Note: Here there be mathematics.
There’s a calculation I’ve been breaking out dozens of times in the last month or so–in innumerable conversations at RWA, in e-mails back and forth with several people asking me for advice. I mentioned it in my talk to the Golden Network, and mentioned it again at the PRO retreat at RWA’s national conference. Usually the question that has been asked of me looks like this: “I got an offer from my publisher for $3,500 for my next book,” someone says. “Should I take it or self-publish?” (Note: I’ve seen similar numbers from five different people in the last month, so if you think I’m talking about you, I’m not–I picked the advance that was the aggregate offered.)
I never answer that question. I can’t know what your circumstances are or what you should or shouldn’t take, or what you value and what you need or where you are in your career.
What I can do is tell people how to think about money earned over time in a semi-rational fashion.
First, we need to talk about time, and specifically, how long a time. When people say that ebooks are forever, that may be true in the strictest sense of the word. But your ownership rights in your ebook will terminate seventy years after your death, and that will undoubtedly restrict your commercial ability to exploit things. Second, the implication is often that if you sign a traditional publishing contract, you tie up your rights forever. But you don’t. All U.S. authors have the statutory right to terminate a grant of rights 35 years after publication under 17 U.S.C. 203. 35 years is a long time, but it’s not forever. (In fact, in my calculation, it’s about 50% of forever.)
Furthermore, even if you had the right to your ebooks forever, money earned today is worth more than money earned next year. That’s because you could take the money you earned today, put it in the bank, and have more money waiting for you next year. What that means is that if someone offered to give you $50 a month every month forever, with no stopping, they aren’t offering you an infinite amount of money. You can actually put a finite dollar value on how much that costs. (For math nerds, it’s because the calculation of how much that is worth is a series of form x^n, where x <1, and so the series converges.) (How could you get something that paid you $50 a month every month forever? You put an amount of money in the bank, one that pays $600 a year in interest, and look–you’ve got money forever!)
So if you are going to think about the value of the rights you are giving up, you should (1) be thinking about their value for 35 years, not for infinite years and (2) be taking into account the time-value of money.
Luckily, economists have been doing this kind of calculation for years. It’s called a net present value calculation.
Here are the things you need to do to figure out the net present value of your rights.
1. You need to have some idea of how much money is worth to you over time.
There are a lot of things that people advise using here, and I’m not going to get into that much. I will just point out that if you owe the mafia money, and they’re going to collect on it in November, and you need $20,000 or you’ll lose a finger… Don’t think too hard. Money today is worth a lot to you. Money earned post-November is not worth nearly as much. Likewise if you are on the verge of losing your house or if your brother needs bail money.
If you’re carrying credit card debt at 17% interest rate, money today is worth a lot more to you than it is to someone who has no debt at all.
For the calculations that follow at the end, I’m going to use 2% as the rate. This is actually high when you compare it to today’s discount rate, but interest rates are historically low, and we’re doing the calculation over 35 years, so. Economists might quibble with this choice, but frankly, this is the smallest of the sources of error in my calculation and so I’m not going to weep about it.
Just be aware that what I say may not apply to your situation, and you might need to jigger the calculations accordingly.
2. Figure out what you’re being offered.
This is just going to be the starting point, but it’s a good starting point.
Let’s take the example I started with (not an actual example, by the way)–someone who is offered $3500 for a book. What would it take for the net present value of your self-published earnings to come out to $3,500? Using 2% as the discount rate, a contract that offers you $3,500 is the equivalent of earning $139 a year for 35 years–that is, making $11.58 a month. That’s what $3,500 a book means.
Now let’s up the ante. What if you were offered $500,000 for a book? That’s a huge advance. A self-published book that has the same net present value is one that makes $19,750 a year, $1645 a month…which means selling about 633 copies at $3.99 a month every month. Put another way, a book at $3.99 that falls somewhere between Amazon rank 5,000 and 10,000 for 35 years is worth $500,000 today.
For reasons that I’ll get into below, and that some of you are screaming about now, this is a really, really rough estimate of actual earnings. But it’s a decent rough guideline. Take the advance. What kind of steady sales would you need to equal that advance over time?
This tells you, by the way, that a $3,500 advance is an absolutely pitiful investment by a publisher. They will earn back what they put in without even batting an eyelash.
3. Compensating for unknowns and earning over time.
Of course, this calculation isn’t phenomenal. For one, it’s a rare book that earns the same in Year 35 as it did in Year 1. We don’t have a clue what the self-published tail looks like in Year 35, because we’re really only in Year 3 or 4 of the self-publishing era, and that’s been coupled with the growth of digital publishing, too. Whether your books are still performing well in Year 35 will probably depend on whether you are still writing new books in Year 35 (35 is a long writing career), and what you’re doing to promote and push your books in Year 35.
