Sep 292010

Where is your money going?

I was inspired to write this post by a couple of recent articles lamenting how the e-book revolution is making things tougher on authors: a WSJ article about the plight of authors, and a Futurebook description of a panel discussion about the future of books. My first thought was that the e-book revolution has increased my sales and income almost a thousandfold (OK, so it wasn’t very high to begin with!), and that the lower costs of e-books, the worldwide digital distribution they afford me, and the ability to reach readers without going through layers of middlemen (publishers and agents) has allowed me to price my e-books competitively and sell more books in a month than I used to in a decade. How can this be bad?

My second thought was that the two articles I read, and the dire predictions and “woe-is-me” lamenting therein, were mostly coming from those same middlemen: publishers and agents.

Let’s start off with some facts about where your money goes when you purchase a print book or an e-book:

  • Hardcover: These books retail for around $25, yet cost about 1/10th that amount — about $2.50 to print.
  • Trade Paperback: Retail for about $14, cost about $1.
  • Mass-Market Paperback: Retail about $8, cost about $0.75.
  • E-Books: Retail anywhere from $0.99 to $14.99, but most new releases from large publishers are $12.99. No printing costs, although they share the editing, cover design, and other costs of print books, and do have some formatting costs as well.

One interesting thing is that, as customers have clamored for lower e-book prices — rightfully claiming that there are no printing, shipping, or returns costs for publishers to account for — publishers have claimed these costs are only a small fraction of the cost of a print book (about 10%). Now, I think they’ve underestimated the costs of shipping and warehousing books, and the tremendous cost of accepting returns (for full credit) of unsold books by bookstores — sometimes paying for return shipping, sometimes having the books simply destroyed, and other times selling them in bargain bins for a fraction of the cover price. But I’ve seen enough data to convince me that the printing costs of a book are roughly in the ranges I spelled out above, when printed in large offset print runs.

One thing that jumps out at me is that hardcovers only cost a buck or two more than paperbacks, but can sell for $10 or $20 more. When Macmillan’s CEO John Sargent laments that “the value proposition goes ever downward when on screen … the perceived value decreases without a physical object,” I think what he’s really saying is that publishers can’t rip readers off for paper any more. I don’t think most readers understand that the extra $17 they pay for a hardcover is only $2 for the extra cost of the physical object (the paper and cover) and $15 as a “you want it first, you pay way more” tax. In other words, publishers were successfully able to charge triple the cost of a paperback for the hardcover version by combining the “it’s new, so it costs more” and the “look at how much nicer and more durable the hardcover book is” costs — without people realizing that the vast majority of the extra cost was the former, and the nicer paper and stiff cover was only a small fraction. With e-books, such intermingling is impossible, since the format of the book doesn’t change — not only are you getting the same words, but there’s no longer a different physical format to throw you off. And I think customers have said, “OK, I don’t mind paying a few bucks extra when a book is new, but there’s no way I’m paying that much more.”

Since I believe most readers overestimate printing costs, a related effect is that, once readers understand that printing costs of an e-book are zero, publishers can no longer exploit that lack of knowledge. Instead of being able to combine “new book tax” with “nicer, more expensive to print hardcover” costs, readers now understand there are no print costs with e-books, and can see the new book tax for what it is. Unfortunately for publishers, their industry had evolved to the point that the huge profits of hardcovers were what had kept them afloat.

So, let’s break down where your money goes a little more closely, shall we?

Cost breakdowns for print books vs. e-books

Your typical hardcover book costs around $25. The retailer (Barnes & Noble or Borders) typically pays the publisher about half the list price, so the publisher gets $12.50 (assuming the book sells, otherwise the bookstore sends it back!). Of that $12.50, it costs $2.50 to actually print the book, and the author gets a 15% royalty, which is $3.75. That leaves $6.25 to the publisher, from which they have to pay for their editors, proofreaders, cover designers, print layout people, CEOs, lawyers, advertising, and rent for big offices in New York City. Whatever is left over, is profit.

