Author Topic: Am I making a profit?  (Read 674 times)

bardsandsages

Am I making a profit?
« on: February 20, 2019, 06:33:39 AM »
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.
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Bill Hiatt

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Re: Am I making a profit?
« Reply #1 on: February 20, 2019, 07:16:29 AM »
All of this is particularly important because there are many great writers who don't necessarily have the business skill set. Yet anyone interested in making a living has to find some way to develop those business skills.


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Lee

Re: Am I making a profit?
« Reply #2 on: February 20, 2019, 09:26:31 PM »
I know people that have been in business (not books) for a very long time and still don't get this. It cannot be overlooked if you need to make a living, yet it so often is.
I know all of this, have been in business for 30 odd years and still overlook things occasionally.
 
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bardsandsages

Re: Am I making a profit?
« Reply #3 on: February 21, 2019, 12:18:29 AM »
Part of the disconnect I believe for a lot of authors is the fact that Amazon and all of the vendors call what they pay out "royalties." And the writer mind gets into the thought process of, "Well, trade publishers only pay royalties of 15 or 20% and Amazon is paying me 70%" But they aren't royalties in the traditional sense of the word. Amazon is paying you your profit on sales, which is the difference between the list price of your product minus what Amazon is "paying" for it. Out of that profit, you have to pay all of your expenses. Unlike true royalties, in which the bulk of the production, administrative, and marketing expenses are paid for by the publisher.
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David VanDyke

Re: Am I making a profit?
« Reply #4 on: February 21, 2019, 03:53:58 AM »
Part of the disconnect I believe for a lot of authors is the fact that Amazon and all of the vendors call what they pay out "royalties." And the writer mind gets into the thought process of, "Well, trade publishers only pay royalties of 15 or 20% and Amazon is paying me 70%" But they aren't royalties in the traditional sense of the word. Amazon is paying you your profit on sales, which is the difference between the list price of your product minus what Amazon is "paying" for it. Out of that profit, you have to pay all of your expenses. Unlike true royalties, in which the bulk of the production, administrative, and marketing expenses are paid for by the publisher.

Depending on the definition used and what country's laws we're talking about, yes, your Amazon sales can result in royalties--at least, according to my research, which includes "payment from distributors." That's why Amazon sends you a 1099 when you make more than $10, which is the IRS trigger for "royalties," rather than the $600 trigger for other income.

https://definitions.uslegal.com/r/royalties/

https://dictionary.law.com/Default.aspx?selected=1870

Then again, I'm not a lawyer. Perhaps someone else has a better answer.

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Bill Hiatt

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Re: Am I making a profit?
« Reply #5 on: February 21, 2019, 08:08:59 AM »
Part of the disconnect I believe for a lot of authors is the fact that Amazon and all of the vendors call what they pay out "royalties." And the writer mind gets into the thought process of, "Well, trade publishers only pay royalties of 15 or 20% and Amazon is paying me 70%" But they aren't royalties in the traditional sense of the word. Amazon is paying you your profit on sales, which is the difference between the list price of your product minus what Amazon is "paying" for it. Out of that profit, you have to pay all of your expenses. Unlike true royalties, in which the bulk of the production, administrative, and marketing expenses are paid for by the publisher.

Depending on the definition used and what country's laws we're talking about, yes, your Amazon sales can result in royalties--at least, according to my research, which includes "payment from distributors." That's why Amazon sends you a 1099 when you make more than $10, which is the IRS trigger for "royalties," rather than the $600 trigger for other income.

https://definitions.uslegal.com/r/royalties/

https://dictionary.law.com/Default.aspx?selected=1870

Then again, I'm not a lawyer. Perhaps someone else has a better answer.
The use of the term royalty hasn't really become standardized. However, I think regardless of the term, the financial reality is the same. People need to keep an eye on how their income relates to their expenses.

