Think Like A Publisher: #3….Projected Income

The first chapter in this new series was “The Early Decisions” which included picking a business name, setting up checking accounts, and so on. The second chapter was “Expected Costs.” To actually get a profit-and-loss calculation for a book project, you must now make some pricing decisions and projections of income.

Yeah, I know. I know. This is all so new, how can anyone predict how much money they will make on any project? Well, you can’t. Not really. But you can try. And you want to know a dirty little secret. New York traditional publishing can’t predict how much they will make on any book either.

But they try.

And that’s the key. To really act like a publisher, you need to understand what you are trying to gain. You need to know how many sales will get your expenses back. And you need to know at how many sales will you start making a profit.

So this chapter is about why you need to try to determine set income ranges, and how to do that at this moment in 2011.

This is the last of the basic three set-up chapters. After this one, we start getting into more detail on specific areas.

Caution!!

Here we go again, back into pricing. Remember, this discussion is about acting like a real publisher, not a hobby writer. Real publishers are in the business to make a profit. That’s the focus now, so please keep that in mind. If that is not your intent, fine.

Pricing

To determine any kind of income and sales potential, you must first make some pricing decisions. And you must decide as a publisher what your long-range goals are.

Those of us involved with the starting of WMG Publishing sat down and talked about long-range goals. We all wanted WMG Publishing to become, down the road, a decent mid-sized publisher of fiction of all types from many, many authors. You might decide that your publisher is just to publish your work. That’s normal for indie publishing and nothing wrong with that at all. Or maybe your business mission statement isn’t to make any money, but to have a lot of people read your work. Fine as well, if you are clear for yourself on that.

The choice of mission statement will also determine your standard pricing. And your pricing will determine also how you sell books, both electronically and in paper editions.

(Ignore for the moment promotion discounts. I will cover that in a later chapter.)

The values we set for WMG Publishing and the values I will be using for this discussion on setting income are as follows:

Electronic Publication

Short story: 99 cents.

(Gross Income Expected: 35 to 60 cents per sale domestic. Use 35 cents for calculations.)

Short Novels, Short Collections: $2.99.

(Gross Income Expected: $1.94 to $2.o9 per sale domestic. Use $2.00 for calculations.)

Regular Novels (over 35,000 words), Long collections: $4.99

(Gross Income Expected: $3.24 to $3.49 per sale domestic. Use $3.25 for calculations.)

In the above calculations, Gross Income is after the fees and costs taken out by the bookstores and providers of electronic sales.

POD Publication.

Short Collections, Short Novels: $7.99 trade paperback.

Novels, Long Collections: $15.99 trade paperback. (Might vary upward with extra long books.)

Gross Profits on both are in the range of $3.00 to $4.00 per sale. Use $3.25 for calculations.

Why Pick These Prices?

These electronic prices are under traditional publishing ranges, yet not too far under to seem to be a discounted price. And the novel price is under the $5.00 impulse buy mark. Trade paperback prices are normal traditional publication prices for trade paperbacks in the size range indicated.

For the trade paperbacks, the price range also allows WMG to do catalogs and 40-45% discounts to bookstores as well. (More on that in later chapters in Think like a Publisher.)

As I mentioned in the first post, there are three types of publishers. Discount publishers, high-end publishers, and middle ground publishers. We wanted WMG Publishing to be in the middle ground with the mass of most traditional publishers. To do that, the prices had to be in that range as well.

Also the price range we picked allows for promotional pricing at times when needed.

Again, all pricing decisions are based on the early mission statement and the hope for the future for WMG Publishing. With your own press, think about what kind of publisher you want to be, then figure your prices to fit in the range of that decision.

Also, keep some basic math in mind. If your motives are profit, you must sell ten books at 99 cents to make the same amount that you would make when you sell one book at $4.99. And since no traditional publishers do 99 cent novel pricing except rarely as a short-term promotion, a 99 cent price for a novel will label you as a discount or hobby publisher. WMG Publishing motives are very profit based.