The typical trade paperback sells for about $13 (maybe a bit more, but this price will line up nicely with e-book pricing), costs about $1 to make, and provides an 8% royalty to the author ($1.04). Subtract the 50% retailer cut ($6.50), and the publisher profit is $4.46.

The numbers for a mass-market paperback book that sells for $8 would include about 75 cents for printing, an 8% royalty to the author (64 cents), and the same 50% ($4) to the retailer. That means the publisher is left with $2.61 for all their costs and profit.

E-Books used to be sold under a similar model: publishers priced them the same as hardcovers (!!!), retailers paid 50% of that price to the publishers, and then sold them for whatever they wished (list price, or some discount from list price, like how Amazon sold e-books at a loss for $9.99). Publishers insisted on the agency model, where the publishers set the sales price (not the retail price), and get 70% of the proceeds. Under this model, a $13 e-book garners 30% to the retailer (like Amazon or B&N.com), 70% ($9.10) to the publisher, and an author royalty of 25% of the publisher’s net proceeds (instead of the cover price), which works out to 17.5% of the cover price, or $2.27 in our example. The publisher has no printing costs, but let’s be generous and include 10 cents or so to account for e-book file creation (which is a one-time cost divided by the number of e-books sold). Subtract the $2.27 due to the author from the remaining $9.00, and the publisher is left with $6.73.

To recap, a hardcover nets the publisher $6.25 (or 25% of the cover price), a trade paperback $4.46 (34.3%), a mass-market paperback $2.61 (32.6%), and an e-book $6.73 (51.8%).

Wait, and publishers are complaining about e-books? They just found a way to earn more money on each $13 e-book than they used to make on a $25 hardcover. The percentage of your money they’re ending up with has more than doubled in the e-book world — and that’s the really important number, because don’t you think they can sell a lot more e-books for $13 than hardcovers for double that price?

And what about the author? Well, I may be biased, but it seems to me the author isn’t getting all he deserves here on e-book sales. First of all, publishers justify giving authors only 8-15% royalties in the print world because publishing a novel includes a lot of financial risk: to get those low per-book printing costs requires large print runs, and that involves up-front capital and the risk of paying for a bunch of books that never sell or get returned. There are also costs of storing and shipping all those books (along with the costs of editing and preparing the book), almost all of which occur before the first sale is made — and the publisher doesn’t even get paid for print sales until a month or two later! On the other hand, with e-books, there will be some editing and preparation costs, but there are NO printing costs or other huge up-front outlay of money for shipping or warehousing. There’s no way to lose money by printing more books than you sell, and publishers get paid much quicker on e-books as well. It seems to me that if publishers deserve the lion’s share of the revenue from books because of all their up-front financial risk, then the corollary is also true, and they don’t deserve as much if their financial risk is lower, as it clearly is with e-books. Instead of doing editing and cover design work, printing tens or hundreds of thousands of copies, and using their vast distribution, storage, and shipping network to get their books into thousands of bookstores across the country (and thus earning their share), publishers are now just doing the same editing and cover design work and a relatively-painless e-book conversion and upload process, and are taking 75% of the proceeds.

Now, I’ve done a lot of proofreading and editing, and designed my covers, formatted my e-books, and uploaded them to Amazon and elsewhere. And it takes a good deal of time and effort — but it does NOT take 3x as long as writing the book in the first place! For a large publisher especially, the formatting effort should be minimal — I know my third book took a lot less time to format than my first once I got the hang of it. More importantly, these jobs don’t require huge publishers with lots of money: authors can hire editors and cover designers by the hour or for flat rates, without giving up the majority of their books’ revenue forever!

I find it interesting when literary agent Simon Lipskar chides readers that they “should feel guilty if they buy a Kindle edition versus a hardcover, but not versus a paperback, in terms of what the author gets.” Whoa. Who determines how much the author gets? Right, the publishers. And, besides, even at 17.5% of gross, an author’s e-book take is still better than their hardcover take, let alone the measly 8% they get from paperback sales. (Of course, for an independent author like myself, I get the full 70% of e-book revenue after Amazon takes its 30%, so I have no complaints — I can charge readers much less for an e-book and still make a higher royalty than on a paperback, which is a win-win in my book.)

