profit and loss planning how traditional publishers use educated guesswork to evaluate books

Authors have more options than ever when it comes to publishing a book. We can choose to self-publish, work with a contract publisher or packager, outsource most of the work, DIY everything, or pursue a traditional publishing arrangement. And we can mix and match among these for every book we create, choosing what works best for each unique project.

But in order to make the right choices, you have to understand the benefits and drawbacks of each option. There are lots of reasons to choose self-publishing, and lots of reasons to pursue traditional publishing deals. It’s all about making the right choice for the right project at the right time.

Traditional publishers, too, have to make choices: with limited resources for editorial, production, and marketing, they have to pick books that they think will succeed.

This involves a lot of planning and financial mapping—but it also involves a lot of guesswork. And that’s one reason why navigating traditional publishing can be so frustrating, especially for new authors—it’s hard to understand why a book that has a great concept, snappy writing, and a perfectly positioned author platform might not get picked up, while book #27 about sparkly vampires gets a wad of money thrown at it.

Let’s go behind the scenes and follow a hypothetical fiction book on its way to publication as a traditional press evaluates it and plans for its release.

The Setup

To help shed some light on how a traditional publisher chooses a book, let’s create a scenario.

A new author, Alex Wei, has written a timely, well-crafted novel that’s poised to hit some big themes emerging in the fiction market. Unicorn Blues is an action-packed dystopian YA adventure featuring, you guessed it, unicorns. Also possibly baseball, to appeal to the young male demographic.

Alex doesn’t have a huge platform, but does have a solid email list and some good marketing, as well as one or two well-received short stories that have been published by good literary journals.

Alex has an agent, who sends Unicorn Blues off to a bunch of traditional publishers who are currently looking for new YA properties.

And now the fun begins…

Pitch

Every book starts with a pitch. Whether you’re doing it yourself or you have an agent in your corner, the book needs a short, sweet synopsis and catchy hook to grab an editor’s attention.

Now, submissions sent by agents are typically at an advantage—unsolicited submissions tend to get read by overworked, under- or unpaid interns or very low-level staffers who get beaten down really quickly. Agented submissions may make it to the desk of someone who has actual input into the acquisitions process, rather than having to go through six layers before reaching that point.

But even agented submissions can get bogged down in the sheer volume of submissions coming it. So when prepping a submission, it’s really important to have an unforgettable tagline and elevator pitch that the editor won’t be able to shake.

Alex’s agent crafted just such a pitch for Unicorn Blues and the editor who picked it up is hooked. She wants to know more, reads the first 50 pages, and desperately wants the book for her roster of fall releases next year (it takes that long to get a book through production).

Go Alex! Time for a contract and a party, right?

Wrong. That acquiring editor doesn’t actually get to give the go-ahead to Unicorn Blues all on her own, no matter how much she loves the book. There’s a lot to do and a lot of people to convince before that.

P&L

First, the editor (let’s call her Jan) has to create what’s called a P&L.

Short for “profit and loss” or “profitability and liability,” the P&L is a massive, detailed spreadsheet of what Jan estimates it will cost to acquire, edit, design, and produce Unicorn Blues, compared to what she thinks the book will earn in its first one to two years on the market.

In publishing, if a book doesn’t “earn out” what it cost to produce within six months to a year, it’s not considered a good investment, so it’s important that Jan’s able to show that the book will be profitable in a hurry.

Every publisher’s P&L looks a little different, but all include certain important categories.

Costs

A P&L’s most important categories involve cost analysis. Costs to produce a typical fiction book like Unicorn Blues include:

  • Author advance
  • Royalties to the author
  • Copyediting
  • Proofreading
  • Cover design
  • Typesetting
  • Manufacturing (sometimes called Paper, Print, and Binding or PP&B)
  • Warehousing and fulfillment (sometimes called Freight)
  • Marketing
  • Overhead

Often, these are broken down into very detailed sub-categories, where “Marketing” might include advertising expenses, promotional materials, bookstore cooperative programs (coop), and more.

