Who Doesn't Like Pie?

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Today, we celebrate pie!

 I love pie, don’t you? Especially in the summer.

 Blueberry. Key lime. Plum. Revenue.

Revenue? Oh, I know you’re probably thinking Yuck, revenue pie sounds disgusting. But it isn’t. Because if you get a big enough slice of revenue pie and the revenue pie is tasty enough (that is, has value), then you can go and buy as much blueberry, key lime, and plum pie as you want. You can also pay the mortgage, get the car fixed, and put braces on your kid. Revenue pie, it turns out, is the best pie of all.

I’m going to focus today’s post on just one kind of revenue pie: the deep-discount pie—not to be confused with a deep-dish pie. (Sigh. So many pies, so little time.)

I balk at the traditional designations of “regular” sales versus “deep discount” sales (also called “special” sales and “high discount” sales), because today’s (unhappy) truth is that “deep discount” sales have become as “regular” as any kind of sale for most publishers. They are no longer “special,” the strange outlier; for many books, “deep discount” sales make up a significant number—sometimes the largest part—of total units sold.

So, they’re important, and the terms in your contract surrounding “deep discount” sales can have a huge effect on your bottom line—your slice of the publishing pie.

I’m going to use actual numbers from the sales of one of my titles and graphics (in pie charts!) to illustrate a couple of important points about “deep discount” sales. 

But for now, here’s a super easy way to understand the fundamental difference between “regular” sales and “deep discount” sales.

First, a few basics about retail. Like all retail businesses, the wholesaler (the publisher) sells the product (the book) to retailers (bookstores or other outlets) that then sell the product (the book) to customers (the readers). Unlike most retail businesses, every book has a list price printed on the cover. The list price is the price that the retailer (the bookstore) typically charges the customer (the reader) for the product (the book). 

How does this work in publishing? Publishers charge the bookstores less than the list price for the book; otherwise, the bookstore couldn’t make a profit and so couldn’t pay its rent, utility bills, salaries, and so on—the expenses it needs to cover in order to stay in business. So, publishers sell every book to bookstores (and other retailers) at some discount off the list price, and this discount varies from 40% off the list price to 85% off the list price.

That’s a big jump, isn’t it? From 40% to 85% is a significant portion of the pie.

Somewhere in that 40–85% range, a publisher designates a breakpoint—a line set by the publisher that divides the “regular” sales to a bookstore from the “deep discount” sales to a bookstore. For Publisher A, that breakpoint might be 51%; for Publisher B, that breakpoint might be 54%; for Publisher C, that breakpoint might be 60%. I have seen with my own eyes all of these breakpoints in actual contracts for children’s books from top-tier publishing houses on contracts signed within the last year. So, there is great variation between houses and even within houses regarding the definition of what a “deep discount” sale actually is. It’s a fluid concept.

Why is this breakpoint important? 

Because at this breakpoint the entire payment structure for how you, the author, are paid, changes radically. For sales at or below the breakpoint, you are paid a percentage of the list price—which doesn’t change. But when you exceed the deep discount breakpoint, you are paid a percentage of the net amount received (in other words, the list price less the discount, also simply called “net”). The greater the discount, the lower the net amount received, and thus the less money you receive for that sale.

Let’s take an example and see how this affects the amount of money you, the author, receive for the sale of your book. For this example, let’s assume four things:

The list price of your (paperback) book is $8.00.

Your regular paperback royalty is 10% of list.

The breakpoint in your contract (that divides “regular” sales from “deep discount”) is 54%.

Your contract says that for “deep discount” sales, you will receive 5% of net.

For a book that your publisher sells to a bookstore for 54% off the list price, you will receive your regular royalty, which is 10% of $8.00 = 80¢. This is a “regular” sale.

For a book that your publisher sells to a bookstore for 55% off the list price (above the breakpoint), you will receive 5% of net, which is [5% of (45% of $8.00)] = 18¢. (The 45% is what’s left over after the 55% discount has been deducted from the list price; i.e., “net.”) This is a “deep discount” sale.

It doesn’t take a PhD in mathematics to understand that there’s a big difference between 18¢ and 80¢. And when this difference is applied over multiple sales over multiple years, the loss in revenue to you grows. Quickly and devastatingly. “Deep discount” sales result in significantly lower revenues for authors in the short run and in the long run. 

In its landmark survey that revealed the decline of authors’ income over the past ten years, the Authors Guild considered the following to be the principal causes of the loss of revenue to authors:

… the growing dominance of Amazon over the marketplace, lower royalties and advances for mid-list…including the extremely low royalties paid on the increasing number of deeply discounted sales and the 25 percent of net ebook royalty. [emphasis mine]

I discussed this survey in an earlier blog post, Power…And Money. It’s critical for authors to understand that even a single percentage point up or down on the breakpoint (for example from 51% to 52%) can make a huge difference in how much money ends up in your pocket. (Think about how you might shop for a mortgage, where even an eighth of a percentage point makes a difference over the life of the loan. It’s the same with the breakpoint defining “regular” versus “deep discount” sales if your book remains in print over a period of time. It adds up.)

