Why 3rd Party Royalty Rates Matter

Now cross posted to our writer-focused blog.

Welcome to a special Bree Loves Numbers Post!

I state up front that I offer this post for authors only.  I’m writing about money, and royalties, and how the oddities of some epublishing contracts can make massive differences in how much an author gets paid for a sale. What is best for a consumer is often at odds for what is best for an author’s bottom line, so I want it disclaimed up front that I am a huge advocate of all readers finding the most affordable way to purchase books without having to fear recrimination from authors.  This is not, in any way, meant to encourage readers to alter their purchasing habits.

It is, however, the cautionary tale of how deceptive numbers can be for authors in this business.  And even though I fancy myself not so stupid about numbers in general and tricky numbers in particular, I learned some of this the hard way.  So learn from my mistakes!

A Real Life Example

In a simple world, math is easy.  Here’s an example: which of the following numbers would you rather see under “copies sold” on a royalty statement?

• 371
• 488
• 723

You already know it’s a trick question or I wouldn’t be asking.  It wouldn’t warrant a blog post if 723 was the winning number, followed by 488 and then 371.  But would it surprise you to know that the difference in royalties due between 371 copies and 723 copies was exactly $44?  And that 488 is actually the best number of all?

Let’s give the numbers some context:

• All Romance eBooks: 371 copies sold: $387.14
• Direct Sales: 488 copies sold: $596.09
• Fictionwise: 723 copies sold: $430.14

I did not make these numbers up, though I plan to make up plenty of numbers shortly.  These numbers are the real totals of one of our stories over a set period.  I will state up front that the royalty rate for the fictionwise sales is not a particularly bad one.  In fact, it’s one of the better ones I’ve seen.  That should tell you up front just how much it hurts when your 3rd party rate isn’t so friendly, and the majority of your sales take place at 3rd party distributors like fictionwise, who hold constant sales and let the authors foot the bill.

The Basic Breakdown

If there’s one thing I’ve learned in the past 2 years, it’s that 3rd party rates vary.  I’ve seen everything from 30% net to 30% cover and, let me tell you, the difference between those two can be massive. This issue is complicated intensely by the fact that it’s almost impossible to generalize anything across  epublishers.  Variables that affect your bottom line include:

1. Royalty rate (the most obvious)
2. What percentage of sales are direct vs what percentage are 3rd party
3. Which sites your books will be sold on
4. What sort of deal your epublisher has with each site

#1 is the easiest to find–it will be right there in your contract.  Contracts can be tricky, and there is always much online discussion about the difference between gross and net, and what the words are popularly understood to mean.

No amount of online talk can replace the advice of a lawyer or experienced professional (and having one look at your contract is good sense) but my experience thus far in epublishing is that most epublishers offer a percentage of the cover price for books sold directly from the publisher website, and a percentage of the money received from 3rd party distributors.  However, I do have one epublisher who pays on the cover price for 3rd party sales, and that can be very nice indeed.

However, that brings me to #2: how many of those sales are going to be direct?  Having an 80% royalty rate on direct sales won’t do much good if you get 5% of the net on 3rd party sales and 95% of your sales go through 3rd party venues.

This is the detail that even makes knowing the total number of copies someone sold of questionable value.  Sure, you sold 500 copies of Book X, but did you get paid 35% of the cover price, or 35% of the ~40-60% fictionwise gave your publisher, which was already based on the 60-80% left after they discounted it for a sale?  (Did that make your head hurt?  Don’t worry, it made mine hurt too.  I’ll explain more later.)

#3 comes in to play here as well.  Yes, those discounts sure hurt, but if you’re only going to sell 25 copies of your book directly from the publisher’s site, you have to ask yourself at what point a discounted sale is better than no sale at all.  Is your book going to be available at the popular and highly visible spots?  Amazon?  Fictionwise?  ARe & Omnilit?  How about Books on Board or the Sony Store?

You may never know #4, though you can assume that, unless you are publishing with one of the biggest epubs, the chance that the deal in any way favors the author & publisher is minuscule.  Distributors take huge chunks of the money (30-60% is a popular range) and that’s not including any discounts they apply at the site.

I like numbers. I keep track of all of our sales in a database, with the source, payment & copies sold recorded for every pay period and every book.  I know how much money we make at each publisher, and what percentage comes from 3rd party sales vs direct.  Epublishing is generally not a business where you’ve got someone in your corner looking out for you, so knowing these things can mean the difference between frustration and profit.

Let Me Do That Math For You

I find this is all easier when I see the breakdown of numbers in terms of dollars, so below I’m going to create a few basic scenarios based on various 3rd party royalty percentages.  For each scenario I’ll also break it down further into five sub-scenarios: if the sales were 100%, 75%, 50%, 25% or 0% direct.

