But, that's how it works, FWIW!

Advance

Just to add to the confusion, depending on publishing schedule, very large advances can even be paid in twelfths or eighteenths, with the writer receiving a check every month until the advance is doled out. We should all be lucky enough to receive such a large advance.

Having your advance broken into parts can actually be beneficial to the writer. It not only lasts longer, but if the advance is broken across two tax years, you will probably pay a good bit less in taxes.

Anyway, what I really wanted to emphasize is the value of a good agent. A good agent knows all these things, plus a great deal more, and she'll handle them all for you. This lets you concentrate on the writing. If you think convincing a publisher to take your book is difficult, try handling what comes immediately thereafter.

A good agent is worth far more than her 15%. Not only will a good one usually get you considerably more than you'll get on your own, so the 15% is made up for right there, but having someone to handle the business side of writing is a pure blessing.

Jamesaritchie said:

A good agent is worth far more than her 15%. Not only will a good one usually get you considerably more than you'll get on your own, so the 15% is made up for right there, but having someone to handle the business side of writing is a pure blessing.

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Amen to that.

Jamesaritchie said:

A good agent is worth far more than her 15%. Not only will a good one usually get you considerably more than you'll get on your own, so the 15% is made up for right there, but having someone to handle the business side of writing is a pure blessing.

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Thirding that sentiment. My agent got many times more than the original offer on the table. She was also very well-versed in strategy as to which house would do what for the book (really do, not just promises). She is worth every penny.

My advance is divded into thirds, by the way.

Okay - my question, based on what one poster stated in that most books don't 'earn out' - should the writer consider the advance as the actual price earned?

And wouldn't smaller advances 'earn out' more often than large advances, balancing the scale somewhat in the long run?

Having your advance broken into parts can actually be beneficial to the writer. It not only lasts longer, but if the advance is broken across two tax years, you will probably pay a good bit less in taxes.

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An interesting point. I have relatives who work in a different line of business which also pays large sums at odd periods, small scale property development. They're able to split the tax on developing a property however they want over the entire life of the project, i.e. from the tax year in which they buy the land to the tax year in which the complete property is sold. Would something similar not be possible with novels?

Tippy said:

Okay - my question, based on what one poster stated in that most books don't 'earn out' - should the writer consider the advance as the actual price earned?

And wouldn't smaller advances 'earn out' more often than large advances, balancing the scale somewhat in the long run?

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Because most books don't earn out, this means that for most books the writer actually earns more than the royalties. Therefore, having a large advance is good for the writer and bad for the publisher. Theoretically, I suppose, if publishers paid smaller advances they would be able to pay higher royalties, but that doesn't strike me as the kind of thing that's likely to happen. Smaller advances would probably not affect royalties in the slightest; the publishers would just make more profit on books that would otherwise not have earned out.

Tippy said:

Okay - my question, based on what one poster stated in that most books don't 'earn out' - should the writer consider the advance as the actual price earned?

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If your book doesn't earn out - then yes. But that puts you in the publishers' bad books; two or three books that don't earn out makes your position very shaky.

And wouldn't smaller advances 'earn out' more often than large advances, balancing the scale somewhat in the long run?

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Again, yes. But often not as much as if you'd had a large advance.

Given the choice, I would prefer a small advance that not only earned out but continued to earn a confortable income for years - a "long-seller".

The trouble with small advances is that they usually also mean a small marketing budget, while a large advance is usually accompanied by a big promotion.

For my last book, my advance was divided into quarters: a quarter on contract signing, a quarter on presentation of sample chapters and a detailed synopsis, a quarter on acceptance (which means after the completed ms. has gone through the editorial process and been approved by the editor), and a quarter on publication.

I don't earn a living from my book writing, so this isn't a hardship to me, and in fact it's beneficial in tax terms to have the income spread out like this over several years. But for a writer who does live off her book income, this increasing tendency to slice up advances--and the often looooong periods between meeting a benchmark and having the publisher actually issue a check--can be really stress-inducing.

- Victoria

aruna said:

If your book doesn't earn out - then yes. But that puts you in the publishers' bad books; two or three books that don't earn out makes your position very shaky.

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But... but... if most first and second (and third???) novels lose money, surely they aren't earning out. So how does someone get a fourth novel published?

azbikergirl said:

So how does someone get a fourth novel published?

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Bingo! You don't! And that's the position I'm in right now!

To be more precise, I COULD have gotten a fourth published but it would have had to be along their very strict guidelines, and practically every chapter overlooked by them. They do consider me a good writer an dstoryteller, but they wanted me to fit into their concept, which wasn't possible.

victoriastrauss said:

For my last book, my advance was divided into quarters: a quarter on contract signing, a quarter on presentation of sample chapters and a detailed synopsis, a quarter on acceptance (which means after the completed ms. has gone through the editorial process and been approved by the editor), and a quarter on publication.

