The Profitable Publisher

There’s an obvious answer: of course they are. Like many simple answers, this one is wrong. Or at least it’s incomplete.

We all know that the current system was invented to allow bookstores to order current stock during the Great Depression. It lived on later both because it’s hard to reverse a system like this one, and because publishers benefitted from it as much as bookstores do.

How do publishers benefit from the returns system?

It’s easier to get booksellers to take a chance on innovative books. After all, their risk is much reduced. Many people in our business bemoan the lack of variety and quality in trade books. The return system gives a break to those new and risky books that do get onto someone’s list.

Net sales increase. Very few readers will special order a book that isn’t on the shelf when and if they look for it. If your book isn’t there when the customer comes, that’s a lost sale. With the returns system, bookstores order more copies, and your book has a better chance of being available for purchase.

Net profits increase under the current system, for most publishers. If you have the right balance between increased sales, and increased returns, you can make more profit. Of course, you can go too far in this direction. You need to find the point where the margin you’ll make from the next extra sale will exactly balance the cost of the extra returns necessary to make that extra sale.

Returns give you information that isn’t always easy to get any other way. Until recently, it wasn’t possible to know how many of your books were being sold to end readers. (Thank you, Bookscan, for changing that!) The only way you knew a book hadn’t walked out the store’s door was a return.

It’s still not possible to find out if books have been unpacked and shelved, or not, until you look at the boxes that return. And you won’t know if readers pick the book off the shelf and then put it back (meaning that the spine or front worked, and the copy didn’t), until you look at the condition of the returns. There’s at least some value to that information.

This system distributes rewards and penalties fairly. A book that sells through well, and a publisher that consistently brings out such books, will bear a lower cost. If we had no returns system, and simply gave larger discounts, those discounts would be applied across the board. Returns are more accurate in assigning costs.

Last, but not least, publishers are going to bear the cost anyway. Chains have much more power in today’s book business than the publishers do. So the cost of the books that don’t sell will hit publishers in either the form of returns or of higher discounts. In the current regime, at least we get the books back.

This isn’t the prevailing view, I know. I eagerly await your comments and arguments!

Not yet, but in another decade, I think we will be.

Why? Because of revolutions in the way we handle data, including e-books and our sales techniques.

Let’s start with the controversial part: we all know that the e-book devices on the market aren’t as good as printed books. (Let’s call the printed books p-books, shall we?) But in another few years, they may well be. And e-books have obvious advantages in weight and volume, in convenience of purchasing books, and in cost.

Some market segments are very price sensitive and very sensitive to convenience. If a significant fraction of the readers for a given segment switch to e-books, the rising price of the remaining p-books will push the remaining readers ever faster in the same direction.

So, if some formats just stop being offered in some market segments, or even in many of them, what happens to bookstores? To wholesalers? To distributors?

No one in the book business has much margin to spare right now. We need to figure out what the changes might be, and have plans ready to implement when we see the cascade start, or we risk being caught very short.

When p-books aren’t purchased as often, what will bookstores have to offer? Can gift books, art books, and other premium forms of books sustain bookstores? Or will they need to offer more sidelines? And e-book readers? And more book-related programming, making them a shopping destination?

Some of them, of course, will look at challenging Amazon’s primacy. That’s going to be a very hard slog for obvious reasons, but it could be done if the new stores offer some sort of community experience or added value that Amazon’s site isn’t delivering.

Wholesalers and distributors are necessary now because of the numbers of small bookstores and small presses, and because of the volume of business done by the indies.

They can aggregate the orders and build enough volume to make large fixed investments in handling books and orders more efficiently. But when the volume of p-books being shipped drops, especially when the indie publishers surge into the e-book arena by preference because of the lower barriers to entry, then a big part of their role disappears.

Will the efficiencies of wholesalers and distributors order processing, credit and collection, and payment systems be enough to earn them a reasonable place in the supply chain? Or will they need another role?