The bottom line is, e-books not only cost a lot less to produce (no printing costs, shipping, warehousing, or returns), but also require far less up-front investment and risk. Since those are costs and risks borne by publishers in the print world (and they are compensated for it), it only makes sense that removing those costs and risks should reduce the cut publishers are fairly entitled to take. Instead, publishers want the best of both worlds: reduced costs and risks, and they want to keep more of the purchase price for themselves.

Now, I do understand the publishers’ current dilemma: they’re caught between the new economic realities of e-books and their old business models, and 92% of book sales are still print. So, they may need to do a lot of painful downsizing and re-organizing, but they can’t do it all just yet and abandon their print sales model. But what frustrates me is that publishers aren’t telling us this, they’re not saying, “This is a tough transition time and we need to do certain things for the next few years and then here’s how we see things shaking out.” They’re not offering authors 17.5% of e-book royalties for the first 5 years, to increase to double that once e-book sales overtake print, or whatever. They’re not moving forward with their transition plan, they’re just trying to protect the status quo by fighting e-book adoption. And, like lots of businesses, it seems they’re more interested in protecting their own short-term profits and salaries and bonuses than in working on a long-term, sustainable business plan that’s fair to readers, authors, and publishers in the new digital world.

Related posts:

  1. What Are They Thinking?
  2. Cheap E-Books Dominate Amazon Bestsellers
  3. E-Books and the Agency Model
  4. E-Books Outselling Print Books on Amazon
  5. Electronic Publishing Myths

33 Responses to “Cost Breakdowns: E-Books vs. Printed Books”

Comments (30) Pingbacks (3)
  1. Brooke says:

    For book lovers like me, I would very much prefer the printed books. Although e-books are much cheaper and sometimes come for free, I can hand printed books to my children and they can do the same when they get married.

    I have nothing against e-books since I often download free versions of books. Don’t know how to explain it but when you get a hold of printed books, it’s like you’re a part of something and that you’re perfectly bound to the writer’s imagination and writing.

    • Always Write says:

      Sorry for the delayed response, your comment got caught in my spam queue. Thanks for coming by and sharing your thoughts — I also love printed books, but I have to say I very quickly converted once I received a Kindle 2 and started reading e-books on it. I just love the added convenience, lower cost, and extra features (I can bring thousands of books with me on a trip, the built-in dictionary, adjustable text sizes, etc.).

      I find that I don’t miss the printed book at all: to me, the “book” is the words themselves, not what they’re displayed on. And as for the writer’s imagination and writing, maybe it helps that I wrote all of my books on a computer, so it’s natural for me to read them on an e-reader.

      But, I think some people will always treasure the printed books, and I certainly still like having certain special books in physical form. I wonder: have you ever tried reading e-books on an e-Ink screen (like on the Kindle or Nook)? The vast majority of people I know who have tried it, like it very much.

      • Brooke says:

        The only thing I got so far is the iBook. I like it, as well, but I’m just really attached to hardbound copies. See, when I was little, my mom would hand me down her books, so, I kind of grew up looking up to my mom who reads books. She has a good collection of it, though. :-)

        • Tuttle says:

          What I’ve personally seen is for me the kindle takes the place of books I’d get mass market paperbacks of and if its one of those books that I’d want a hardcover book for myself or the ability to hand down, I’d still get that. It’s not paper or ebooks, is whatever is more appropriate for the particular book. It makes complete sense for someone to read an ebook and go buy a hardcover version of the book or for someone to just pick up a hardcover of one of their favorite authors which really makes a difference on their life.

          • Always Write says:

            I could definitely see e-books essentially taking the place of mass-market paperbacks, while people who still want a nice physical object as a keepsake or to display on their shelves would buy hardcovers of their favorite books — especially special editions, signed copies, etc.

