I suspect that non-publishing people probably have a rather hazy idea of how publishers calculate the price and profit of their books.
To some extent you know ahead of time what sort of retail price the book should have. If it’s fiction and the manuscript when you first get it, towers two feet off the desk, you know it’s going to be a big book. Maybe you can price it at $35, but your efforts will be to get below that. Were it a physics monograph, you’d be thinking between $150 and $250 with a bit of trepidation. These first impressions are not of course what we use to decide pricing, though it is surprising how often people get wedded to their first impressions and move heaven and earth to force reality to conform. We go through an estimating and costing process, involving calculating net profit. Trade publishers are perhaps more likely to allow their first price “guess” to dictate things — they tend to have a range of standard prices to which everyone in the trade expects them to adhere — rather than, as an academic publisher is more likely to do, allowing the cost of production to determine the price. Given that demand for an academic monograph is pretty inelastic this isn’t as crazy as it might sound.
The elements involved in your costing, the profit and loss calculation, are:
- retail price
- print quantity
- free copies
- unit cost of production*
- royalty rate
- overhead percentage
- averaged discount to retailers, wholesalers etc.
- net profit (net profit + overhead = gross profit or gross margin)
Basically your job is to figure out what net profit will result from printing a certain quantity and pricing these books at a certain price. The only fixed elements in the list above are frees (there’s probably a standard company-based assumption here; we used to allow 10%), overhead (declared as an average every year, based on last year’s costs divided by sales), discount (though you could always decide that a difficult book to price might slip into a different discount category), and royalty. Royalties come in two varieties; they are either paid on the retail price, or on the net receipts (i.e. price less discount). Which it is will be a fact covered by the contract with the author, as will the percentage rate.
So you solve these equations:
- Gross receipts (per copy) = (P x ((100 – D) ÷ 100)) where P = retail price and D = discount.
- Overhead = Gross receipts x H%, where H = Overhead percentage.
- Royalty = (R% x P, or perhaps R% x Gross receipts if it’s a net royalty) where R = royalty rate.
- Net profit will equal Gross receipts minus Royalty, minus Overhead, minus Unit cost.
- Divide that by Gross receipts to get the net profit as a percentage. Then if that doesn’t work, i.e. if your net profit is too small, you do it again with a different retail price. This will mean there are changes in Gross receipts, Overhead, and Royalty. If you change the print number this will change the unit cost: but beware, to get into the habit of increasing the quantity in order to “justify” your desired price flirts with ultimate bankruptcy.
One of my bosses used to make me do these calculations in my head — having come out of the accounting side of the business he found that sort of thing easy. I never found it exactly easy, but I could eventually manage the calculations in a reasonable time. I’d always do them on paper if I wasn’t facing him though.
See also Economics of the book
* The unit cost is made up of two parts:
- fixed costs
- variable costs.
The fixed costs are those that you incur whether you print one copy or one million. These include typesetting, copyediting, design, permissions fees for interior and cover art. Press makeready can be included here (it is invariable) but is often just left as part of the printing cost, which makes up the variable cost along with paper, binding, jacketing, cartoning, and, if it is included in unit cost rather than overhead as it usually is, the cost of shipping to the warehouse. The variable costs increase roughly in step with increases in quantity and the effect of the fixed costs becomes smaller as the quantity increases, as they are divided over a larger number of books. So the more copies you print, the lower the unit cost: wherein resides the temptation to overprint.