As it becomes less and less possible to have sales reps showing all the new books to all the bookstore buyers, is there a place for an automated system that integrates Bookscan-type data, bookstore buyers’ feedback, and publishers’ catalog data to produce useful ordering recommendations? Could this turn into a wholesale version of Amazon.com?

Is there a role for such a system in the e-book world? Probably not. There may well be a role for retailers, but I’m not sure that I see a near-term need for another layer of intermediaries. But p-books might well be a profitable niche for wholesalers that can add this kind of value-added service.

If you’re a bookseller, I’d like to hear whether you see an advantage to you in such a system? And how you are preparing for the future.

If you’re in wholesale or distribution, what do you think of the above?

And if you’re in publishing, how do you see the future of the books you’re making? Will p-books ever lose market share to e-books?

Am I completely out to lunch?

The short answer: they’re usually trying to re-invent the wheel.

Very small presses have a hard time exposing readers to their books. We all know this. And inevitably, discussions of this issue cause someone to suggest a co-op as a solution. Such a co-op could try to sell directly to readers, or to bookstores, or to Ingram. It could even be a purely sales and marketing organization that never handles a single book. Let’s look at those:

Selling directly to readers: This has to be web-based, or it’ll be much too expensive. That wheel’s already been built. It’s called Amazon. It’s so easy to get a small presses’ books onto Amazon itself, that this seems pointless.

Selling to retailers: This wheel is known as a wholesaler, or possibly a distributor. The co-op will need to give the retailers reason to bother with its catalog, and it needs to make the ordering, payment and service as convenient, quick and inexpensive as they are with Ingram, NBN, etc. And building that capacity is expensive. Building the response time and consolidating shipments from all the different publishers requires a warehouse. So the practical version of this option is another small press distributor. That has huge economies of scale, so the chances that you can match the current distributors’ services and prices are slim. Still, another distributor isn’t a BAD idea. Necessarily. It’s just not a NEW one.

Sales and Marketing Only: One version would be to contract with a copywriter or a publicist, and create campaigns at a lower cost. In-house publicity is less expensive because the publicist is constantly working, and doesn’t need to spend time running a business or marketing her/his services. This would give the small presses the opportunity to share an in-house publicist. It could be useful. It could also be a disaster. It will work best if all members of the co-op have similar types of books, rather than a similar geographic location or other characteristic in common.

Of course, there are other types of marketing co-op, such as the mailings done by PMA, or Florida Academic Press, or several other organizations. That can work, although publishers report mixed results.

Or there could be a joint catalog, one that might have more interest for bookstores than any single publishers’. Or even a central ordering website and shopping cart. The problem would be in administering the payments, and in customer service, if the publishers shipped separately. And, of course, it would have to give better discounts to stores than the wholesalers do, since the shipments wouldn’t be consolidated and the convenience would be less.

And all of this requires that the books be of sufficient quality and have a significant appeal to the reading public. And there’s the rub. Many small presses are run by people with minimal experience in publishing. Their judgment may not be good enough to ensure that the books are packaged and tuned for their markets. And worst of all, the successful small presses in this mix will tend to grow out of the need for it, meaning that keeping it vibrant and appealing would be a constant problem.

In short, most versions of a co-op are a perfect illustration of the old saw: For every problem, there’s a solution that’s simple, obvious, appealing . . . and wrong.

A question from the Audience, paraphrased:

How to amortize plant costs in COGS: You say we should amortize over time, but we use a per book cost. For example: if our development costs are $5,000 and we expect to sell 5,000 books, we amortize the costs at the rate of $1.00 per book. That way, we more closely match revenue and expenses. However long it takes to sell those books, that’s the time we use to amortize the cost. While GAAP may suggest your version, is there any problem with this?

I see two potential difficulties, both of which can be handled:

1. You may never sell all the copies you expect.

Handle this by having a reserve against that eventuality. When it happens, you write off the balance against that accumulated reserve, rather than taking a then-current expense. This restores the matching.

