Net Royalty vs. Gross Royalty

About a month ago, I spent a good while typing up a forum post sparked by something I’d read on a popular writer ’s blog (name or link not mentioned because there’s really no sense in it; it was only one sentence in a completely unrelated blog post) that said, “royalties paid on profit is never a good thing to see in a publishing contract.”

Since KHP pays 50% net royalties (on ebooks – paid the other way on print), I naturally took offense to the statement, told in the context that this is a big red flag for presses that should be avoided. I also failed to see the logic in this.

Since the forum I’d posted it on crashed shortly after, I wanted to do it again, this time with more detail, and I’ll try not to digress much.

For starters, let me explain the difference:

Gross Royalties are a percentage paid to the author based on a percentage of the retail price, often between 5 and 15%. Say you have a mass market deal and it pays 10% gross royalties on a paperback that costs $6.99. For each sale, you get about 70 cents royalty. For a small press, the retail may be something like $14.95, and thus the royalty per sale (again, at 10%) would be about $1.50.

Net Royalties are where you get a percentage of what the press has left per book after subtracting production costs, or the net profits. If you’re still getting 10%, but this time in net royalties, this brings the royalties in the above comparisons down quite a bit, so this would understandably not be the better option. However, this is only in the case of selling through the big stores, and sales for small presses there are very low.

Before I start throwing figures at you, know this: relying solely on Amazon or brick and mortar stores is damn near suicide for small presses. Some presses let their orders from such places go through Ingram or perhaps Amazon’s Creatspace, so they never see the book and don’t incur any production costs until a sale is made. This can help tremendously through mainstream outlets, but for my examples, I’m referring to the small presses who have their books printed for direct distribution (they touch the books between printing and selling).

Amazon, Baker & Taylor (big supplier for Barnes & Noble and Borders), and Ingram (Lightning Source’s distributor), buy books at 50-55% off of retail. Say a book costs around $5 to print (people hear a lot of $3-to-print but that’s if you print off a bulk amount, in which case the press is stuck with tons of stock when they don’t sell). For my below figures, I’ll use the usual 55% buyer’s discount, the $5 production costs, and the retail price of $14.95. For the royalties, I’ll  use 50% for net royalties and 15% for gross royalties (because there is no way a press can do 50% gross royalties, especially when the big stores take 55%)

For presses paying gross royalties: Easy. Authors get $1.50 per book sold. Amazon and others pay the press $6.72 per sale. Subtract the $5 production costs and the press has $1.72. Give the author the $1.50 and the press profits a whopping 22 cents per sale. And there is other overhead like website costs, ISBN blocks, promotion… now you can get an idea of why I mentioned “suicide.”

For presses paying net royalties: After the stores’ discount, you’re left with $6.72 and subtract the production costs to get $1.72. At 50% royalties, both the author and the press get 86 cents. But wait! The author isn’t getting as much as with gross, so they’re getting screwed! Red flag! Red flag! … Compared to the gross royalty example, how much do you suppose the author will continue to make after the press goes bankrupt? This way, the author is getting the same as the press. It’s more of a partnership. And it’s assuring to (most) authors to know that if they see a low royalty check, the press isn’t doing any better. If the check is high, the press is just as thrilled. Again, partnership. In my opinion, that’s how it should be. Authors are not simply money-makers and the press is not simply a company made for writing checks. If you want to make money, you work together for it.

Still, the royalties/profits suck either way, thanks to the big stores’ heavy discounts. And here’s where I explain the “low sales” further. These days, the market is in rough shape regardless of the press size, but when a small press gets a book up on Amazon, it’s amongst a sea of mainstream bestsellers that get all all the front space, and all the vanity crap that’s clogging up the rest of the space. It’s a virtual sea of books, to where someone would have to type the title, specifically, into the “search” box to find it. And people, especially authors, think this is exposure?

Hence, low sales. I’m guessing that a small press who claims to make fantastic sales from Amazon sold more than one that month, perhaps a handful in the previous quarter. Then you have those who take anything to fill their catalog, thinking quantity over quality will bring sales up. Readers only need to buy a few crappy ones before they avoid titles bearing that press’s name.

