This post is sparked by a few conversations I have had recently with creative types that are freelancers.
The point of this exercise is to get people thinking about profitability and not just sales rank. Too many authors have great sales rank but aren’t able to pay their bills. There are a lot of reasons for this, but the big one is not having a firm understanding of their real costs or how much money they are actually making.
As a publisher, you have two sets of costs: direct costs and indirect costs. Direct costs are those expenses directly related to your book: cover art, editing, proofreading, formatting, Point-of-purchase promotions. Indirect costs are those expenses related to running your business but not associated with any specific book: web hosting, publishing software, equipment, accounting or legal services, etc.
Most indie publishers price their books based only on their direct costs and don’t think about the indirect costs…unless you have a decent accountant that reminds you about the deductions you are eligible for!
And with both the direct and indirect costs, most authors forget to include their own time in the equation. You feel you are saving money by designing the book cover yourself, but that time spent designing the book cover is time spent not doing something else. You are still “paying” for that book cover. You are simply paying in the form of your own time instead of cash out of pocket.
What I suggest is calculating an annual budget for your business, estimating all of your expenses, including the valuing of your time, so that you can accurately determine a pricing strategy to make a profit.
How do I value my time?
If you have a marketable skill, such as editing or proofreading, that you already charge for, then you already know what your time is worth. Time spend working on your publishing is time not spent performing a marketable skill.
Some authors balk at this. But in reality, as a publisher, you need to budget to pay your people…and that includes you. If you were an author working for a trade publisher, you would get a royalty on every sale. If you were an editor for a publisher, you would get paid either an hourly rate or a flat rate for editing the book. Now you are going to say that Amazon pays you royalties…but what Amazon actually pays you your gross profit from the sale of goods. But because Amazon and others call them “royalties” it screws with your ability to think through your actual expenses. All that money reflects is the retail price you set for the product minus the cost of what Amazon is paying for the product. That is NOT a royalty in the real sense of the word.
Let’s use a simple number like $10/hr to calculate your time. And let’s say you spend 5 hours a week on your publishing business. That is $50 a week, or $2600 a year.
Let’s come up with some baseline expenses for the year so we have numbers to work with. Our example assumes you are publishing four books a year.
Direct Costs (annual)
Art costs: $200 (pre-made covers)
Editing: N/A (you self-edit and work with beta readers). Calculated in your time
Formatting: N/A (you self-format). Calculated in your time
Advertising: $1000 (you are awesome and can get the occasional BookBub, plus Amazon ads and FB ads)
Your time: $3000 for 300 hours (includes writing time, editing, formatting) at $10 an hour.
Indirect Costs (annual)
Web hosting: N/A (you use a free Wordpress site)
Internet access: $200 (probably more, but we are only considering the time spend working online)
Software/subscriptions: $100 (Adobe suite subscription or a stock art website subscription)
Equipment: $100 (calculating depreciation on your computer, printer, etc based on the percentage of time used for work)
Accounting/Legal: $50 (tax software. You do your own taxes)
Your time: $3000 for 300 hours (editing, cover design, social media posting for promotion, updating your website, etc).
So your total direct costs per year are $4200 and your indirect costs are $3350.
So you need to make $7550 from sales in a year to hit your break-even point (note: this is different from your EBIT, earnings before interest and taxes. We are just talking about recovering your costs). That is $1887.50 per book if you are publishing four titles a year.
Now that you know what your real costs are, you can come up with a pricing strategy. There are a lot of different options.
If you are making your first book of the year permafree, then you need to recalculate the per book break even number (becomes $2516) Keep this in mind. In addition, don’t fall into the “ebooks are forever” trap. They aren’t. Your book that is selling 1000 copies a month today is not going to be selling 1000 copies a month three years from now. You need to focus on hitting your break even point in the year…because next year will bring new expenses that need to be covered.
At 99 cents, you earn 35 cents a sale from Amazon. If your books are only sold on Amazon, then that means you need to move over 21,500 units in a year to break even.
At $2.99, you earn between 1.50-2.00 per sale if you are wide (averaging across all channels.) If most of your sales come from Amazon, then you are closer to the $2 mark (just over, in fact). If most of your sales come from other channels, you are closer to the 1.50 number. For purposes of illustration, let’s just use an average of $1.75 per sale. You now have to sell just over 4300 units across all four titles to break even.
At $4.99, you earn between $2.49-$3.49 per sale. Using $3 as an average, you now have to sell just over 2500 units in a year to break even.
In general, indie genre fiction is not going to sell beyond that price range.
Most people are going to end up with a variety of price points depending on how long they have been publishing and the type of stuff they publish. If you are selling print, you need to determine your revenue for each sale and factor that in to your figures. For example, if I can make $4 profit per print sale and I know I will sell 100 print copies a year of a title, I need to sell fewer ebooks for that title to hit my break even point. If my book does well in Select and can generate a flat $300 revenue each month from borrows, I need to sell fewer ebooks to hit my break-even point. If I have a deep backlist and know I can get five sales a month from ten different backlist titles each month, I can use those sales to offset my indirect cost and adjust my break even point for new releases.
If you are a new publisher, I recommend being extremely conservative when estimating your sales potential to avoid either underpricing your book (the lower the price, the more volume you need to move to break even) or overextending yourself in expenses (the difference between a $50 pre-made cover and a $2000 custom painted cover). As you build your business and get a better understanding of what your sales volume is going to look like, you can adjust your budget accordingly. You might start off with a higher price point and find that you can’t move enough titles, so you adjust the price down to boost volume. Or you may find that while you are selling a lot of books at a low price, increasing the price drops sales volume but still increases profitability.