Publish for Profit
By Peter Stahl 

Although publishing remains a "gentleman’s profession" compared to most other businesses, it is an extremely competitive, tough and unpredictable one. Making good money in the publishing business can be difficult due to the industry’s economics. The publishing industry offers low barriers of entry, consequently there are a lot of publishers out there in relation to the industry’s size. To be more exact, there are about 53,000 publishers in the U.S., each trying to gain a piece of the pie in an $18 billion industry. Every year, these publishers put out about 120,000 new books which means that most books have a very short life span. Unless it is a best-seller, most new titles will not get the marketing and promotion attention that they need. This is why even good publishers may only be able to squeeze out about a 10 percent profit.

The economics of the publishing industry are tough and maybe this is why many companies figure that they will lose money on three out of ten books, break even on three and profit on only four titles. By doing Title Profit and Loss Statements, publishers should be able to improve these somewhat discouraging numbers and have a clear concept of how and when the book will make money.

Title Profit & Loss Statement
As a publisher, the most important decision you make on a constant basis is what to publish. The publication of a book, audio-tape, CD-ROM or video represents a commitment of money, time, and effort. Many times it is a difficult decision because publishers are torn between their obligation to publish works of literary merit, or to publish titles that seem to have a higher profit potential. Although, it should be remembered that publishing is a business and must be run as such in order to survive.

Using a Title P&L helps a publisher to make informed decisions about estimated sales, returns, royalties, cost of goods and net profitability. It also forms the basis upon which most budgeting is based. A Title P&L should therefore be completed for every book that a publisher considers acquiring.

Income
The top line of the Title P&L is revenue, which is derived by multiplying the number of copies sold by the wholesale price of the book (that is, the actual price received after discounts to the book trade).

The retail price of a book is determined by the marketplace and prices of similar books, as well as probable costs of manufacture. Most publishers prefer an eight to nine multiple, but the higher the better, as long as the market can bear it. The length of the book and the material to be included is also taken into consideration. Most of these estimates can be approximated by past experience of similar books. However, it is important to keep the sales figures conservative and realistic.

Additional revenue includes subsidiary income such as: book clubs, foreign rights, audio rights, movie rights, etc. On average, large publishing houses show a subsidiary income of about 7 to 8 percent of net sales, whereas smaller publishers usually earn about 1 to 2 percent. Another source of income for publishers is remaindering. Unless it is central to your business, our suggestion is to take a highly conservative position and leave remaindering and sub-rights income out of the Title P&L, letting these other income sources be truly supplemental. If a book is worth publishing from an economic perspective, it should be profitable even without these revenues.

One of the main problems in the trade publishing industry is that books are sold on a returnable basis. Net sales after returns is often referred to as "sell-through," and the industry average for returns is 21 percent. Most publishers know their average return rate and should use this number. If you are planning a large print run, it might be a good idea to incrementally increase your returns, since what goes out in large numbers could come back in large numbers. When it is time for a second or third print run, a publisher needs to have a good idea of how many copies have actually been sold, so there are no unpleasant surprises after more books have been printed.

Cost of Goods Sold
Included in cost of goods sold are those costs that are repeated each time a book is printed, basically: paper, printing and binding. Royalties are fixed by contract and could be based on either the book’s retail price or on the net amount received by the publisher. Royalties represent a big chunk of a publisher's costs, although it is an expense that only incurs if you sell books -- unless a royalty advance was paid. The one-time expenses that incur every time a book is created, such as editorial, art, design and text costs are combined under development costs.

Much of the commercial success of a book depends on the accuracy of the first print run. To be economically sound, a first printing should be based on projected sales over a six to twelve month period. A publisher's knowledge of his market (as well as his/hers experience) and intuition is of great importance in estimating how many copies should be printed. While it is true that the more copies printed the less each single copy of a book will cost; it would be self-defeating to print a large number of copies if they are not sold, just to increase the profit margin and make the book look good on paper. Instead of just thinking about unit cost, you must also consider the total out-of-pocket cost and conserving cash flow.

Gross Profit
Gross profit is derived by subtracting cost of goods sold from net revenues. Gross profit is an important figure because it tells you how much it cost the company to produce net sales. Most trade publishers work on a gross profit of around 50 percent.

Focusing on gross profit, rather than on net profit, can often be the key to increase a company’s profit picture. Often publishers are trying to curtail overhead expense, when in fact the problem is above the line. If discounts are too steep, or royalties, print or development costs are too high, it will lower the gross margin, making it very difficult to show an adequate return on sales.

Overhead Contribution
The overhead contribution accounts for about 30 to 40 percent of sales for most publishers. Included in overhead are rent, utilities, salaries, phone, office supplies, interest, warehousing, marketing, insurance, and the many other expenses required to run a business.

Net Profit
The amount left over after all of the expense categories have been deducted from net sales is profit. If this number is substantial, then the book could be published from an economic point of view.

Conclusion
To improve profits, it is important to get into the habit of creating a Title Profit & Loss Statement for each prospective new book. Although this might seem obvious to some, we often run into publishers that have never performed a Title P&L, and they have no idea which books make money and which ones lose money. Without the vital knowledge that a Title P&L will provide, these publishers are left in the dark, not knowing why certain books lost money or what needs to be changed in the future.

Title P&L’s will assist you in deciding which books to publish as well as better your chances of making money. Compare previous Title P&L’s to actual results for each book and use this tool to improve your publishing program. Armed with the wealth of information that Title P&Ls can provide, you will have more control of your future and know where your publishing program is going.