It's true that trads still pay for quite a few things that would be expenses for an indie author, though more and more of them seem to be expending less and less. I'm sure the largest publishers still do a lot, especially for A-List authors, but smaller publishers often don't see promotion, for example, as their job. I know a number of people who are published by small publishers who spend a lot of money doing promos, something I don't think would have happened as often in the past. I've also heard that publishers are trying to cut down on editing costs by trying to avoid accepting manuscripts that need more than a very cursory edit. (It was probably always a good idea to edit as thoroughly as possible before submitting to a publisher, but now it seems increasingly vital, with the result that authors, even working with trads, are spending more time and money on editing.)


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munboy

Re: Am I making a profit?
« Reply #6 on: February 21, 2019, 09:07:59 AM »
I use a timesheet app on my phone to keep track of my hours down to what book I'm working on and what I'm doing on that book, whether I'm planning, writing, or editing. I set an hourly wage for myself and I input it into a spreadsheet along with the editing costs and cover. That way I know exactly the cost of producing a book.

I keep track of time spent on the business side (advertising, newsletters, taxes, and such), too. Basically, any time I spend on my writing career, it's tracked and put into the spreadsheet as an hourly wage...I don't pay myself other than in royalties, but it's good to know how your books are doing really when stacked against the cost to produce and hourly wages is the best way to calculate time.

This is what my timesheet app looks like, the options I have to choose from when I "clock in."

  • Business
    Boundless Writing (my next release)
    Boundless Editing
    Boundless Planning
    Future House Project (ghost writing for a publisher)
    Echodragon Planning (side project with my wife)
    Echodragon Writing
    Heir Planning (long term epic fantasy project)
    Heir Writing
    Heir Editing
 
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bardsandsages

Re: Am I making a profit?
« Reply #7 on: February 22, 2019, 02:01:52 AM »
Depending on the definition used and what country's laws we're talking about, yes, your Amazon sales can result in royalties--at least, according to my research, which includes "payment from distributors." That's why Amazon sends you a 1099 when you make more than $10, which is the IRS trigger for "royalties," rather than the $600 trigger for other income.

The decision to call them "royalties" instead of "net revenues" was a business decision started by POD services like Lulu because "royalties" sounded easier to digest than "net revenues." There was no legal reason to choose one over the other. It was a marketing decision. I know this because I "lived" through the revolution, so to speak.  grint

Before the rise of POD services (which was the precursor for the digital movement in self-publishing) most self-publishers went to a printer, printed the books in bulk, and sold them on consignment or worked directly with wholesalers who sold your books to bookstores. POD services provided a means of selling the books without the up-front printing costs, but the basic sales mechanic was still the same. Lulu and others provided storefronts that allowed the self-publisher to sell their books without having to maintain an inventory. But the process was still the same. You paid for the production cost and the seller (which, in this case, was also the printer) paid you the difference between your list price and the price they were paying for the book.

When POD services started offering distribution to stores like Amazon and BN, they were STILL doing the same thing a regular wholesaler was doing, they were just doing it in addition to other services. Instead of having one company print and another company distribute, you had one company handling both.

But to expand their businesses, they needed to attract more self-publishers, because self-publishers sell low volume. I remember a very telling quote from Bob Young, owner of Lulu. It was something like, “I don’t need a hundred authors selling a million copies. I need a million authors selling a 100.” POD services were looking for volume of users, not volume of book sales.

Back then, most people weren’t interested in “running a business” and generating “revenue.” You can’t “sell” that idea to a housewife or a college kid or a retiree.

But you can sell them on royalties, because royalties aren’t scary. Authors understand the idea of “royalties” even if they don’t understand how to run a profit and loss sheet. THAT is why POD services called them “royalties.” Because royalties were easy to sell to people who wanted to publish their books but didn’t have any interest in running a business.

In addition, this allowed POD services to set up the false comparison between trade publishers and POD services. “The average trade publisher only pays 15% royalties. Self-publish and make 50% royalties instead!” It was always a marketing strategy.

