The controversy over Kindle Edition book prices brings up the question of what physical books actually cost and what elements ought to be improved and/or eliminated when it comes to Kindle Editions.
In particular -
- We really need a listing of the costs involved in producing and selling a physical book. This post covers that.
- It would also be good to know what creating, distributing and selling Kindle Edition books costs, and how these costs interact/overlap/stack with the costs of producing a physical book. That’s something we’ll look at soon (although not in this post).
First, let’s look at -
A Simple Model of Book Costs and an Example
The very simple break-up is -
- Author – Creation. 8-15% Royalties.
- Publisher – Being the Curator, Polishing, Manufacturing, Marketing. 45-55% (includes Author’s Royalties). Note that Printing accounts for just 10% of the book price.
- Distributor – 10%.
- Retailers – 40%.
- Consumers. Just the paying part ;)
An example found at BookFinder states a cost break-up that closely matched what my research turned up -
- Book Retail Price: $27.95.
- Retailer (discount, staffing, rent, etc.) – $12.58. That’s 45%.
- Author Royalties – $4.19. Exactly 15%.
- Wholesaler – $2.80. Exactly 10%.
- Pre-production (Publisher) - $3.55. That’s 12.7%.
- Printing (Publisher) – $2.83. Translates to 10.125%.
- Marketing (Publisher) – $2. That’s approximately 7.15%.
Note that the 3 Publisher Costs add up to approximately 30%. There doesn’t seem to be an entry called Publisher Profit.
Detailed Analysis of Cost of Book Publishing
The most helpful sources for figuring this out were -
- TeleRead’s Calculating a Fair Price for Ebooks post and discussion.
- WriterBeat’s Profit and Loss Analysis Post.
- Salon’s post on Why Books Cost So Much.
There are a ton of different sites that had valuable information and if there is information from your site without an attribute please leave a comment and I’ll add a link.
Let’s look at all the stages of a book’s creation, distribution and sales, and the costs at each stage. For simplicity we’ll look at a typical book published by a Large Publishing House -
Creating the Raw Book
Cut: Advance + Royalties of 8-15%.
- Author’s time and effort.
- Agent. For Large Publishing Houses this is usually a pre-requisite.
- Publicist (if employed).
- Marketing Costs (If author does marketing in addition to publisher).
Notes: Advance and Royalties work in this way -
- Authors get an Advance. After book sales have covered the advance they get royalties.
- Royalties are usually 8% for the first 100,000 books and 10% after that.
- Successful authors, well known authors etc. get 15%.
- Agents usually work for a percentage of author’s earnings. Its possible to get a lawyer (instead of an agent) at an hourly rate to negotiate your rights etc. with a Publisher.
Book Screening and Acquisition – Picking a Book to Publish and getting Book Rights
Owner: Publishing House Editor and Chief Editor.
Cut: Falls under Publisher’s Cut, which is 45% to 55%. This includes the Author’s Royalties.
- Staff Costs of sifting through books – Editors, Chief Editors.
- Staff Costs after a book has been selected and a deal is being negotiated – Editors and Executives.
- Lawyer Costs (when applicable) for signing agreements and securing copyright on books.
- Advance to Author.
- The number of manuscripts (solicited and unsolicited) that publishers go through is huge.
- Book royalties have to initially cover the author’s advance – Authors get paid royalties on additional book sales only.
- Most books are not successful and publishers do not earn back the advance (not to mention other costs of publishing them). Authors get to keep the advance even for failed books.
- As opposed to the Kindle Store where there is little cost to add a book, every book that is published is a non-trivial investment of time and money.
Successful Books Subsidizing Failures
Cut: Included in Publisher’s Cut.
- ‘Tax’ winning books must pay to make up for failures.
- A book’s cost, or to be more precise, the Publisher’s Cut, includes a multiplier to account for this ‘subsidy’ that successful books must pay.
- Consider the Venture Capitalist investment model. For every 10 investments, they make back money on 2, lose money on 7, and 1 is a runaway success that pays for the failures and makes them money.
- Publishers have a similar model and every book they acquire might be the ‘runaway success’ that supports 7 (or more) losers. This is factored into the publisher’s cut.
Finishing the Book
Owner: Publisher (working with the Author).
Cut: Included in Publisher’s Cut and Author’s Advance/Royalties.
- Proof Reading.
- Cover Art.
- Book Design including Cover Design, Font, Spacing, etc.
- Book Jacket and Inside Jacket.
- Getting Blurbs and Reviews from successful authors etc. This includes the cost of sending out galley copies to these authors.
- Cost of getting an ISBN.
- Staff Costs – All the editors, artists, and everyone else.
- Staff Costs – Loads of support staff including Contract Manager, Arts Director, Royalties Manager, Sales Manager, Production Editor, Rights Manager.
- It was interesting to see that there’s so much that goes into taking an acquired manuscript and creating a finished book.
- There are a lot people involved and lots of managers and executives.
- Large Publishers have in-house printing presses. So the next stage is all-Publisher.
Printing the Book
Cut: Included in Publisher’s Cut
- Scheduling Costs (for the printing presses).
- Setting up Plates for printing.
- Press Time.
- Printing costs vary according to type of paper, type of cover, number of pages, etc.
- Number of pages varies according to the book and its formatting – spacing, font, etc.