Because this is meaningless without context, I will provide this with the disclaimer that it is my personal anecdotal data alone, and that most of our books have only been on fictionwise long enough for us to get 1 or 2 statements reporting data.  The more we sell there, the lower our percentage of direct sales will trend.  At the moment though, the four publishers where we’ve published more than one book have the following percentages of direct sales: 68%, 57%, 42% & 36%.

Further basic assumptions for these scenarios:

1. The book costs $5.00
2. The book has sold 500 copies
3. 3rd party distributors are taking 45% of the cover price (and lest you think this too severe, trust me, many take more.)

Scenario #1: 35% on Direct Sales, 35% of money received on 3rd Party Sales

First we’ll assume that the author receives the same royalty on all sales, but the 35% they receive on 3rd party sales are after all distributor discounts.

• 100% Direct: $875.00
  
• 75% Direct: $776.56
• 50% Direct: $678.13
• 25% Direct: $579.69
• 0% Direct: $481.25

Anyone who has an epublished book on fictionwise, though, is likely to make a lot of sales during one of their many 25%-40% off sales, not to mention how many sales are made in the first weeks while books are discounted.  Just for fun, let’s redo those numbers and assume all 3rd party sales averaged 20% off.

• 100% Direct: $875.00
  
• 75% Direct: $752.50
• 50% Direct: $630.00
• 25% Direct: $507.50
• 0% Direct: $385.00

So in this scenario 500 books can mean anywhere from $385 to $875 , which is a $490 difference.  Now consider the overall impact if you have 5 books, or 10 books, or 1000 sales instead of a 500.

For reference, the royalty rates used in this were: 19.25% (35% of 55%)
& 15.4% (35% of 55% of 80%)

Scenario #2: 35% on Direct Sales, 50% of money received on 3rd Party Sales

Here’s a slightly more author-friendly scenario, where the publisher and the author split all proceeds from 3rd party sales down the middle.

• 100% Direct: $875.00
  
• 75% Direct: $828.13
• 50% Direct: $781.25
• 25% Direct: $734.38
• 0% Direct: $687.50

This scenario shows a much smaller range, though that does widen a bit when discounts are introduced.  This posits the same average of 20% off over the lifetime of the 3rd party sales.

• 100% Direct: $875.00
• 75% Direct: $793.75
• 50% Direct: $712.50
• 25% Direct: $631.25
• 0% Direct: $550.00

In this scenario 500 books can mean anywhere from $550 to $875.  A $325 range still, though the higher percentage of net helps cushion the impact of those pesky 3rd party discounts.

For reference, the royalty rates used in this were: 27.5% (50% of 55%)
& 22% (50% of 55% of 80%)

Scenario #3: 35% on Direct Sales, 30% cover price on 3rd Party Sales

The friendliest scenario yet.  I have one epublisher who offers this 3rd party rate, and I can say frankly that I enjoy it a great deal.  In this case there’s no need for a second set with discounts, because the author doesn’t need to worry about discounts, just about how many copies they sold.  (This is excellent for record keeping & transparency.)

• 100% Direct: $875.00
• 75% Direct: $843.75
• 50% Direct: $812.50
• 25% Direct: $781.25
• 0% Direct: $750.00

Not a huge difference in any case, though I think you can pretty much guarantee that any company that is giving you 30% cover on 3rd party sales is probably making enough direct sales to make up for it.

In fact, in my experience that’s something that has applied very consistently–the worse our 3rd party rate ends up, the larger our percentage of sales that are 3rd party seem to be.  In the context I originally gave, I mentioned four numbers: 68%, 57%, 42% & 36%.  We made 30% cover on the first, 50% money received on the second & third, and 35% money received on the final.  The overall totals of money earned show this very clearly.

Let Me Sum Up

This is a lot of data, and a lot of information.  The sad part is, I have pages more I could include, and maybe I will at a later date.  I could do an entire post alone on the various price points and at what point a percent of the money received is a better deal than a percent of the cover.

Is it exciting?  Well, okay, I find it exciting, but it’s well documented that I’m a bit nutty about the statistics.  But the fact of the matter is–this is stuff you need to know if you want to make informed decisions about epublishing. Of course, only you can decide what your ultimate goal in epublishing is.  Mine is to have a career doing something I love, and because I want it to be a career I pay attention to the money.

I believe pretty firmly that the only way to make educated choices about epublishing is to find and share information.   I’m always happy to discuss my experiences, so if you have further questions about this topic, leave a comment and ask!  If you’d prefer to ask in private, my email is bree@moirarogers.com  Just understand that my opinion is just mine and my experiences are my own.

EDITED ON DECEMBER 9th: As a timely caveat to my post, Fictionwise is holding a sale on all multiformat (which includes pretty much all epublished) books for the rest of the month.  40-60% off.  If you assume the above conditions of 35% of the net receipts on a $5.00 book that sells 500 copies but is discounted 60%, you’d get something that looks like this:

• 100% Direct: $875.00
• 75% Direct: $695.63
• 50% Direct: $516.25
• 25% Direct: $336.88
• 0% Direct: $157.50