So how, as authors, can we mitigate the loss of “deep discount” sales and maximize our revenues? How can we ensure that our backlist titles will generate solid income? (For more on the importance of the backlist, read my post Backlist to the Future.) And why aren’t we talking about pie anymore??? (Don’t worry, pie is just around the corner. Hang in there!)

We have to do two things to control the hemorrhaging of revenue that typically occurs around “deep discount” sales: (1) push that breakpoint as high as we can during contract negotiations so that as many sales as possible earn our full royalty; and (2) negotiate a higher percentage of net that we receive on sales above that breakpoint. 

Our goal is to keep as many sales as possible in the “good” slice of the pie (full royalty) and for those that do fall into the “bad” slice of the pie (deep discount), make that slice yield more taste (value). 

To be clear: “deep discount” sales don’t have to be bad, as long as their numbers are controlled and you receive a decent slice of the revenue pie on every “deep discount” sale. It can be wonderful to sell 5,000 copies of your paperback at a “deep discount’—as long as you’re not earning 18¢ per copy.

Recently, I renegotiated a contact for a backlist title that has sold well over the years. The contract was old and outdated, and I wasn’t happy with some of the terms. My publisher was willing to work with me to find a way we could both be happy with the contract, and I’m glad that we were able to work together to reach new terms. One important focus for me was “deep discount” sales.

I negotiated on two fronts: raising the breakpoint from 54% to 60% and raising the percentage of net paid on each sale above the breakpoint from 10% to 20%. This means I achieved both goals listed above: (1) I pushed the breakpoint up six percentage points thus keeping more sales in the “good” slice of pie; and (2) I negotiated a doubling of the amount I receive on sales above that breakpoint, meaning the “bad” slice of pie would yield more money.

I’ve now had 18 months of sales to review since the changes in terms took place, which means I can compare the effects of the new terms—the actual bottom line. 

The first thing to note is that the change in terms did not result in a loss of sales; in fact, there was a modest increase in sales (8.4%) from before I renegotiated the terms. I don’t think the change in contract terms had any effect on the number of books sold.

But there’s a critical difference in the before and after of renegotiating the contract (and here comes the pie!):

Watch how the full-royalty slice of pie grows as the breakpoint in my contract rises six percentage points.

Watch how the full-royalty slice of pie grows as the breakpoint in my contract rises six percentage points.

By raising the breakpoint in my contract for the dividing line between “regular” sales and “deep discount” sales, I shifted a significant number of sales from the “deep discount” category into the “regular” sales category. “Regular” sales will always earn you more revenue than “deep discount” sales, so you always want to increase the size of the “regular” sales slice of pie.

So, at this point, without selling more books, I’m earning more money. Just by raising that breakpoint.

But then I also made that After slice of pie (the 36% that represents “deep discount” sales) “tastier” by doubling the amount of money I get for each sale from 10% of net to 20% of net.

Here’s a bar chart that shows a comparison of revenue with the old contract terms (BEFORE) and the new contract terms (AFTER):

Comparison of revenue per sale for different categories (“regular” and “deep discount”) and combined overall that shows the difference in revenue generated by my old contract terms and my new contract terms.

Comparison of revenue per sale for different categories (“regular” and “deep discount”) and combined overall that shows the difference in revenue generated by my old contract terms and my new contract terms.

One more thing I want to add is that I was successful in having the terms “deep discount” and “regular” removed from my contract. In today’s publishing industry, sales are sales, and “deep discount” sales are as regular as “regular” sales. In my contract, we distinguish between sales that pay a percentage of list price versus sales that pay a percentage of net as “books that sell at a discount of 60% or less” and “books that sell at a discount greater than 60%.” There is no separate paragraph in the contract that distinguishes “deep discount” sales from “regular” sales. The new terms say what they mean, and don’t employ anachronistic euphemisms to mask the true meaning (and consequences) of these sales. The old terms don’t make sense in today’s publishing industry, and they’ve been used to the detriment of the author. 

If, after reading this post, you’re saying to yourself, “But it’s just pennies!”, you have to consider how those pennies add up over time, just as interest on a mortgage adds up to a surprisingly large amount over a 30-year period. So, using this particular book of mine, which has sold reasonably well as a backlist title over more than a decade: if, for the past ten years, I had had the contract terms related to “deep discount” books that I have now, I would have earned an additional $397,960 above and beyond the revenue I received for sales of this title. Pennies add up.

And if you’re saying, “But I don’t sell as many books as you do,” then you’re missing the point of this post, which is not about whether I sell more or less than anyone else. It’s about how each of us, in the space we occupy in the publishing ecosystem, can each tend our own garden and nurture growth. And growth in revenue—on whatever scale—is possible for every individual writer. Educate yourself. Read your contracts. Review your royalty statements. Talk openly with other writers. Make yourself smarter. Declare your value to yourself. Dare to ask for what you want. Live and learn.

“Take care of the pence; for the pounds will take care of themselves.” 

—William Lowndes, British Secretary of the Treasury, 1696–1724

I would add, take care of the pennies, and you’ll be able to buy as much pie as you like!