  2. L.C. Evans says:

    Nice article, David. As readers become more aware, publishers will have to change or lose big time. I think readers are already thinking that big publishers’ ebook prices are a ripoff. As more readers get ereaders, this attitude can only spread. I think the most I’ve ever paid for an ebook is 6.99.

    • Always Write says:

      L.C., thanks for the compliment and for leaving your thoughts. I’ve definitely seen countless readers express outrage over e-book prices above $9.99, and I agree — I can’t see myself paying more than that for an e-book. Truth be told, I don’t even spend that much, although I can see it as a reasonable price for a new bestseller (but I never paid hardcover prices before, and I don’t plan to buy the most expensive, newest e-books now).

      It does seem that enough readers are willing to pay $12.99 (but not $14.99!) that publishers seem to be gravitating to that price point. I guess those prices wouldn’t bother me as much if the publishers showed a real willingness to lower those prices after the e-book was out for a while, and ensure they stayed below the least expensive print version available.

      That being said, just because the market might bear a certain price, that doesn’t mean it’s my preferred price or the best one for authors or readers in the long run. I’d rather make my books far more affordable and reach more readers at $2.99.

  3. Melvin Stief says:

    You’ve made some decent points there. I did a lookup on the topic and wanted to let you know that I found that nearly all experts will agree with your post.

    • Always Write says:

      Thanks for the confirmation! I try to make sure my posts are informed and well-researched, especially when putting forth numbers or talking about contentious issues like this one.

  4. Tara Maya says:

    This is extremely eye-opening, thanks, David.

    I also wanted to let you know how I found you. I bought the trade paperback of Right Ascension on Amazon. I had no idea that it was self-published. I enjoyed it a lot. Then I saw your name on Victorine Writes and recognized it. I was very impressed.

    • Always Write says:

      Thanks for the kind words, Tara! I’m very glad you enjoyed the book — and thanks for letting me know how you found me (I always wonder how people come across my blog).

  5. ohyeah says:

    There’s a lot more “cost” to subtract from the “profit” of printed books; you mentioned it right in the beginning, that the seller returns the book if it does not sell. That happens to a fairly large percentage (half?) of all books, and the cost of printing and shipping and destroying those returned books reduces whatever profit might have been made on the books that were actually sold. With e-books, however, there’s no such cost, which significantly increases the profit they generate for the publisher.

    • Always Write says:

      Oh, I agree that publishers have been under-representing the true cost of printed books (and therefore the savings they enjoy with e-books) as they try to explain why they’re pricing e-books at or above the price of paperbacks. Certainly, warehousing, shipping, and returns costs add to the printing costs I listed above — but it’s very difficult to get accurate data on exactly what those costs are, since I’ve seen wildly-varying reports (like returns being anywhere from 20% to 60%) and publishers aren’t keen on releasing that information. But my main point is that, even if we ignore all those extra print costs, e-books are STILL a much better deal and provide publishers with higher profits than print books.

  6. Peter Olcott says:

    In all these explanations of cost of ebook versus printed, there is another consideration. As the price of the book drops, the number of books sold can greatly increase, by the laws of supply and demand. The maximal profit could be much much higher with low ebook prices. You can see this play out because on the Amazon store, I have purchased $1 books from unknown authors, and these books enjoy very high sales ranks, much higher than famous authors, and generating a much higher profit for these self-published authors, than if they had demanded high prices, and wallowed in obscurity.

    What these dumb publisher are not realizing, is that they could maybe catalyze a lot more book sales BY keeping the price low, maybe even much lower. How many more books would they sell if they reduced the price to $5, even though they cannibalized their expensive hardcover sales? Could they create a whole new class of casual reader? The average American spends 5 hours in front of the TV per day. Could these publishers target this massive demographic by making books inexpensive, and a daily ritual for millions of consumers?