2. It’s awfully tempting when considering some sort of incremental deal to include the per book plant cost. This is very wrong. The plant cost is a cost of producing the book in the first place, and is not at all changed whether or not you make the special deal. (I see it all the time, and it makes people turn down deals that have only a small profit margin on each book, but huge volume, and huge profits in total. Not good.)

You handle this by being sure to do a total cost and profit worksheet on the book with the deal and without the deal, in order to decide if you’re better off doing it. That’s a lot more work, and most folks make errors somewhere in that as well.

You can, of course, change your amortization pattern to reflect the expected speed of sale, rather than using a straight line. And that would do a pretty good job of restoring the matching of revenue and sales. (In fact, it has an even better effect: it matches your intended revenue when you planned the project to the expenses you incurred based on that planning: much better feedback, even if not quite the same as the reasoning underlying GAAP!)

So, we’ve beaten this issue into the ground. You amortize plant costs somehow, and they don’t go into Inventory. But how do you get them into COGS on your Income Statement? Most accounting programs compute your COGS straight from your change in inventory.

You can’t use the pre-programmed Income Statement report, but must write a custom report to replace it. I know that sounds scary, but there’s just no way around it.

In this custom report, your copy the Income Statement, with the one exception that your Plant Cost Amortization and your Royalty Expense accrued are included in COGS rather than in Operating Expenses.

Some accounting programs will pull anything into COGS that’s in a pre-programmed range of account numbers. That’s not common, though, so you will almost certainly have to bite the bullet, and read the manual, and learn how to write a custom report.

Is there any way around this? No. Even if you treat Plant Costs as part of the inventory value of your first print run, which I do NOT recommend, you still have to write a custom report in order to include your royalty expense. Could you include royalty expense as part of the inventory value of your books? No, not for tax purposes, not according to any type of financial accounting standards, nor according to any other set of standards I know. These rules are based upon the practical consequences of the way you record your information, but that’s a little complex to go into here. Just, please, believe me. This is a bad idea that tends to come back and bite you. Hard.

Now, who is confused by this entry? Don’t be shy, ask. This is complicated stuff, and I’m not a writer. (Well, duh. Apologies to all you editors out there who must be itching for a blue pencil as you read this!)

I think that the Kindle may signal the beginning of the end for paperbacks. Finally, we have an ebook platform, that while still far from perfect, may soon have a reasonable market share.

Why would that spell the end of the paperback? CDs and MP3s haven’t killed off other music formats. Well, except that digital music really HAS almost killed off analog (CDs vs. pressed vinyl). And getting your music piecemeal, and by download, is becoming ever more popular. It does begin to look as if getting a physical copy of the music file (a CD) will be the less common choice soon.

Books are a little different than music. Hardbacks are most commonly bought now when readers don’t want to wait for the paperback, when we need extra sturdiness (for reference or libraries, for example), for the look or status value (for a gift or coffee table display, etc.), or for the physical experience of a book.

Readers of paperbacks tend to want the content and to be price sensitive. Once ebook platforms reach a certain level of quality, and gain modest commercial momentum, they’ll carve into the volume that makes paperbacks a lower cost alternative. And ebooks will be inexpensive, too. Price pressure may well produce a sudden movement toward ebooks.

Do you think paperbacks will continue to be popular when they are no longer the most inexpensive alternative? Or even when they cost almost as much as a hardback because of the low sales volume?

And if a large portion of our paperback sales move to ebooks, what happens to wholesalers and distributors? To bookstores?

Since DRM is pretty universally reviled by ebook readers, and since it can always be broken, what can we do to make sure that we get paid for most of the copies out there?

What else should we be thinking about and preparing for? Any thoughts?

In another comment I was asked:

How do you project sales for your first title. I got to compare it to the competition’s sales with similar distribution, but what I’d like help with, if at all possible, is to get access to the info you recommended on Bookscan and Ingram. You mentioned iPage and Bookscan and Amazon and take the average of all three.

Backing up a bit, in the PMA-U webinar, I started from each book’s projections in order to assemble the sales and direct expense projections for the company as a whole. Sales projections for your books begin with the selection of comparable titles. These books should not only be available now, and similar in topic and quality, but they should be distributed in ways that are comparable to your plans.

