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.