A few years ago at Skullvines, we sent a really nice promotional package to Barnes & Noble in hopes that they’d give it a shot in their stores. The form rejection said, “Blurbs not good enough.” The front cover sported a blurb from Clive Barker and the back had other big names. Do you think they even looked? No, they said, “Hm, another small press” and chucked it.

The big stores will rarely give small press titles a chance, and if they do, there is little to no profit to be made.

So where is the money when a press does direct distribution? Direct sales. Let me offer you those figures:

The press sells a book at $14.95 and, since there is no big store discount, they simply subtract the $5 production cost and split what’s left with the author. Both the press and the author get approximately $4.98. Big difference!

Let me offer you a scenario that’s very close to how it actually goes down, and I’ll even throw in profits from Kindle ebooks. For this example, I’ll say the ebook sells for $2.99 for which Amazon pays $2.09 per sale. And most presses who pay gross royalties, to my knowledge, rely more on big store sales than direct, but I’ll be generous here. Here we go:

For a slow month on a $14.95 small press title (paying 50% net royalties):

1 Amazon sale gets the author 86 cents
1 Baker & Taylor order (which takes about 8 or 9 months to pay) gets the author 86 cents
5 direct sales get the author $24.90
3 Kindle sales get the author $6.27

Total royalties for this month: $32.89

A press making the same sales, but paying 10% gross royalties:

1 Amazon = $1.50
1 B & T = $1.50
5 direct = $7.50
3 Kindle sales = $0.90

Total royalties = $11.40

See any red flags? Are gross royalties better with small press?

Let’s be more generous and say they pay 15% gross:

1 Amazon = $2.24
1 B & T = 2.24
5 direct = $11.20
3 Kindle = $1.35

Total = $17.03

Still not near as good as $32.89. It doesn’t even touch it.

Now, I’m not slamming presses who pay in gross royalties. It’s pretty common, actually, and practiced by some fantastic presses who are great to work with and treat their authors fairly. Most of these rely more on Amazon sales, etc, and it’s direct sales that make net royalties pay so much higher. If they make less direct sales than otherwise, their way is fine. It all depends on the business model – how they distribute.

This is simply to illustrate that a press who pays net royalties is NOT somehow screwing the authors over, especially if they make more in direct sales than otherwise.

A big issue that hinders progress for small presses, regardless of how they pay, are the incredibly huge discounts stores take for each sale. At the same time, there are enough presses out there who are screwing people over, so customers are paranoid about buying direct. I don’t blame them.

Hopefully I’ve managed to clarify some things for those not in the business, or authors who were told to stay away from “net profit” paying companies. As always, there are good and bad presses, and it can be difficult to tell which are which, but this method of payment is NOT a red flag.

Thanks for listening.

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  • Hugh

    I’m confused. at the end of your piece you said this method of payment is NOT a red flag?  Is it Net profit or gross profit, or is it both?  Maybe I’m thick as a post but, you lost me here.

    • JerrodBalzer

      I was reiterating the beginning of the post, that someone had stated if a press pays a portion of Net, it’s a big red flag when it’s in fact, not.

      Actually, with ebooks being the big sellers these days, it’s the norm to pay a percentage of whatever the distributor (Amazon, Nook, etc) pays the publisher, which would be Net. And there are no overhead fees involved in this to creep into funds, or at least, there shouldn’t be. If a press claims there are, THAT might call for a red flag, but again, not the method of payment.

  • Edwin

    I agree with you on the advantages of a Gross Profits royalty agreement (which you call Net Profit) 

    That said, what authors need to ask is how is the royalty basis term is defined in the royalty contract.

    The publishers I work with call it Gross Profits and define it as net receipts less the cost of goods sold.

    If the term is not definied Net Profits could be interpreted as Net Receipts less (cost of goods + overhead + marketing).

    • JerrodBalzer

      I believe you’re confusing “profit” with “royalty.” I’m discussing net and gross royalties, which are based on either profits or retail price, respectively. In your case, you’re getting net royalties whereas gross royalties pay a fixed percentage of the retail price per sale. I hope that helps to clarify.