Once you have selected your comparable titles, you need to collect information on their sales. This is not usually publicly available. You can, however, use several sources to make an estimate, and then average these estimates to get a number that is probably closer to accurate.

Common sources include:

–Insider information. If you know someone in the other company, call them up and ask. Publishing folk often trade this kind of information, knowing that they’ll want a similar favor in the future.

–Bookscan. This Nielsen company assembles Point of Sale data from about 70% (by volume) of all the book trade outlets. It does NOT collect data from non-booktrade outlets, so craft books, for example, have heavily under-reported sales. Bookscan memberships cost $795 per year through PMA’s member discounts (last I checked) and are definitely worth it if you’re publishing more than a couple of titles per year. If you’re not, and you’re selling “bookstore books,” you probably have a distributor and the distributor probably has a membership. Ask them to look up the sales data on your comparables for you.

–Ingram. If you are selling directly to Ingram, you have access to Ingram’s iPage program. If not, your distributor does. Look up your comparables in this database as well.

–Amazon. Their sales ranks are roughly inversely proportional to the sales over limited ranges. Over longer ranges, it’s more complicated, but if you choose your comparables wisely, and if you know the true sales of just one of them, you can determine the relationship for all of them.

(For more information on all of the above, see the lecture notes for “Making Profitable Financial Choices” toward the bottom of this page.

Bookscan, for a trade book, captures about 65 to 70% of the total sales. Ingram captures between 35 and 45% of total sales, for many trade books. Your type of book may be different. For most of the book trade, Amazon represents 10 to 12% of total sales. Whatever each venue’s right fractions for your books, divide that venue’s reported sales by the fraction to get an estimate of total sales for the book.

Then average all your estimated sales, and you have a better estimate.

When you’re working with estimates, it’s important to remember that the solid-looking numbers aren’t really definite. Try several different sets of comparables, and try different approaches in order to get a good feel for the range in which you’re operating.

After you have estimates for each comparable title’s total sales, there are many ways you can use it. One of the best is to derive a demand curve for titles like this. It will be quite “fuzzy” because there are a number of confounding variables, but you can get some idea of how many more copies you’ll sell for each dollar’s drop in price. And that can be used to pick the most profitable price for your book.

I know that some of the math above sounds a little intimidating. Because many of my clients feel the same way, I created an Excel package that does most of it for you. More information about it is listed under “Pricing Package” in the Software portion of my site.

Publishers would be better off if books weren’t returnable, wouldn’t we?

Well, no, I don’t think we would. We’ve all heard that full return privileges can induce booksellers to try a book about which they’re unsure. And that’s obviously true. There are costs to the bookseller in returning a book, but not so many that they won’t take a modest risk.

But what about more predictable books? Because you can’t know how many more copies will sell out of which locations, there will always be some books left over, even on bestsellers or predictable backlist performers. These are the bulk of what is now returned. Someone somewhere is going to bear the cost of those extra books. Because booksellers have so much more power than publishers in the book business, that cost is going to be borne almost exclusively by the publishers.

If we have to bear the cost, either in the form of higher discounts, or as returns and credits, we might as well get as much as possible from it. Returns offer publishers something to sell (as hurts or as remainders), and information. There are lots of ways to make money from a returned book, if it’s in decent condition. Small publishers have found that they can sell small numbers of damaged copies and remainders quite well through Amazon’s Marketplace and various other second hand book venues. You can also donate books (and take the tax deduction for donating) to foreign ESL programs (novels) or to other worthy causes. You can strip and tip hardbacks to make the first run of a trade paperback re-issue.

As for the information to be found in returned books: Were the books even unpacked and put on the shelf? Were they taken off the shelf and examined (and scuffed)? Were they thumbed through? At what stage in the buying process did the examination stop? Can we learn anything from examining the returned book?

Or is there a pattern in the over-ordering and under-ordering? Which demographics did well with the books and which didn’t? Is there a correlation to your marketing and publicity? To your author’s background and travel? Something else to be learned?