For her first round of work on Unicorn Blues, though, Jan is most likely to just include the top-level expenses she estimates for the book.

Revenue

Next comes revenue—what Jan estimates Unicorn Blues will make. This is typically broken down by the volume expected to sell in different channels, such as:

  • Direct to consumer
  • Bookstore trade sales
  • Specialty stores
  • Book club sales
  • Mass market sales

Jan will go through and estimate how many books she thinks will be sold in each area, separately for print and digital, applying the estimated revenue per book sold in each.

That part is important—the list price of the book, say $14.99, is not actually what the publishing company will make from selling that book to a particular type of account.

Most bookstores, for instance, get about a 40-55% discount off the list price. So while you the consumer might pay $14.99, the publisher only receives $6.75.

Now, there’s a whole lot more to a P&L than just this—gross sales, net sales, returns, in-store promotional fees, discounts, vendor fees, distribution charges, and more. But for a brief overview of the black magic that is the P&L, it’ll do.

Wait…black magic, you say? Yep. Hold on to your hats, this adventure in traditional publishing is about to get bumpy.

P&L is fuzzy math

Fuzzy Math

You’d think that with a massive spreadsheet like the P&L, Jan would have a really great idea of how much Unicorn Blues will bring in.

You’d be wrong.

Y’see, for all the detail and thought that goes into creating a P&L, it’s really one giant exercise in fuzzy math.

That’s because it’s impossible to figure out how much a book will make. No matter how many great reviews it gets or how much money the publisher sinks into advertising it, there’s just no telling whether the book-buying public will pounce on it.

Sure, you might be able to estimate a little better if you’re dealing with a new Stephen King novel, or even if you’re trying to calculate the sales for a new book by an author who’s already published one or more novels successfully. But with a book by a new author like Alex Wei?

Total guesswork.

That’s why the time and effort spent creating P&Ls that are used to judge the commercial viability of a traditionally published book is, honestly, kind of a waste. You just can’t tell how a book will perform in the market until it’s actually in the market.

In particular, editors often fudge the revenue numbers for a book they’re really interested in. You can come up with pretty reliable figures for how much a book will cost, but since estimating the first year’s sales is just educated guessing, editors frequently play with these numbers to ensure that the book looks profitable.

Say Jan came up with a total production cost of $5,850 for Unicorn Blues. She estimates that the book will sell around 3,200 copies in print through bookstores and about 6,500 digital copies, because people really like YA ebooks.

On her P&L for the book, Jan will estimate the print manufacturing costs per paperback and calculate out the discount for bookstore sales, yielding a total bookstore revenue of $16,800 and a total ebook revenue of around $32,000 (all before author royalties are subtracted).

This doesn’t look too bad! But if Jan really wants to make sure the book gets acquired, she can massage those numbers and, say, estimate that Unicorn Blues will actually sell 6,800 print copies and 12,500 digital copies, yielding a total revenue (before royalties) of $35,700 print and $62,000 digital.

Now it really seems like a no-brainer to acquire, given those up-front costs of $5,850, right?

Plus, Jan can play around with the advance amount she might offer Alex for the book. The novel will be a lot easier to nudge to profitability if Alex only gets a $5,000 advance instead of a $25,000 advance, after all.

So you can see how, instead of being a true budget spreadsheet, a P&L is really a numbers game, where an enthusiastic acquiring editor can make a nudge here and a tweak there to help a book appear like a surefire financial winner.

Pub Meeting

Once Jan has the P&L together, she gets ready to pitch Unicorn Blues at a pub meeting. No, that’s not a nice four-beer lunch—it’s a “publishing” or “publishing board” meeting, sometimes called an editorial meeting, acquisitions meeting, or just staff meeting.

At this meeting, Jan and the other acquiring editors come together to discuss the books they’re most excited about and want to add to the company’s upcoming releases.

But editors aren’t the only ones there, and they’re not even necessarily the most important people in the decision-making process. The marketing and PR department and sometimes even various representatives of the financial department attend, too, to give their input on what books the team should be concentrating on.