We have literally no data, and while we can make stuff up, be aware that this is all we can do: Make stuff up and hope our assumptions are reasonable.
Second, you have to take into account that you can earn out your advance on your traditionally published books, too. And, in fact, if you’re offered $3,500 for a book, you will earn out your advance over the course of your publishing career unless your book was incompetently produced and priced. (In which case, I hope your contract allows you to get your rights back earlier.) So you need to add the money you make upon earn out into your calculation. How long will it take you to earn out? How much will you earn per year after that? This poses precisely the same problems that I just mentioned.
Luckily, since you’re comparing the value of two income streams performing under similar conditions, as long as you make similar assumptions about each one, you won’t be prejudicing one over the other. So let’s do something more complicated. Imagine that for the person who is offered $3500 for a book, she’s paid 50% on signing and 50% on delivery. Imagine that she’ll have a print run of 8,000 copies (based on a number of authors I’ve talked to, this is about right–if you’re getting more books printed than 8,000, and your advance is $3500, you’re being seriously low-balled on the advance figure), and she’ll sell 6,000 of those in the first year at 8% of the cover price of $7.99, giving her $3835.20 in print earnings.
Imagine that she’s going to sell 2,000 digital copies of her book a year, every year, for five years, at which point it tails off and she sells only 500 digital copies of her book a year for the remainder of the life of the contract. Imagine that the cover price is $7.99, the publisher is making 70% of the cover price, and she’s getting 25% of that.
In year 1, the author makes the advance of $3500. In year 2, when she gets her first royalty payment (assuming the book is published relatively close to turn in and there isn’t a huge reserve per year–in actuality, this might hit in year 3 or 4, but we’re going for simplicity), she gets $335.20 (the excess over her advance from print earnings) + $2,796.50 for her portion of the digital earnings.
In years 3-5, she gets $2,796.50 per year.
In years 6-35, she gets $699.12.
If this is the case, the net present value of that contract offered to her by the publisher is $28,827. Not bad.
So what’s the alternative? Let’s suppose that she self-publishes the book at $3.99. That she sells 2,000 copies of the book a year for the first five years (the lower price point combatting whatever marketing *cough* the publisher may or may not do for the book), and 500 copies a year for the next 30 years of comparison. And let’s further suppose that she must spend $2,000 to get her book on the market.
The first year, she makes $3200: $5,200 in income minus $2,000 in expenses. (I’m using $2.60 as the income for the book–Amazon gives 70% minus a delivery charge in most circumstances, 35% in others; B&N gives 65%. $2.60 is a little on the low side, but not a lot on the low side.)
Years 2-5 she makes $5,200. Years 6-35 she makes $1300.
The net present value of self publishing that book is $49,685.
Now, of course, there are an infinite number of corrections you can add to that. I’m not insisting that this is the way to do it. I’m only claiming that if you want to know what your rights are worth, you should think of the value over time for 35 years. Make your calculation as simple or as non-simple as you want.
4. Ask if it’s worth it.
I hear a lot of reasons why people go with traditional publishers. They don’t want to do the work. They want books on the shelves. They want the prestige. They think the publisher will do a better job in marketing. They want reviews in major print publications. I could go on and on. Some people want the advertisement that a big print run will give them. Some people think it’ll help them break out to the next level. Some people think that diversification is important in income, and so want to diversify. And so on.
None of these reasons are invalid, bad, illogical, or in any other way awful. In fact, all of them are important and worthwhile.
I do think, though, that you should have at least some sense of what that thing is costing you. If your calculation suggests that your publisher’s contract is worth $28,000, and you’ll make $49,000 if you self-publish, and you’re going with your publisher because you want to have books on the shelves, ask yourself if it is worth $21,000 to you to put 6,000 copies on the shelf.
If you think your publisher is going to do a better job marketing, ask yourself if that marketing is worth the difference in price. (And think about the value of the marketing as well as the cost for you to purchase it in both time and money. And be frank–don’t imagine you’ll get the kind of treatment a bestselling author gets if you’re not a mega-bestseller. If you’re getting an advance of $3,500, look at people from your publisher who are similarly situated, and ask what kind of marketing they’re really getting. How much is it worth? If you’re talking getting a book on NetGalley, you can do that for a very small amount–and that’s about all that some publishers are doing for their authors.)
There are absolutely some publishers who are putting value into their author’s books, and it’s definitely rational to accept less money in exchange for other things that have value to you. But you should have some sense of how much less money you’re accepting, because at some point, the thing you’re getting in exchange for that money just might not be worth it. And if you haven’t run net present value calculations before, you might be surprised at precisely how much it’s costing you.