    Lastly, because the marginal cost of digital publishing is so low, publishers can explore prices all the way down to $1 if they wanted. This could never happen in the old paper book model, because the marginal cost and upfront cost is so high.

    • Always Write says:

      Peter, thanks for coming by and commenting. I agree with everything you say — in fact, I’ve posted about how producers of digital content can generally cut prices in half and sell 3x, 5x, or 10x the number of copies, increasing profits. I discussed it at length in this post, which you might enjoy:

      http://www.davidderrico.com/pricing-digital-content/

      I’ve also touched on the issue in a few other posts here.

  7. GE Anderson says:

    Great article. Thanks for posting it AND thanks for adding in all the quantifying data. The ebook revolution will only end up being positive for all concerned when publishers finally get on board.

    • Always Write says:

      You’re very welcome; I’m glad to see that people are finding these posts useful. I consider the e-book revolution to be a very exciting time for readers and authors — although it might certainly be a scary time of upheaval for the publishers who are on top of the current publishing world. In the long run, just as the invention of the car may sadly have put buggy-whip makers out of business but ultimately had many benefits, some publishers may go out of business, but some will adapt and others will rise up and embrace the promise and efficiency of e-books to help authors and readers and improve the purchasing and reading experience.

  8. Ramon Lo says:

    Thought you’d like this if you haven’t seen it already.

    http://money.cnn.com/video/news/2010/10/05/n_vis_stephen_king.fortune/

    • Always Write says:

      Thanks for the link — some interesting stuff in that Stephen King interview video. He’s right that the future is coming, things are changing no matter how much certain businesses (publishers or bookstores) might want to prevent it. And I also agree that the value of a book is in the words and the story, not in the medium in which it is delivered. E-books won’t be the “death” of books, they’ll simply be a new, less expensive, more environmentally-friendly, more convenient delivery mechanism that more and more people will come to prefer over paper books.

  9. JB says:

    E-books are perfect for novels and 90% of the readers out there. Those clinging to print books have a good point: it’s that smell of opening a book, etc.

    However, for someone like me, even though I can get all my technical manuals, training materials, API documentation, etc. in e-book format it’s simply not feasible to do so. Writing liner notes, drawing diagrams, writing out scenarios/equations, etc. simply cannot be accomplished efficiently AT THIS TIME. The type of notes and things I take in the margins simply are not covered.

    I also work with a computer every waking moment of my work days and do research on one at home constantly (I’m a software guy). Using the print books feels “nice” because I can read/study/research technology without actually using technology. I can turn off my phone, jump in the tub and just read for an hour or so.

    A lot of people don’t understand this, is that the e-reader displays are unique. They are **NOT** like staring at a computer monitor. This makes them much more friendly for EVERYONE to read. Things like the iPad which are back-lit can wind up hurting your eyes after a while, but the basic e-readers are built differently. If you don’t know about it already: http://en.wikipedia.org/wiki/E-ink

    If they could come up with a solution viable for reading research and making notes for technical/mathematical/etc. purpose I would probably switch in a heartbeat.

    • Always Write says:

      Hi, JB, and thanks for coming by and commenting. You’re right: while e-books are (IMHO) perfect for novels, they’re not yet ideal for textbooks, children’s books, anything you’d want to draw on (although you can type in text notes), etc. I also have no doubt that, in time, e-Ink screens will develop color, the ability to draw notes and diagrams, unbreakable screens, faster refresh, etc. But they’re not there yet.

      And I can appreciate the idea of shutting everything off and getting away from technology. I know the Kindle is technically a computer/electronic device, but it doesn’t feel that way to me: I shut off the 3G wireless and just read like I would read a paper book. No distractions, no beeping or emails coming in, no backlit LCD screen, etc. I truly am almost able to forget it’s an e-reader (the 2-week battery life helps here) and just get lost in the words.