These days, in fact, marketing and PR can slam the brakes on a project that the editorial team is really excited about if they think it won’t be easy to sell to the book-buying public, practically jumping off the shelves into people’s carts.

So Jan’s job in this meeting is really mostly about pitching Unicorn Blues as a sure-fire money-maker with insane marketing potential.

She shows off her P&L, tweaked and massaged to indicate that there’s no way the book will lose money. She also recycles that same catchy pitch that caught her eye in the first place, enthusiastically gushing over the book and assuring everyone in the room that she’ll be able to get big-name authors to blurb the book, making up for the fact that it was written by an unknown.

She also comes up with some examples of comparable books on the market and reasons why marketing the book will be a cinch—maybe they can tie it in with a new Starbucks craze or something on Instagram with rainbow toast.

Basically, as hard as Alex worked to win over an agent and create a dynamic, engaging pitch for the novel, that’s how hard Jan is working now to win over a room of editors with their own projects to promote, along with a crowd of sales and marketing people who need every book to be a smash hit.

Once again, educated guessing is the name of the game: about what trends will be raging six months to a year when the book comes out, about how many copies the book will sell, about how many bookstore buyers will be interested, and about how fast the book will sell in comparison to new titles on the market. It’s a huge list of “what ifs.”

But Jan worked the P&L beautifully and the idea of a shapeshifting unicorn baseball team wins over everyone in the room—it seems like a great, fresh concept and Alex’s writing is really strong.

Unicorn Blues gets the thumbs-up!

Publishing Deal

Only after all this happens does Alex finally, finally get an offer of a publishing deal.

After the meeting, Jan sat down, ran the numbers on the P&L one more time, and figured out an advance that Alex might agree to, in combination with the publishing company’s standard royalty rate, that would still leave some wiggle room and profitability for the company.

That’s because most editors are fully aware that their P&L projected sales are full of hot air. They also know that they need to ensure that they pay off the advance and production costs of the book in order to get the opportunity to acquire anything else in the future. So when calculating a potential advance, they’ll often shrink those P&L numbers back down to something a little more in line with likely reality, then base the advance off that.

Splitting Revenues

When you look at the bottom line, subtracting out advances, royalties, production costs, and the like, publishers really don’t make very much money on each book sold.

So when Alex sees a paperback royalty of 8% of list and an ebook royalty of 25% of list, it seems almost insulting—a measly $1.20 per paperback sold?!

But when Jan looks at the numbers, her company is only getting $6.75 for each $14.99 paperback sold. And from that $6.75, they’re paying about $1.50 in manufacturing costs, plus the expenses of warehousing, shipping, distribution, etc. And let’s not forget about the overhead of staff salaries, rent, utilities, and so on!

In truth, the publisher is probably receiving around $3.25 or less per book sold. Subtract from that the author’s royalty of $1.20. The publisher only makes $2.05 on the sale.

So 8%, when you break it down like that, is more fair than it might seem, given the amount of work, marketing support, production effort, and specialist expertise that goes into producing a traditionally published novel.

The Results

In the end, Alex can probably expect a higher volume of sales with the support of Jan’s team at the traditional publisher than if he were to release Unicorn Blues on his own. That’s because they have a lot more market intel, industry connections, advertising dollars, and specialist expertise than Alex does. While many self-published books only sell a few hundred copies, even relatively unknown authors can expect a few thousand sales through a traditional publisher.

Sure, Alex could hire a PR team and others to help him promote his book, but that would be an up-front expense for him. He’d also need to manage his team directly instead of spending his time writing the next book in his Unicorn Baseball series.

So in the end, Alex decides to go with Jan’s offer and signs a contract for Unicorn Blues to come out via traditional publishing.

Jan breathes a sigh of relief, starts the editorial and production process moving, and rolls up her sleeves to start doing the educated guesswork of predicting how much the next book to cross her desk might make.

Traditional publishers use educated guesswork to evaluate books, estimating the first year’s sales to figure out whether to take a risk on a new title.

For more on how traditional publishing works, read on:

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