Beware Of Kings With No Clothing – Calculation of Royalty Fees In Publishing Contracts

Writers In The Storm welcomes publishing attorney and author, Susan Spann. Susan  practices law in Sacramento, California. Her debut novel, tentatively titled SHINOBI, in which a Japanese ninja and a Portuguese priest must save a teahouse entertainer accused of murder, will be available in 2013 with St. Martins/Thomas Dunn Press.

By Susan Spann

Royalties are the payments an author receives on sales of a published work. Some contracts link royalties to advances – the money an author receives up-front on the deal – but even contracts without advances contain a royalty clause.

Generally speaking, royalties are calculated as a percentage of sales, sales price, receipts or profits, but publishers have many ways of defining these deceptively simple terms. Authors must read contracts carefully and be absolutely certain the royalty terms are clear and unambiguous before the contract is signed. Afterward, it’s too late to clarify the terms and almost impossible to change them.

Royalty percentages are usually stated clearly, but the calculations can be harder to understand. In the interest of flushing the lurkers from the weeds, let’s take a look at three common ambiguities in royalty calculation:

Wholesale vs. Retail vs. “Price Received.”

Authors’ royalties are calculated as a percentage of some base amount per book (or copy) sold. The basis for that calculation varies from publisher to publisher – and sometimes from contract to contract.

“Wholesale price” is the price the publisher charges to distributors and retailers. This number will be lower than “retail price” (or “standard/suggested retail price”) which is the price at which resellers offer the book to consumers – or, in some cases, the price the publisher suggests resellers charge. “Price received” is a third category entirely, and represents the actual price the publisher receives from the person or entity who purchased copies of the author’s work. This can be lower than wholesale, in the case of discount sales, or higher than wholesale, in the case of publishers who sell directly to individuals via websites or other direct forms of public sale.

Gross Receipts vs. Net Receipts.

In addition to basing royalties on the price of works, publishing contracts may also calculate on the basis of “gross” or “net” receipts. These terms may be used in combination with other pricing factors, for example, “Ten percent (10%) of gross price received.”

Gross receipts means the amount the publisher actually receives from the relevant source, without deductions. This is the best kind of calculation for authors, because it makes accountings easier and gives the author a larger share of the take.

“Net” receipts means gross receipts minus certain expenses, which may or may not include taxes, distribution fees and other publisher costs. Contracts which base royalties on “net” receipts without further clarification are dangerous because they provide no limitations on what the publisher can deduct from receipts, potentially reducing the author’s share to zero. Authors should not agree to royalty clauses with “net” receipt calculations unless the contract specifies – in detail – what the publisher can and cannot deduct when calculating royalties due to the author.

Discounts, Returns & Promotions.

Most contracts provide that authors receive reduced royalties on works sold at deep discount and no royalties at all on copies returned to the publisher or distributed free of charge for promotional purposes. In some cases, “deep discount” pricing results in no royalties at all. There isn’t much most authors can do about negotiating better terms in these categories, but careful reading of the contract is still a must.

Discounts, returns, and promotions should be defined in a way that prevents an unscrupulous publisher from including all works sold at any discount in the “deep discount” category or from giving away too many free copies of the author’s work (for example, as a “freebie incentive” for buyers to purchase a different author’s work).

A note of caution: publishers are in the business of making money. It’s very rare for a legitimate publisher to produce print works and then give them all away. Inappropriate levels of giveaways are more common in e-only publishing, but even there it’s not in the publisher’s best interest to produce your work for free.

The relationship between an author and a publisher should be one of mutual benefit. Don’t assume your publisher is out to harm you – but be alert to contract terms that work to your detriment.

In the end, the author should remember two key factors about royalty calculation:

  1. Never, ever sign or agree to anything you don’t understand or which seems ambiguous when you read it.
  2. Always, always obtain the opinion of your agent or an attorney before you sign.

Professional review is never as expensive as a lawsuit, and lack of understanding now almost always adds up to sorrow later on.

I blog about writing and publishing and tweet @SusanSpann. If you’d like to read more about publishing contracts, be sure to visit my website.

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16 Responses to Beware Of Kings With No Clothing – Calculation of Royalty Fees In Publishing Contracts

  1. Your blog about royalties and payments like advances that we writers recieve clarified things for me that I have never understood before. Thank you so much for your post.

  2. Jenny Hansen says:

    Susan, this post ROCKS! I’ve yet to see a publishing contract, but based on the other contracts I’ve worked with, I’d never want to agree to Net. I understand that many authors do, but it sounds like something to be avoided.

  3. Sharla Rae says:

    Thanks Susan for putting the legalese in authorese. No one wants to claim ignornace but even reseaching this kind of info can make my brain turn to mush. You’ve stated it plain and simple so our creative minds get it.🙂

  4. Susan Spann says:

    Thanks for the compliments! I enjoy “translating” legalese, and I think it’s good to dispel some of the confusion – and mystery – surrounding the contract process. Big thanks to Char and the Writers In the Storm crew for letting me guest-blog today!

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  6. That was a good matter-of-fact way of giving us the reality of royalties. A friend of mine was truly hurt with the term “net” in her contract. It seems even office copying and other “sundry” items were deducted from her potential royalties. Caveat emptor is the mantra of the real estate agent … it must be for all of us in the writerly “business” as well. Thanks, Susan🙂

  7. Laura Drake says:

    I know I’ve read this info before, but my head refuses to absorb all the legaleze.
    Thanks for putting it in English! I’m going to make a cheat sheet from the definitions so I don’t look like an idiot.

    About that, anyway!

  8. I reviewed a contract from an e-publisher recently and was interested to see that the royalties were based on the gross receipt, but then they went on to list the items that were deducted from the gross receipt before the royalty was paid.

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  11. Gerri Bowen says:

    Great post, Susan. I actually understood and connected to what you wrote. Thank you!

  12. Richard Snow says:

    Sharla, thanks from Down Under for writing such a clear piece. when my turn comes I will definitely look at “Gross” vs “Net.”

  13. Susan,
    That was a great article. It explained all those terms in an easy-to-understand way. My first book was with a small press, and the editor insisted on basing royalties on wholesale price. That seems to be common with small presses. He would not pay royalties on books I bought, so I dealt with a wholesale house to buy my copies and sold them for a profit.
    Carolyn Williamson

  14. Susan Spann says:

    Thanks again for all the kind comments and compliments.

    Ellaquinn – what you saw was another way of calculating “net” – but a slightly trickier one to pick up on. Some publishers use the word “gross” but then redefine it as “net.” I’ve actually seen the opposite too – a publisher’s contract which used the word “net” but then defined “net” as “gross sales minus publisher’s taxes due on sales, if any” – essentially giving the author royalties on gross instead. Great comment – and one that proves how important it is to read every word!

    Carolyn – you’re right that small presses tend to have unique royalty provisions, and that it’s extremely important to make sure you understand them. This ends up being an issue that impacts independent (non-represented) authors more often than those with attorneys or agents, because it’s often difficult to understand the legalese. As your case proves, though, sometimes understanding the terms can help you find a creative way to maximize the benefits of the contract. It was a really smart move to find a wholesaler to buy your copies!

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