Costs, Profits and Risks in the Book Publishing Business

I'm a big numbers nut myself, and publishing math gets quite interesting when you make some first order approximations. A quick estimate puts Amazon alone at 8% of the retail book market, perhaps a little more, because I’m using a fairly generous estimate of the total market size. Adding BN.com and the other new book online retailers will get our online percentage to 10%, in part because I want round numbers. Barnes&Noble/Dalton and Borders/Walden together come to about 25% of that market. The percentages aren't exact because I'm use guestimates to adjust for music, DVD, and specialty items (coffee) for the brick and mortar retailers, and I'm going to add another 5% for the independents. As much as I love a good independent bookstore, their percentage of the market is small and shrinking, and they may even be less likely to experiment with new publishers (unless they are local) than the chains because their shelf space is more limited and their bills more pressing. For most small publishers who aren't in the textbook game, these outlets, plus direct sales, are about the extent of the market they can hope to reach. The remaining 60% or so of the market is made up by college bookstores, direct textbook sales to schools, mass merchandisers like supermarkets, newsstands and Walmarts. The rest of my comments are going to be based on these numbers, so if you think I'm all wet (and I may be) the rest of my dissertation won't make much sense.

I'm going to set aside direct sales for the moment because those are entirely in the publisher's control, whatever the printing technology and discounts, and concentrate on online sales vs brick-and-mortar sales. For the typical small publisher, I'm putting the potential market at 25% online, 75% chains, IF they can get stocked on all the bookstore shelves. Getting stocked on the shelves requires more than just giving the trade discount and accepting returns, and if you go through a master distributor to get there, you're talking about giving up a discount 60% to 70%. I suppose I could make up a little equation to kick out answers, but let's just look at a simplified example.

Scenario #1 - Take a 180 page paperback that is printed and put into distribution with no shipping charges by LSI that costs $3.30. Assign a 25% discount. Price the middle of the road nonfiction book at $14.95. The publisher profit on sales is $11.20 - $3.30 = $7.90. That's a little more than 52% of the cover price.

Scenario #2 - Take a 180 page paperback that is printed and put into distribution with no shipping charges by LSI that costs $3.30. Assign a 55% discount and accept returns to encourage bookstore ordering if you have that sort of marketing effort in place (not free). Price the middle of the road nonfiction book at $14.95. The publisher profit on sales is $6.70 - $3.30 = $3.40. That's about 23% of the cover price, or less than half the profit of the short discount model.

Scenario #3 - Take a 180 page paperback that is printed offset in sufficient quantity to get the cost down to $1.00, delivered. Just to make the math really easy, I'm going to say the discount for Amazon and the chains is 60% with free shipping, instead of using the real 55% discount and including shipping to Amazon, the B&N warehouse, not to mention the higher cost of dealing with a distributor. Figure that you're a very efficient publisher and your whole cost of returns and remainders and inventory overhead for all time will only eat 10% of the cover, almost surely an underestimate. The publisher profit on sales is then $6.00 - $1.00 - $1.50 = $3.50, almost identical to the 55% discount POD book in this instance at 23% of the cover price.

Before continuing with the potential profits analysis, it's important to point out that Scenario #3 requires you risk a much greater up front investment across the boards. Not just the five figures for the initial print run, but an extensive prepublication marketing effort so you'll have somewhere to send the books. Traditional publishers often base the size of the print run on the pre-press orders. If they fail to sell through, the additional risk over the POD model includes both the cost of the books and the cost of that pre-publication marketing.

But let's ignore the investment cost and risks of offset printing for the moment and ignore the quality hit of print on demand. That lets us lump Scenarios #2 and #3 together as the traditional model, because even with the different printing technologies, the basic profit is the same in this example, and the returns risk is the same if the publisher is successful in getting the stores to stock a few thousand copies. Well, that's not exactly true because the POD returns cost the publisher about three times as much, but let's let that offset (pun) the higher up front investment cost of scenario #3. In the traditional scenario, the book gets a shot at bookstore shelves if marketing and demand are up to it, but, the profit is less than half of the scenario #1, short discount POD model.

Back to our retail market for small publisher books, which I put at 25% online and 75% brick and mortar. Now let’s assign some arbitrary sales numbers for our title, which will be subject to many adjustments later, but say it would sell 4,000 copies a year if published under scenarios #2 and #3.

4,000 copies as $3.50 net per copy = $14,000 net

Under our scenario #1 short discount model, we only get 1,000 copies sold, or

1,000 copies at $7.90 net per copy = $7,900 net

Hey, wait a second. That's not that bad for limiting the risk, but is it really the end of the story? No, because even at the short discount, the stores that would have stocked the book will fill special orders if your marketing (online and word-of-mouth) creates demand. Unfortunately, Ingram doesn't report what percentage of books they sell for Lightning Source are actually shipped to brick-and-mortar vs online retailers, but more than two thirds of our LSI U.S. sales come through Ingram. Note the "U.S." part, because at no extra cost, our books are also distributed in the U.K. While the scenario #1 and scenario #2 books done with LSI get the U.K. connection, the scenario #3 offset printed book will rarely get international distribution. U.K. sales are running at 17.5% of our U.S. sales this year at essentially the same profit margin. Granted, a publisher can do offset in the U.S. and print on demand in the U.K., but it potentially means designing the book twice and it's another vendor to deal with. It also doesn't include the direct sales, which I've found my online marketing can easily drive to 20% of my total, though I'm currently discouraging direct orders.

There are limitations on the quality side when you use the big three that can get you the distribution that makes the on demand model work very profitably. Don't confuse the fact that most POD books never see a bookstore shelf with a market barrier when the reason is that it's an entirely different publishing model. A publisher expecting to have their books modeled at Barnes & Noble and Borders and carried in distribution to independents needs an initial print run of 5,000 to 10,000 books for the sell-in and immediate restocking if it moves, and most publishers following that model already have a good number of titles in print, a proven distribution network, some even do their own distribution and warehousing. They also have the sales force that can go to the shows, make the buyer lunches and produce the catalogs that convince bookstores to give their titles a shot on the shelves. All this is very expensive and time consuming, and a hard pull for a one horse business. It's possible, but it involves far more risk than starting out with print on demand, and the rewards only justify it if you end up with a genuine bestseller, a book that sends you back to press time after time.

So, as I readily admit above, I can’t say exactly how much of the potential market a publisher is losing by not being carried in stores, but for price points similar to those above, the publisher isn't gambling more than half the potential profit. The publisher also greatly reduces the risk, not in just printing and returns costs, but in the up-front marketing costs the store model requires. When I moved from offset to on demand publishing, I determined that I'd do 100% of my marketing online, and for that reason, I believe that the short discount model is actually reaching the same customers I'd have gotten if I'd gone with the traditional discount model. That means I believe I'm earning a little over twice as much as I would have if I'd gone with traditional route without the traditional marketing to support it.