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This obviously wouldn't apply to a first book though... Can you explain how it might be divided in that case?

Advances

How many parts advances are broken into can also be determined by the kind of writer you are. When I write a novel, I usually write it very fast. Because of severe health problems, I've spent the last four years depending almost exclusively on short fiction, nonfiction, and assorted other projects I can do quickly for money.

But when I'm writing novels, I'm pretty fast. The editor sees the synopsis and offers me a contract, but by the time the contract arrives, the novel is often finished, or very close to it. So delivery and acceptance often happens before the signing part of the advance can be sent. On two occasions, I've sent the finished novel in at the same time I mailed the contract for the novel. Because of this, I usually receive my advances in only two parts, even though they should technically arrive in three or four parts, depending on the contract.

Advances, royalties, and earning a living from writing is a funny thing. I have managed to write, very slowly and very tediously, the first drafts of two novels over these years, but because I wasn't sure I was going to be able to write them at all, I did this without a contract. Everything is now working out, but even though the advances are going to be decent, when you spread them out over the time it's taken me to write them, the income per year isn't going to be very impressive at all.

This really is a business where one day you're the dog, and the next day you're the fire hydrant, and it can be through no fault of your own, and no fault of the publisher.

What I'm saying is that advances and royalties are part of the game, and nice things to think about, but it's the writing that matters. If you can sit down and write every day, be grateful, because this is what makes the advances and royalties possible. If you can, and will, do this, everything else will probably take care of itself. The writing is about all we can really control.

three seven said:

This obviously wouldn't apply to a first book though... Can you explain how it might be divided in that case?

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In my case, the advance for my first book was divided into three parts: Signature, delivery, and on publication. Signature and delivery came almost together because the book was already finished at signature; so technically it came in two parts, two thirds, and one third.

azbikergirl said:

But... but... if most first and second (and third???) novels lose money, surely they aren't earning out. So how does someone get a fourth novel published?

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As I understand it, the publisher will be looking at the sales numbers in those cases. A record of increasing sales with each book will count in your favor, as it shows a growing reader base. And a book doesn't have to earn out to turn a profit, so the publisher isn't necessarily losing money on each of your books that didn't earn out. If your books are earning their keep and sales are rising, the publisher may consider your fourth book a good risk.

Aconite said:

As I understand it, the publisher will be looking at the sales numbers in those cases. A record of increasing sales with each book will count in your favor, as it shows a growing reader base. And a book doesn't have to earn out to turn a profit, so the publisher isn't necessarily losing money on each of your books that didn't earn out. If your books are earning their keep and sales are rising, the publisher may consider your fourth book a good risk.

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Very true, but you probably do need to start earning out at that point.

How do you sell your next book if your previous three books tanked? You change publishers, if you can. Sometimes a new publisher will be willing to try and break you out even if your track record with your old publisher isn't terrific. Or you change your name. Many, many writers have changed their names--sometimes more than once--to escape a poor sales record. Some have become extremely successful under their pseudonyms.

- Victoria

aruna said:

In my case, the advance for my first book was divided into three parts: Signature, delivery, and on publication. Signature and delivery came almost together because the book was already finished at signature; so technically it came in two parts, two thirds, and one third.

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I had a similar arrangement for the last book that I sold complete. It wasn't my first novel, but I'd just switched genres, so it was almost like starting from scratch.

I think the difference isn't first novels vs. subsequent novels, though, but complete novels vs. novels sold as partials or proposals.

- Victoria

Earning out

I think the value of earning out depends on the writer, and teh size of teh advance. When you first begin writing, and have modest sales, earning out can be very important. But as each of your books sells more than the last, the size of the advance goes up, or should go up, accordingly.

If you receive a $5,000 advance, and the books sells only $4,000, the publisher may lose some money. Keep doing this for three or four books, and the publisher gets real nervous, and may well drop you. If you receive a $100,000 advance and sell $80,000 the publisher will probably still earn a decent profit.

Receive a $1,000,000 advance, and sell only $300,000, and the publisher will have a hussy fit.

Here's an interesting article on publishers' profits and losses, and the complex calculations that go into figuring this.

Among other points: publishers don't necessarily expect writers to break even with their first books.

- Victoria

victoriastrauss said:

Here's an interesting article on publishers' profits and losses, and the complex calculations that go into figuring this.

Among other points: publishers don't necessarily expect writers to break even with their first books.

- Victoria

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Wow, very good article. When I sold my first novel, the editor told me I essentially had five chance to start earning out, that they didn't expect me to start earning a profit until the fifth novel, but after that, it was essential.

I know publishers don't expect the first book or two to turn a profit now, but I don't think new writers still get five chances. Three is probably more like it, and I've known a couple of writers dropped after two novles failed to earn out.