- After books are printed, they usually have to be stored in a warehouse, packed and shipped to a distributor. These costs are sometimes covered by publishers.
- For larger print runs, the cost of printing a book comes to just 10% of a book’s price. So the perception that ebooks should be a lot cheaper than physical books because there’s no printing or binding is inaccurate.
Cut: Distributor usually gets 10% when dealing with Large Publishers.
- Getting the books from publishers (sometimes covered by Publisher).
- Warehousing the Books.
- Packing and Picking Fees.
- Shipping Costs to get books to all the retail locations.
- Working with all sorts of book retailers.
- Printing Catalogues for retailers to choose books.
- Baker & Taylor is one of the main distributors - its the main distributor to Libraries, and also a big distributor to Retailers.
- Ingram is the other huge distributor and describes itself as the largest middleman in the market.
- Distributors take a HUGE cut from smaller publishers and self published authors (40%-60%). Not sure why it’s just 10% from larger publishers.
Cut: Varies. Around 40% for book-stores, up to 60% for general retailers.
- Marketing the Store.
- Building Cost or Rent, Taxes, etc.
- Electricity, Phone, Internet, etc.
- Book Sales oriented Retailers are claimed to get a 40% cut. General retailers (like WalMart etc.) supposedly take up to 60%.
- The rumored market share for books retail is Amazon 8% of the market, BN.com 2%, Barnes & Noble and Dalton combo – some portion of 25%, Borders/Walden - remaining portion of 25%, Independents 5%, Libraries 10%, etc.
- Harlequin has tie-ups with grocery stores and drug stores so Ingram etc. talk with Harlequin too.
- WalMart, Sam’s Club, and Target are the other major retail outlets – since they sell other items too, they get a larger cut so books can compete with music and clothes for shelf space.
Cut: Included in Publisher’s Cut.
- Publicity (in addition to Author’s Publicist).
- Galley Copies for reviewers.
- Marketing Staff for the Publisher.
- Sales Staff for the Publisher.
- Print Catalogues.
- Author Book Tours.
- Getting Shelf Space, coop (money to retail outlets for advertising) and incremental coop.
- Printing Ads and Flyers for distributors etc.
- One huge advantage of going with a Large Publisher (along-side the reputation/credibility) is the amount of marketing muscle and know-how they can bring.
- Publishers have to decide what books to support with a marketing push, and their analysis of your book’s likelihood of success factors in heavily.
- Without getting a Large Publisher, or giving a distributor like Ingram a large cut, it’s almost impossible to get Shelf Space in stores.
Cut: Comes out of Publisher’s Cut.
You make no money on a returned book. In addition there are -
- Shipping costs.
- Warehouse Costs.
- Staff Costs for handling these returned books.
- Returned books have to either be sold at outlet stores (at lower prices and sometimes at a loss) or destroyed. There were two different statistics here, which might or might not make sense together. The first is that 20% of shipped books are returned.
- The second is that only 1 out of 3 paperback copies sells, and the remaining are either sent to outlet stores, remaindered (i.e. destroyed) or returned.
- Books sold at outlets usually incur losses. Books that are remaindered/destroyed obviously incur losses.
- These losses have to be covered by the earnings from books that are sold.
Customer’s Acquisition Costs
Price Paid: Book Cost, and some expenses in addition to book cost.
- Book Cost.
- Time to find and get book.
- Driving to the Store.
- Taxes on the book.
- Reading Means – For a physical book this is free.
- This factor is not considered much. However cost to end customer becomes important when we start comparing brick and mortar stores with online stores, and physical books with Kindle Edition Books.
- Customer Convenience will become increasingly important as technology makes other purchases faster and easier.
5 Thoughts about Physical Book Publishing
- There are a lot more stages and costs than anyone would imagine. This convoluted process can be optimized in innumerable ways – Mr. Bezos would be hard pressed to find a more ‘improvable/kaizenable’ business model.
- Everyone who works for publishing companies claims that there is little money to be made and everyone does it for the love of it. Not sure if this is a function of profits not being shared with employees or there simply are no profits.
- There is huge consolidation of power -
10 or so publishers and 2 or so distributors seem to have cornered the market. While retail outlets are more spread out, the majority of retail is again owned by giants. The trifecta of publisher-distributor-retailer controls the market and each gets a large cut.
- The number of people employed is staggering. A bail-out for Publishing doesn’t seem as crazy an idea.
- Looking at optimization opportunities, a few jumped out immediately -
* Moving away from physical objects – The number of times a physical book is shipped, handled, stored, warehoused, inventoried is ridiculously high.
* Book Successes having to pay for Failures – The Internet allows for crowd intelligence, faster feedback, and a lot of other means to reduce the number and cost of failures.
* Book Returns – Every 4 copies of a book that are sold have to pay for the 1 copy that has to be returned (not to mention the returned book’s shipping, warehousing costs).
* Amount of Manual Labor – There are a TON of people involved in the book creation, distribution, and sales process.
* The fact that a book takes 16-18 months after being acquired to get to stores.
My main closing thought is that Kindle Edition books and Kindle DTP are going to destroy the current model of publishing. In the ruins of the old model there will be a huge number of opportunities (such as selling customizable book covers and cover design services). Amazon and the Kindle will basically replace the publisher-distributor-retailer trifecta.