Monday, January 20, 2014

Profit and Loss Statements for Independent Publishers


by Gamal Hennessy

When I hear self-published authors talk about the success of their book in the marketplace, the discussion often begins and ends with the number of copies they’ve sold. A few of them might boil things down to an actual dollar amount a book makes each month, but these board measurements don't capture the whole story.

A book that makes $1,000 but costs $3,000 to launch isn't as financially successful as a book that makes $1,000 but cost $700 to launch. At the same time, a book sold through one outlet will bring in less money than the same book at the same price sold on a different website. To help independents get a better handle on the financial performance of their catalog, I suggest using a simple profit and loss statement or P&L.

A Little Background
My experience with P&Ls comes from the time I spent in the media industry. Every time we released a graphic novel, DVD or other product, the business affairs department had to generate a P&L to predict and measure that product’s potential success.

A lot of companies use P&L's to plan and evaluate their business. The banks that I deal with now have P&Ls that would make your eyes bleed. I've kept my version simple because independent publishing has a fairly straightforward business model and because I'm not that smart.

Determining Losses
The first element to a profit and loss statement is calculating your loss. In publishing, this is the amount of money you have to pay to get your words out into the world. It is often referred to as the cost of goods sold. I've found that there are several costs that make up this number when releasing a book:
  • Editing
  • Cover Design
  • Formatting
  • Marketing
  • Registration (ISBN, copyright, etc.)
  • Advertising (if any)

You might have other costs associated with the marketing or production of your books, but this list covers the basics. (See Just How Much Does It Costs to Publish a Book Anyway?). In this case, your total cost is the sum of everything you have to pay to produce one book. That's the bad news.  

The good news is that digital distribution has reduced the subsequent costs to almost zero. You pay one price for the first book, but don't have to pay anything extra books whether it’s two more or two million more. That means the price you paid for that first book decreases with every additional book sold. You might have additional initial costs when you launch a new product (bundle, audiobook, graphic novel, etc) but then you also have an additional revenue stream.

All Profit Is Not Created Equal
Independents face a choice when it comes to distribution of their work. They can go with a low to generate volume sales or a high price to give each individual sale a higher impact. They can test the benefits of exclusivity with one distributor (Amazon's KDP program), or they can give up those benefits to post their books on several smaller online stores for higher incremental revenue.

There are vocal supporters on all sides of this debate. You'll have to make your own choices for each book you release. The one thing that should not change is keeping track of how many books you sell and how much you make for each book.

Profit in independent publishing is based on the royalty you collect for each book sold. For example, if your novel is $2.99 on Amazon, you collect 70% of the sales price or about $2.10. If that is the only place where your book is available, then it's fairly easy to determine how profitable your book is overall when you look at it relative to its loss.

Breaking Even
In the simplest economic terms, a book succeeds to the extent that the profits exceed the losses. The threshold between success and failure is the break even number. If your book sells at a level less than break even, you lost money on that book. If the book sells more than break even, it is technically profitable.  You might not be able to quit your job to write, but you're making more than you're spending. Congratulations, a lot of people never get to that point.

Using our example above, let's say your $2.99 book costs you $1,000 to release. If you make $2.10 per book, then you'd have to sell about 477 to break even.

In terms of a profit and loss sheet, it is helpful to determine the break even number and how much you make from each website at each price point. This will not only show you which websites are better for your book, but which prices make you the most money. Does it make sense to sell 50 books at a $2.10 royalty or 500 books at a $.35 royalty? Should you sell on one site and sell 200 copies or spread out to five sites and sell 40 copies each? If you compare the numbers in your P&L the answers should come to you.

Beware the Miser
A P&L has a larger benefit besides just telling you if you broke even or made money. It can help you manage the business side of publishing. It seems to me that there are only two ways to increase the profitability of a book; increase sales or decrease costs. Increased sales are the long term play. Because out books don't go "out of print" we can continue to count on long term sales if we continue to publish new material. Each new book stimulates interest in the overall catalog, making your new book the best advertising for your old book.

Decreasing costs is the short term play. If an author can make $500 in sales on a $250 production cost, he'll always be profitable. But it’s short sighted to reduce the quality of the product in an attempt to reduce the losses to zero. A low quality book will chase readers away to the point where both your costs and your profits are zero. (See Are Self-Published Books Inherently Inferior?). The smarter choice is to produce quality products within a budget you can handle.  They'll serve you better in the long run and you'll be proud of them.

Follow the Muse
It is also a mistake to use the P&L as an indicator or what to write. Let's say you're trying to choose between writing a YA werewolf story, a historical romance, and a sci-fi epic. According to your P&L, your last historical romance was profitable.  Your YA book fell flat and you don't have any previous sci-fi to make a comparison.

Which book should you write?

You write the book you are inspired to write most. The P&L is a helpful business tool, but it isn't a creative tool. Your artistic muse is in control when you sit down and write, not an Excel spreadsheet. You might get creative with costs and pricing when the book is done, but save most of your creativity for the book. Don't let the numbers get in the way.

Have fun.
G


6 comments:

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  4. Well, there are certain cases in which profit or loss should not be declared. It depends in the long run of the company which will decide whether that money investment was a success or failure. Thank you Gamal for writing this useful information.

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    PROFIT AND LOSS

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