Calculating A Project’s Projected Income

Now comes the fun part. Hang onto your math brains. And let me stress again that not even traditional publishers know this number for a fact. If they did, publishing would be a very simple business without risk.

In traditional publishing, publishers have some tools to use in this area. For example, they can look at a book and then (like shopping in real estate) they compare to other books of the same length in the same genre with the same basic author recognition. So if a similar book sold 20,000 copies, then it is pretty safe to use that sales number in the current books calculation.

They also use an author’s track record. If the author’s last book sold 50,000 copies, then it is pretty safe to do a profit-and-loss calculation with that as the sales range. (And that projection then sets the author’s advance.)

But as an indie publisher, with no real track record yet, (and a world that is expanding into electronic publishing faster than most people can keep up with) how is it possible to make any real projections of sales?

Bottom line: It’s not.

Traditional publishers have functioned under the idea that a book is only active and available new to readers for a short time. Just like fruit in a grocery story. But unlike the produce model of traditional publishing of paper books, where books spoil and get pulled from limited shelving, electronic publishing doesn’t have that issue.

Our books don’t spoil. And we have unlimited shelf space to display our books until readers find them. And in this area, that makes all the difference. And we don’t print paper books ahead of time, but only to order, so we are not trapped into warehousing and shipping costs.

Traditional publishers had to hit their projections within a certain selling time frame before the book was pulled and another book took its place on the shelf. Indie publishers have no real time restriction at all. So instead of trying to guess at a total sales in a set time to determine the amount of money that can be spent on a project so that the project makes a 4% profit, indie publishers can calculate a different number entirely.

The Break Even Number. (Or… At what number of sales does a book starts earning a profit?)

Actually, traditional publishers have that “break even” number sort of in their calculations as well, but pay little attention to it.

Indie Profit-And-Loss-Calculation

For traditional publishers in the produce model, this profit-and-loss calculation is done on computers and has many varied factors. And actually, you also can set up this sort of program on a computer to plug in all your factors on every book as well if you have that bent. Art costs, layout costs, overhead in your office, time it took to write the book, and so on.

I don’t care to do that much work, to be honest. But I do want to know at how many copies sold will the book or story start earning a profit for WMG Publishing.

And I want to know that number BEFORE I start into a project.

If the projected expenses are such that a book would need to sell 100,000 copies to start earning a penny, I’m going to back away from that project quickly. Too many things could go wrong and I sure don’t want to be like traditional publishing where a book that sold 50,000 copies could be considered a failure. (It happens more than you can ever imagine.)

So an “Indie Profit-And-Loss Calculation” would run simply like this:

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All Actual Costs plus Time Costs plus Overhead Costs divided by Gross Income Per Book equals NUMBER OF SOLD BOOKS NEEDED TO BREAK EVEN.

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The best way to show this is to just run through a calculation. Math brains ready? Here we go…

Example:

Novel

Total Cost Publishing Costs: $350.00. (Four hours of time at $50.00 per hour plus $100.00 cover cost plus $50.00 overhead for those four hours. Time includes electronic and POD layout time and launch time. For the moment exclude my writing time on the novel. We’ll bring that in later. And remember, the $50.00-per-hour is my calculation from an earlier chapter. Do your own.)

I get $3.25 gross profit for both POD and electronic sales. So I divide $350.00 by $3.25 to get the number of copies that need to sell to break even on all production costs.

Bottom line: I need to sell 108 copies to make $50.00 an hour for my production time, $50.00 for overhead, and replay my cover costs. (If you are only concerned about first repaying the $100 out-of-pocket cover cost, you would need to sell 31 copies to recover that using these numbers and pricing.)

Now add in my time for writing and the overhead for that time.