In short, we’re going to be paying for the average bookstore’s average excess number of copies. At least the current system gives us something back. And it charges the publishers whose books are worst the most, rather than making us all pay an average rate. Are we really sure we want to change this system?

It’s pretty common to hear people from outside book publishing speak at length about the things publishers do badly, and the stupid choices these dinosaurs make. But publishing execs tend to be very smart people. Why are they doing such obviously stupid things?

Maybe they’re not. You see, book publishing is an unusual industry. Our products are relatively distinct, but they’re sold in both low volume and at a low price, or more specifically, with a low profit margin. That determines some of the stupid looking choices.

For example, it seems unbelievable that we have so little market research. But you can’t apply the focus groups on one combination of cover and contents to others. And you can’t afford to do much research for a single title, since the research costs more than you’ll make from the book.

Other peculiarities of the business have influence. We have hundreds of thousands of titles annually, thousands of retail outlets to serve, and tens of thousands of small presses. That results in very high transaction costs for each order, invoice, payment, etc. Other industries, faced with even higher numbers automate. (Think about the origins of the UPC system, for example.)

Why doesn’t the book industry do something similar? Those trade partners that do thousands of transactions (big NYC publishers and Ingram, for example) do automate. But it just doesn’t pay anyone to extend that automation down to the mom and pop level. And much or most of the book business is at that level (bookstores, authors, free-lancers and publishing companies all included). There are aggregators, but every extra player in the game means someone else drinking from the shallow pool of profit.

Why don’t authors sell their work electronically or by POD directly to the reader, as musicians are beginning to do?

This one is more complicated. Stay tuned for another post on that topic. In the meantime, what’s your favorite aspect of the industry that seems really stupid?

The short answer: whoever buys the ISBN from their national ISBN Agency. (In the US, that’s RR Bowker.) This is the minimum requirement for a publisher. Successful publishers do far more.

If you didn’t buy the ISBN from the Agency, you’re not the publisher, even if you pay a “self-publishing company” and make all the decisions. If you use one of their ISBNs, they’re the publishers, and it CAN matter. Why?

First: The ISBN identifies both the book and the publisher. The publisher will get all of the orders, information requests and returned books. It is possible to buy a single ISBN, but that doesn’t give a publisher ID. You’re better off buying a block of 10 or more.

And also: If the publisher is a vanity publisher, aka POD publisher, aka self-publishing company, your book will be judged by the quality of all of their other books. And that’s almost always bad.

Okay, so what else makes you a publisher? Do you need to do your own printing? No, but you do need to find and work with a printer. You would be wise to send out at least a dozen RFQs as well, before selecting one.

You also need to get your book’s cover and interior designed and laid out. You need to get the manuscript edited (copy and line editing are a minimum, and a deeper edit is usually a good investment). I cannot over-emphasize the importance of design and editing. There will be other posts on these topics later.

Publishers handle the distribution of the book. (Small publishers usually outsource this.) This includes soliciting orders from the large national accounts, getting the catalogs that include the book to buyers (not the end customer, the folks that order for the store’s stock) at the smaller bookstores, processing the orders, issuing credit and collecting on it, warehousing the stock, and picking, packing and shipping to fill the orders.

Publishers market the book. Authors are well-advised to do some of the marketing themselves, but publishers handle getting out review copies, getting blurbs, issuing press releases, giving appropriate and timely article ideas that might reflect upon the book, or draw attention to it or the author.

Publishers provide the capital to do all this. Authors get advances, which may NEVER earn out. The designers and editors do their work about 6 months before the book is published. (More or less, and what schedule does your company use?) Printers are paid before the books sell. Bookstores take 90 days to pay, if you’re lucky, after the books leave the warehouse. So the publisher puts up the cash long, long before there’s any possible return. And if the book tanks, and you have no sales, or sales and then 75% returns, the publisher still needs to come up with more money to finance the next book.

Did I miss something you think is important? Do you disagree with my definition?