Profit and Loss

Over the last few weeks, we have been discussing the dollars behind the decisions publishers make. Hardcover vs paperback, cover design, retail pricing... all of these items and many more need to be weighed against the bottom line. In these discussions, we have been tossing around the phrase "P&L".

A reader contacted us off-line to ask about "P&Ls" and how they are set up. Thought I would share some of the more important "Profit and Loss" line items that we believe every publisher should add up before publishing a book.

Author Advance: How much you paid the author against future royalties for the right to publish the book.

Development Edit: The cost of hiring an editor to shape and polish the writing.

Copy Edit: The cost of hiring a separate editor to check for grammar, spelling, inconsistencies, fact check and smooth out awkward sections.

Proofread: The cost of having (preferably two) editors review the finished file right before it goes to print and catch the inevitable errors.

Design: How much you pay the designers to design the cover and interior look of the book.

Layout: How much you pay the designer to layout the text and images within the design template and fix all the errors your proofreader finds.

Art costs: The cost of the photos or illustrations you will purchase for the book.

Marketing and PR: The budgeted amount for promoting the book. Email blasts, on-line optimization, ads in industry newsletters, author tour, getting reviews, in-store display allowances, co-op, book club and library outreach, etc.

Sales and Fulfillment: The costs associated with warehousing, shipping, selling, and billing for your books. (This is often portrayed as a percentage of the billing per unit if you are using a distributor. Sales rep groups, fulfillment houses and distributors often charge a percentage per sale)

Printing and freight: The costs to print and ship your books from the printer to the warehouse.

Once you have added the figures associated with every aspect of your book's production. marketing and sales, divide by the number of books you believe you will sell in the first two years. Be realistic. As we have said before, you are not going to be on Oprah (we promise).

Here is a sample breakdown of how a P&L works for a book. I'll call the book "Blown: My Life and Fortune as a New Author"

Blown (at 336 pages, paperback) retails at $16.95

This book's entire budget totals $30,000 for the items listed above.

After careful research, you expect to sell 5000 copies in the first two years.

The cost per unit is $6 a book.

Let's say you sell the book through traditional channels which means that you sell the book at a 55% discount off of the retail price of the book.

Your gross income from each sale is $7.63

You will net $1.63 per unit sold. (This is a healthy profit margin on a P&L)

But what if you only sell 2500?

The cost per unit will be $12 a book and you will never make your money back.

The solution many new publishers reach for is to raise the retail price of the book, but that is usually not a great idea. As we have said before, set your price to match what the marketing is asking for. It is better to adjust your expenses than raise the price of your book beyond what a consumer will pay for it.

Be very careful about your expectations and sales projections. The more accurate they are, the better you can work your profit and loss and keep your budget in line with potential sales.

Let's Make a Deal - Setting Your Price

Just recently, we blogged about the importance of category research when choosing the right cover for your book.

Category research might be a theme for several posts from us moving forward. All to often, clients, potential clients, publishing friends and colleagues come to us with finished books (or book ideas). All to often, we come back to them with a myriad of questions - including, how did you come to that price, trim size, title, subtitle, cover, etc.?

For us, each of these "packaging" details must be dictated by the market into which we publish. While we always have an opinion, our number one goal is to ensure that our clients and colleagues are getting real-time feedback from the retail marketplace. In this case, our opinion doesn't matter. The marketplace, however, does.

Which, for today's post, brings us to price.

How do you choose the appropriate price for your book?

The first place to start is, of course, your P&L. Once you factor in your advance (for our publisher friends), your editing fees, copyediting fees, layout, design, printing prices and marketing budget, what is your profit margin?

As you know, a P&L is only as good as the person that creates it. For example, if I price a 196 page trade-paperback business book at $24.95, I'm most likely going to see a healthy profit margin in the end. The cost for editing, printing and producing such a book is often dictated at a per-word or per-page rate. Tiny book, tiny costs, big profit margin. That all sounds good, right?

The only problem with this particular analogy is that selling-in and selling-through a 196 page business book for $24.95 is going to be really difficult. People don't have the disposable incomes that they used to. And, more importantly, this particular lightweight book may not scream "value" to your end customer. Especially if they can get a similar book on the same topic for $12.95.

So how should you really set a price?

Let's work backwards.

Let's say you're publishing a book in Category X. Get on Amazon, go to the bookstore, peruse your bookshelf. Pull out all of the bestselling books in Category X. What's their price point? What does the consumer get for their money? Is your category driven by a 336 page trade paperback for $14.95? Do "unknown" authors charge a dollar or two less for for their book? Does the price point reflect a big author's name? A page-heavy book? Do some publishers actually charge less because price-point is their value proposition?

Here's what you'll discover through this simple exercise. The consumer is actually telling you, through book sales, the price they'll pay for a book on your topic in Category X.

If, for example, it's $9.95, $12.95, $14.95 or $19.95, then that's the price you need to get to. It doesn't matter that you're convinced that your book is so extra special that you're sure the consumer will pay an extra $10.00 for it. Research will show that's most likely not the case.

Everybody's on a budget these days. If your P&L shows that you have to sell 15,000 copies of your $5.95 book to make your money back, than that's what you have to sell. Charging $15.95 for that same book just to make your money back, in a category that can't sustain it, just means you won't sell very many copies of your book.

What you need to do is go back to your P&L and take a look at real costs compared to a researched price point. Figure out how many books you need to sell and develop a sales and marketing plan to make it happen.

Like so many things in our business, strong market research can prevent you from making some of the simple mistakes that can have long term, adverse affects on your publishing program. Setting your price is just one area.

So, let's make a deal. Next time you decide you need to charge $24.95 for that 196 page book to make your money back, rethink how - and why - you've gotten in to this business to begin with.

"But how many books will I SELL?" - Author Events Part Two

One of the first things a publisher or author will ask of any marketing plan is "what is the return on my investment going to be?" The person with the checkbook wants to know that if they write out the zeros, they can plan on a significant return on their investment.

I hate to tell give them the only answer that anyone can give... "It depends."

Carol Zelaya, author of the Emily the Chickadee series, published by Richlee Publishing, launched her first children’s book in April 2008. She hired a fantastic PR firm to set up the launch, complete with a book signing tour covering four states that she expected would stimulate sales. Her expectations were quickly dashed.

“I mistakenly thought that once you were invited to do a book signing, you had really made it." says Zelaya "I was so wrong. Even when the stores did tons of publicity and put up big posters, no one came.”

But are sales the only purpose of an author tour? What results and returns can authors expect when the people don't show up at the event? Why do an author event if no one can guarantee sales?

“The thing you have to remember is the benefits outside of the event.” Says David Brody, author of several novels, including Cabal of the Westford Knight, published last February by Martin & Lawrence.

If you go into a tour looking at it strictly in terms of sales during events, it will not work, Brody says. “I may sell only 5 or 10 books at an event, but that is not the point. I have to take into consideration that the store orders the books a few weeks ahead of time, makes a display, puts up a poster; plus, the manager and employees get to know my book. At the event, who knows who will hear me and what they might tell other people? And after the signing, I will leave a few signed copies and those might get displayed for a few weeks. I can often attribute 50 or 60 sales to an event that drew only 10 sales that day. If you look at it that way, the economics make sense.”

So the question I put out there is this... "What is the REAL return on your author tour investment?" I'd love to hear from authors who have recently toured to see if they think touring is worth their time and money.