The Real Way Ebooks Save Publishers

Part of my 12 for ’12 plan involves moving into self-publishing. This is the first of (I hope) a series of posts about why I decided to do this and how being an indie publisher works. 

If you’ve been following the ebook revolution, you’ll often hear publishers justify higher prices for ebooks by claiming that it doesn’t cost much less to produce an ebook than it does for a printed book. After all, the writing, editing, cover, and so on — the fixed costs for developing a book — all cost the same amount no matter the book’s format. The only difference is that paper books must be printed and shipped, which we’re often told is a relatively minor portion of the costs of the book.

Even if you take that as true, it misses a huge part of the brick-and-mortar book-selling business that skews things in the favor of ebooks and print-on-demand books, at least for smaller publishers. It’s all about inventory management.

If I’m a publisher and I sell a book to a bookstore (or a chain, or whatever), I sell it on a returnable basis. This means that the store doesn’t pay me for the book until it’s sold. Books are heavy, and rather than pay money to ship them back, most publishers only ask the bookstore to rip the covers off the unsold books and send those back instead. (This is a point against those that argue that it doesn’t cost all that much to ship books around. If not, why worry about shipping covers back instead of full books?)

Somewhere around 40% of all books sent to booksellers are either returned or destroyed. That means that the average book is overprinted by 66%. Even if the cost per book isn’t all that much, that kind of regular, systematic, purposeful overage adds up.

Books that are returned sometimes get sent back out to other stores that somehow found an audience for the book that was bigger than expected rather than less. Others are held onto for reorders later in the book’s life. Those that remain in the publishers warehouse at the end of the year can be taxed as assets, so there’s a strong incentive to get rid of them after a certain amount of time and let the book go out of print.

With ebooks and POD books, you don’t have to worry about any of this. The cost of making another copy of an ebook approaches zero. While POD books cost more per unit to make than regular books, there’s no risk of overprinting or underprinting.

The real trouble comes with trying to estimate the demand for a book. While longtime professionals can have a decent feel for how many copies of a book might sell, so many different factors come into play that it’s impossible to get it right all the time.

Let’s say you decide to print 5,000 copies of a book, and it sells out. Now what do you do? You can take the money and sit on it, or you can go back to press. If you reprint the book, how many do you print?

Let’s say you’re an optimist and order another 5,000 copies of the book. But maybe the whole audience for such a book is 6,000 people, so you only sell another 1,000 copies. You wind up having to pulp the rest of them. That little mistake can amount to a good chunk of your thin margins on the book and turn it from a profitable seller into a money loser.

Now, for a big publisher, multiply that by hundreds of releases in a year, not to mention the thousands of titles on its backlist. It’s easy to see how a few bad mistakes can cost the company a great deal of money, but over the years the risks tend to average out. The smart publishers know this and fold it into their cost of doing business the same way a Las Vegas casino knows that it’s going to make money in the long run by rigging their games in their favor. That’s smart inventory management.

But what if you’re a small or independent publisher? The numbers aren’t on your side. You’re not a casino owner. You’re a player. A good streak can put you at the top of the heap, but a bad run can leave you flat busted and trying to figure out if you can hock your watch for bus fare out of town.

(In the gaming industry, I’ve seen lots of publishers go out of business. In every case I remember, they had a warehouse full of unsold product. Poor inventory management — among other things — killed them off.)

For small publishers, then, ebooks and POD remove every bit of risk involved with inventory management. There’s no inventory to manage. No book is made until someone pays for it. Instead of gambling your company on every book you publish, you reduce your risk to zero — as long as you can sell enough copies to cover your fixed costs.

The other benefit of ebooks, of course, is the higher profit margins. Most books sold through bookstores give the publisher something between 40–50% of the retail price of the book. With ebooks, they get 70% (in most cases). (The profit on POD books depends on what you charge, as the printing costs on each book is fixed.)

The ebook revolution is the main reason I — and many other authors — have been able to go into publishing our own books. The higher margins and lower risks — coupled with the lower costs of producing a book that modern computers provide — mean we can make money without having to mortgage our houses or line up investors. It’s taken a lot of the guesswork out of the business for the small publisher, and it’s hard to overstate how much of a difference that makes.