  • Michelle

    Good post, but I must point out that accepting net royalties is putting a lot of trust in the publisher and what they are claiming is the production cost. How is an author to know the publisher is not screwing them over by claiming higher production costs than are actually accrued?

    • JerrodBalzer

      A dishonest publisher can just as easily lie about the number of sales, thus screwing you out of gross royalties (and I’ve seen this done to a number of people, unfortunately, and I’m talking big houses – differences of ten thousand books or more). Simply put, if you don’t trust the publisher, don’t contract with them. Research.

      • Mera

        Please can you comment on expected percentages to authors on enhanced eBooks/or Apps – books converted to interactivity? What about the ‘fixed’ costs of production e.g. music/ voice overs/layering images. Is publicity expected also to be recouped before the net receipts deal kicks in? Do you have any insight here? Much appreciated. Best, Mera

        • JerrodBalzer

          There really is no universal rule on things like that, meaning if the publisher allows such things to affect royalties, you’ll need to find out upfront and have it detailed in your contract. While each publisher goes by general guidelines, so to speak, they really are their own entity. Because of this, you help emphasize the point of this post, which is that all publishers who do a particular practice cannot be painted with one broad brush. They all work differently, using certain methods for good or bad. Unfortunately, it can be up to authors to determine which.

          My personal opinion on your examples would be that these are all costs that go into the creation of the ebook, and are thus part of the publisher’s initial investment, not an ongoing cost. With that in mind, the royalties shouldn’t be affected once it’s released. They just have more to recoup for themselves.

          Also, at least at KHP where I’m at, we don’t take publicity/promotional costs out of author royalties. It’s considered part of company overhead. The only thing considered with royalties is the ebooks (we stopped doing print a while back since they were no longer covering their own overhead). Since ebooks have no overhead once they’re released, what we receive from Kindle, Kobo, Nook, Apple, etc, after their cut is shared with the authors, period.

          Any other expenses come out of what we’ve made from it, and we hope the author is doing their own thing (on the social networks, etc) to help promote. It’s a team effort, after all.

          But that’s how WE do it. Other houses are very much different even though they might also pay net royalties.

          I hope that helps!

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  • Small Press

    We do the same – royalties based on net. Basically whatever we get back gets split between us; this is fair to all, common sense and it would drive many small presses without a lot of money behind them to ruin if it were done differently. It’s not good business sense to drive oneself into the red just to meet arbitrary (and often archaic) industry ‘norms’. I’d even go so far as to say the industry is still so elitist that even in the 21st century certain quarters don’t want to see the ordinary person on the street (read someone without a triple barrelled surname who didn’t go to private school…) set up a publishing company. How dare they fancy themselves as genuine literary, theatrical or artistic players on the arts scene! Our company ethos is similar to your own – we’re like a creative co-operative, supporting each other, but retaining a commercial MO! We’re up against an industry that is all to frequently up its own posterior when it comes to small presses and the modern, innovative practices we adopt to stay alive and impact the literary world beyond ghost-written celebrity and the same old names, and it gets overwhelming at times; especially when authors pay heed to this side of the industry and start to wonder if we’re the Devil!

    • JerrodBalzer

      A lot of the old corporate players of the industry are stuck in prehistoric methods, refusing to accept that everything has changed drastically in such a short time period. Because of this, they’re going the way of the dinosaurs, as we’ve been seeing with big publishers and booksellers. A lot of their problems adapting is because it means restructuring their entire way of doing things, and instead, they try to force everything else to keep from changing. A great example is how they overprice ebooks so people would realize the future is bad and stick with print. Handheld electronics is just a fad, right? lol.

      Well, this pay method is yet another thing they weren’t structured for, even though it’s the most fair for both parties and common sense. They’re used to taking the majority of the profits and sending a pathetic amount to the author, regardless of the overhead involved. So how do the dinosaurs react to better methods? They say how evil it is and hope people will simply nod and follow along, so they can hopefully return to staying rich on starving artists.

      This is why I love the digital revolution so. It leveled the playing field and put the reading choices back in the customers’ hands. And authors have a better chance of seeing money for their work.