      I actually wrote a post on the difference between LCD and e-Ink screens, and how e-Ink is non-backlit and much easier on the eyes. It’s the most popular post on my blog to date!

      http://www.davidderrico.com/e-ink-vs-lcd-whats-the-difference

  10. Courtney says:

    very informative article. I work for a hearing aid company that is hoping to reinvent the hearing aid industry with competitive pricing an online sales. Your points are relevant to this market as well. great job and good luck!

  11. Amy says:

    Hi David,

    Thanks for a great blog :) The distributor/retailer cut is the greatest percentage in all models except the ebook according to the graph above. Perhaps publishers aren’t solely to blame for high book prices when surely they would put more into the project (structural/copy/proof editing, design, good production etc) than distributors/retailers?

    • Always Write says:

      Hi Amy — thanks for your comments and for the kind words!

      Certainly, when retailers take about 50% of the retail price of print books, it’s hard to get the prices down (for that reason, I quickly stopped trying to sell my print books in bookstores or do book signings — there just wasn’t any money left after the bookstore cut). Of course, having large retail stores and employees is expensive.

      But, I don’t hear much complaint about print book prices — what I hear a lot of is outrage over comparatively high e-book prices. That frustration is understandable when the retailer cut is much less in the e-book world and the printing, storage, return, and distribution cost of e-books is near zero.

  12. Thomas says:

    THIS IS AWESOME AND SO AM I.

  13. Ben says:

    Hi David,

    This blog represents what I always figured for truth in the publishing world. Thank you for confirming those suspicions and for documenting the details.

    I am a first time author (actually about 1/2 of the way through my first young adult novel). I have been considering my options once my work is complete. First, I was contemplating financing the printing of the first run of 1000 hardbound books myself (or through a donor). Then I would sell them through Amazon or other online retail bookstores at the same time as offering an e-book through those same retailers at a much discounted price. Is that a good approach or should I just skip the printed version altogether? Does positive word of mouth spread as widely if there is no printed version available?

    In my mind, I was also picturing the satisfaction of holding my very own book in my hands, but maybe it is not worth the headache and cost. Any thoughts or advice to a newcomer?

    Also, is there a process I need to consider to get my work copyrighted? Any words of wisdom would be appreciated.

    • Always Write says:

      Hi Ben, thanks for the kind words and for leaving a comment. I’m glad you’ve found the blog useful.

      I actually have several posts about the self-publishing process, including my recommendation for printed books. While I sell many more e-books than print books, there is an undeniable allure to holding your finished work in your hands. But I would NOT recommend paying for a 1,000-copy print run. You can use CreateSpace to print as many or as few copies as you want, a few at a time, and to distribute to Amazon with no up-front cost (they just pay you a royalty when they sell). More details here:

      http://www.davidderrico.com/self-publishing-options/

      As far as copyright, registering it is a relatively easy online process with a $35 fee to the U.S. Copyright Office (www.copyright.gov). Also, your work is copyrighted the moment you write it (once recorded with pen and paper, printed, or even saved electronically).

      – DD

      • Ben says:

        Thank you for the quick reply and the advice. This is all new to me. I will look over the posts you reference in detail. Again, I greatly appreciate it.

        • Always Write says:

          No problem — I’m always happy to help a fellow author. One other piece of advice: as you’ll see from my self-publishing posts, you can do the entire process for free or almost free (although it does take a good deal of time & effort on your part). So be wary of anyone trying to charge you money for self-publishing services, as there are many people who will take advantage of eager aspiring authors. But Kindle Direct Publishing (through Amazon), B&N Pubit, Smashwords, and CreateSpace (among others) are all completely free — THEY pay YOU when and if your books sell, with no up-front costs by you.

          That being said, if you need or want help creating a great cover, having editing done, or having someone help with e-book formatting, I’m sure there are ethical people who can help you for reasonable fees. KindleBoards is a great place to learn, meet other authors, and find people who offer such services. Good luck!

  14. I’m an author and I self-publish my books, DVDs, and CDs to a very active niche market. I have to charge sufficiently to be the guy that keeps writing and delivering this stuff. Physical cost has very little to do with it.

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