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.

Comments 10

  1. Matt, there’s a lot of truth in what you’ve written here, but I think you’re glossing over three pretty major points: time, marketing costs, and sustainability.

    For the single author who decides to self-publish, it’s easy to mark off the time you spent as “free” time. But as a publisher, I have to look at every hour I spend as an investment into one project or another; as money made or lost. I have only so many hours in the day, and books simply do not sell themselves. You’ve got the great head start of name recognition and a built-in audience, but most authors who wrote 12 books in a year would have 12 unread books. They’d also have very few hours to devote to actually selling those books.

    Marketing, again, is not free. And even if you’re only advertising in free venues, it takes time (time again equally money made or lost).

    But the real reason why ebooks don’t all cost 99¢ is simply a matter of sustainability. If I publish your book and it has a POD cover price of $14.99, I make a couple of bucks, but before I start to make a profit, I’ve got to cover my time, the cover, the shipping and printing, etc. But, still, there’s some meat on the bone there. On a 99¢ ebook, if sold someplace like Amazon or Smashwords, we make about 70¢ per book… which we split with the author right down the middle. And let me be the first to tell you that few publishers do the kind of volume you’d need to survive on 35¢ per sale.

    We’ve got to stay lean and while advances in technology have made our survival less risky (no huge outlays of cost), I have to sell a lot of ebooks just to cover our investment on each title. And, of course, there’s a whole essay to be written about how we arrive at our price points. But this is not that essay. 🙂

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      Good points, Frank. I wasn’t saying all ebooks should cost 99¢, just that the claim that ebooks cost just as much to produce as a printed book rings false and that one of the reasons for that is the fact that ebooks and POD books solve the inventory management problems that have plagued publishers till now. It takes a good chunk of the risk out of the equation, although not nearly all of it.

      I mentioned the fixed costs up in the opening paragraph. Most of those refer to the time spent, and I’d toss marketing in with those relatively fixed costs. I don’t look at my time spent on a book — whether for writing, marketing, or any of the other things a publisher must do — as free. I do this full-time for a living, and I don’t have a trust fund to fall back on. I run the Kickstarters for my 12 for ’12 project mostly to cover that time at a bare minimum rate.

      One of the big problems that books of any format have — well, any product for that matter — is making a profit at whatever the perceived value of the product is. If it can’t be done, then it’s time to come up with different products or find better ways to sell them. For me, Kickstarter was the key, and I’ll try to cover that in a future post.

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  2. Hi Matt.
    The epub business is still pretty new. as a stingy consumer, I find I am buying mostly ‘free’ books, and paying for only a few. So I am a customer, albeit very picky.
    But I’m not a good example of a regular reader, b/c I’ve given up on James Patterson and a few other popular authors, who, imo, are just whipping out sketches of books to sell on their reputation.
    However, of the ebooks I get for free, mostly to sample an author’s work, I am finding that a minimum of 40 to 80% have a desperate need for editing.
    Many are simply not well written. And some are not only poorly written, but also not even finished. People are giving a taste of a novella that isn’t even a complete story. Hesitant to leave a 2 or 3 star review, I really don’t know what to do about these books, but I don’t feel comfortable recommending them.
    However, I have found some outstanding gems in e-books and have given them 5 stars. It’s like prospecting, though. At least trad pub filtered books.
    I hope to e-pub some day. These are the lessons I have learned so far;
    Write the best book you can and then make sure it is properly edited.
    It’s OK to give the first one away, but make sure it’s a stand alone story that could have a sequel but doesn’t have to.
    Have at least two more high quality books to publish soon after the first one.
    Thanks very much for your post, and an opportunity for me to have a little say. : )))

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      Excellent points, Louise. As you say, self-publishing means you get to do all the jobs, and it doesn’t excuse you from doing them well.

  3. Matt, very interesting thoughts. I’ve read a number of pieces on this topic–as we all have–and I’ve been trying to think of way to co-opt the small record label strategy for a small press (which I’m considering starting).

    Now, small record labels tend to print vinyl singles in batches of either 250 or 500. They charge $5 or $6 a single, and after paying off costs and the band, turn very little profit. The outsider nature of the music, combined with the band & label’s limited resources, means there’s very little money to be made–but there is art to be made, and a lot of the labels are at it for years, producing quality music that you won’t hear on the radio. Some even become recognizable beyond the underground, like Siltbreeze and In the Red.

    Anyhow, my idea has been to run a small press in a similar manner–i.e., keep costs down with limited runs and limited profits. Even 500 books is a lot to move, so I’d want to start smaller–first though I need to get quotes from some local printers. Point of fact, I think my first step is to produce a very limited run of chapbooks and see if selling those very cheaply can create possible future customers. Do you know if anything like that has been tried?

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      Some small presses do work like that, printing chapbooks and other limited runs to establish reputation. At this point, though, that may be a dying model, unless you’re working with well-respected authors and creating high-quality books for which the limited nature helps fuel the deman. Under a certain print run number, it makes more sense to go to print-on-demand, as the prices are much more reasonable per copy than they are for short runs on a traditional offset press.

  4. Great article Matt, right on the money.

    Returns have bankrupted many small publishers…ebooks nicely sidestep that.

    After my years at West End Games, I KNOW that the big publishers’ claims that printing, warehousing and shipping were only a “small fraction” of the cost of producing a book reeked of utter BS. No way it is possible.

    Returns only compound the problem since with mass market paperbacks you only get the cover back (unsellable) and with trade paperbacks, often the returned books are so scuffed and shopworn that they can never be shipped to another store to be sold as new.

    Now, the only advantage that medium to large publishers have is their (theoretical) ability to get books into physical bookstores…but considering that the physical bookstores have cut back drastically on inventory, order fewer copies of the fewer books they do carry, still return early and often, and the shrinking number of bookstores, honestly, not being available in a printed form is less and less of a liability these days. And there is nothing preventing an indie author from producing a POD book and selling direct to readers through Amazon, Amazon Marketplace, B&N’s marketplace, etc.

    Physical book stores are having a difficult time competing with the immediacy and immense libraries online ebook retailers can offer.

    — Bill Smith

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      Hi Bill! Long time, no see. Much as I love bookstores, they’re on the ropes. Most small communities don’t have one already, and that only accelerates the decline. Soon they may be like record or CD stores, the rare sorts of places where only the hardcore fans go. They’re just being squeezed by Amazon on one side and Wal-Mart on the other.

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