in Publishing
Royalties and net receipts, in general terms
A royalty sounds like a simple percentage. What it is a percentage of makes all the difference, and the terms are worth understanding before signing.
When an author is paid a royalty, they receive a share of the income from each copy sold. The principle is simple. The detail lies in what the share is calculated on, and that can make a considerable difference to what the author actually receives.
This is a general explanation of how royalties are typically structured. Every contract differs, and anyone reviewing a publishing contract should take specific advice from an agent, a solicitor with publishing experience or an authors' organisation.
Two common bases
Royalties are usually calculated on one of two bases.
The first is the recommended retail price, sometimes called the list price or cover price. The royalty is a percentage of the price printed on the book or set as its retail price, regardless of what the retailer actually pays the publisher.
The second is net receipts, which is the amount the publisher actually receives from the sale. This is usually the retail price minus the discount given to the retailer or wholesaler. Because trade discounts can be substantial, net receipts are often much lower than the retail price.
A given percentage calculated on net receipts will therefore generally produce less income per copy than the same percentage calculated on the retail price. When comparing contracts, the percentage alone tells you little. The basis matters as much.
Different formats, different rates
Contracts commonly specify different royalty rates for different formats and sales channels: hardback, paperback, ebook, audiobook and so on. They may also specify different rates for home sales and export sales, and for sales at particularly high discounts.
Many contracts include provisions for reduced royalties when books are sold at unusually high discounts, often called deep-discount clauses. Understanding the threshold at which these apply, and how often they are likely to be triggered, is important.
Some contracts include escalators, under which the royalty rate increases once sales pass certain levels.
Advances
An advance is a payment made to the author before publication, against future royalties. It is recouped from the royalties the book earns. Until the royalties have exceeded the advance, the author receives no further royalty payments. When a book has earned more in royalties than the advance, it is said to have earned out.
An advance is usually not repayable if the book does not earn out, though contracts may provide for repayment in certain circumstances, such as if the author fails to deliver the manuscript. The specific terms are in the contract.
Statements and reserves
Publishers account to authors with royalty statements, typically on a regular schedule set out in the contract. The statement shows sales by format and channel, the royalty earned, any deductions and the balance owed.
Many contracts allow the publisher to hold back a reserve against returns. Because bookshops can often return unsold stock, some copies recorded as sold may later come back. A reserve holds part of the royalties until returns are known. Contracts may limit the size of the reserve and the length of time it can be held.
When reading a royalty clause, check the basis of calculation for each format, the rates, any deep-discount provisions, the treatment of subsidiary rights income, the frequency of statements, and the provisions for reserves and audits.
Royalties are where the book's commercial life meets the author's income. Understanding the terms in advance is far easier than discovering them from a statement.