Again, I use $50.00 per hour, and it takes me under 60 hours to write a 60,000 word novel. So I feel I should get at minimum $3,000.00 for my writing time on that book and my overhead costs for my office. (Side Note: It has been a long time since I took only a $3,000 advance on a novel and sure wouldn’t do it in traditional publishing now.)

Total Expense $3,350.00 divided by $3.25 gross income per sale equals 1,030 copies that need to be sold at $4.99 cover price.

Of course, that low of a number would be considered out-of-print for most of my books in traditional publishing.

But I would like to know how long it will take me to get that money as an indie publisher, and then keep making more. That’s the next calculation.

Calculating Basic Average Sales Rate

My attitude about sales is that even though there are more outlets than I can count worldwide, (not counting bookstore sales of the POD) I want to do this calculation on the bottom of any sales I can imagine. My bottom calculation is 25 books sold total per month across all sites around the world.

Now, at the beginning of an indie publishing career, that might sound slightly high, especially if you are only watching Kindle US numbers. But remember, before you even begin to see the sales for, say, January from Australia through iPad, it’s going to be seven or eight months later. And that is not counting that it might take three or four months for the book to even reach those Australian shelves through all the systems.

So give things time to grow and don’t panic and get in a hurry. You are growing a business. (Again, a topic for a coming chapter.)

25 books per month sales divided into 1,030 copies is about 42 months. 3.5 years.

At that point I will have earned my time back at $50.00 per hours for both writing and launching the novel. And I would have paid my overhead for that time. And the fixed cost of the cover.

Of course, I might sell that many copies in the first year or the first six months. Or it might take me five years. Again, if this business was certain, there would be no risk.

But now the question, the biggest question for indie publishers is:

What happens next with the novel?

In traditional publishing, after 3.5 years you would have been paid your advance, the novel would have been published and vanished except maybe trickling along at 25% of net income for you from a few electronic sites. And years and years would go by before you could even think of getting your rights back. Even if you signed a great contract.

But for me, with my indie-published book, my novel is still just out there in thousands of stores worldwide, in a growing market, still selling. It has been there as inventory while I write and publish more and more and more books and stories to join it on my unlimited shelves.

The book just keeps on earning me money. Even bouncing along the bottom at 25 sales worldwide every month, I will have a passive income of $81.25 per month. For doing nothing.

Let me say that again. For doing nothing.

I have been paid for my time, my expenses, and the book just keeps on earning.

And in this new world, there is no telling how long that passive income could flow. No way of knowing. None.

Summary

Chapter One was about setting up your business as a real business.

Chapter Two was about figuring real costs, including your time and overhead.

Now figure out what kind of publisher you want to be, what is important to you, and what your selling prices will be. Then do a simple “indie profit-and-loss calculation” to determine how many books you need to sell at your sales price to recover your expenses to get a book to that wonderful place of just giving you passive income month after month after month for years into the future.

And the key to that is simply:

Think like a publisher.

Have I said lately how much I love this wonderful golden age for writers?

Coming in future chapters are how to push paper books to bookstores, how to really use price discounting as a tool to sell all your books, business planning, book averaging in a publishing company, and so much more.

Stay tuned.

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And speaking about maximizing income, this is part of the income streams for me. And, to be honest, it keeps me going on these chapters. And anyone who donates a little to the Magic Bakery tip jar, I will send a free electronic book of all these chapters combined when I am finished.

And speaking of the Magic Bakery, this chapter is now part of my inventory in my bakery. (Confused on that, read the Killing the Sacred Cows of Publishing post about making money with writing.) I’m giving you this small slice as a sample. I’m giving you a taste, but not selling any of the pie.

If you feel this helped you in any way, toss a tip into the tip jar on the way out of the Magic Bakery.

If you can’t afford to donate, please feel free to pass this chapter along to others who might get some help from it.

And I would like to thank all the fine folks who have donated over this last year. The donations and the comments both after the posts and privately are really keeping me going on this. Thanks!

Thanks, Dean