Before Amazon moved everything to KDP, they had bought mobipocket. Mobipocket issued 1099s at $600 revenue, because Mobipocket did not pay “royalties.” They paid out revenue. I know this because I sold books through them. It wasn’t until Amazon bought Mobipocket and forced everyone into KDP that the “revenues” became “royalties.” Because, again, it is easier to sell “royalties” than it is to sell “run your own business and earn revenues.” And Amazon did it for the same reason.

Google Play doesn’t call them royalties. I don’t run a royalty report with Google Play. I run an earnings report. Because the Google store never actively recruited self-publishers or “sells” itself specifically to self-publishers. It treats all its business partners the same.
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bardsandsages

Re: Am I making a profit?
« Reply #8 on: February 22, 2019, 02:02:37 AM »
I use a timesheet app on my phone to keep track of my hours down to what book I'm working on and what I'm doing on that book, whether I'm planning, writing, or editing. I set an hourly wage for myself and I input it into a spreadsheet along with the editing costs and cover. That way I know exactly the cost of producing a book.

What is the name of the app that you use?
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munboy

Re: Am I making a profit?
« Reply #9 on: February 22, 2019, 04:58:26 AM »
I use a timesheet app on my phone to keep track of my hours down to what book I'm working on and what I'm doing on that book, whether I'm planning, writing, or editing. I set an hourly wage for myself and I input it into a spreadsheet along with the editing costs and cover. That way I know exactly the cost of producing a book.

What is the name of the app that you use?

Time Recording Timesheet App by DynamicG... I'll include a screenshot of it in the Play store. I have an Android phone, so I don't know if it's available for Iphone.

The app is free, but has a small ad banner at the bottom. I have used it for around a year and barely noticed them, but since this was the only app I found that did everything I wanted it to do (breaks down into an unlimited number of reoccurring tasks and allows for downloading of spreadsheet reports), I went ahead and bought the Pro version to support it and get rid of the ads. (I think it was $4.99)

Although it takes a little bit of fiddling with to figure out all the settings and things it can do (which is A LOT), once I got it all figured out, I'm amazed at the features it gives away in its free version. (The only feature that is added with the pay version is the ability to export reports and backups to dropbox or google drive).

It also has a widget for easy punching in and out.
 
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Lorri Moulton [Lavender Lass Books]

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Re: Am I making a profit?
« Reply #10 on: March 09, 2019, 12:35:11 PM »
The accountant considers total revenue - total explicit costs, while the economist will include implicit costs.  What could a resource (like a business owner) make if working somewhere else?

I do like that this economist mentions personal satisfaction has a value as well.

   
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bookworm

Re: Am I making a profit?
« Reply #11 on: March 13, 2019, 10:36:45 AM »
I use a timesheet app on my phone to keep track of my hours down to what book I'm working on and what I'm doing on that book, whether I'm planning, writing, or editing. I set an hourly wage for myself and I input it into a spreadsheet along with the editing costs and cover. That way I know exactly the cost of producing a book.

What is the name of the app that you use?

Time Recording Timesheet App by DynamicG... I'll include a screenshot of it in the Play store. I have an Android phone, so I don't know if it's available for Iphone.

The app is free, but has a small ad banner at the bottom. I have used it for around a year and barely noticed them, but since this was the only app I found that did everything I wanted it to do (breaks down into an unlimited number of reoccurring tasks and allows for downloading of spreadsheet reports), I went ahead and bought the Pro version to support it and get rid of the ads. (I think it was $4.99)

Although it takes a little bit of fiddling with to figure out all the settings and things it can do (which is A LOT), once I got it all figured out, I'm amazed at the features it gives away in its free version. (The only feature that is added with the pay version is the ability to export reports and backups to dropbox or google drive).

It also has a widget for easy punching in and out.
That app looks amazing. I'm hunting for an iPhone version. Hope it exists.