Pulling Back the Publishing Veil: Return Reserves, Buy-in, and Sell-through

One of my plans for my posts here at Amazing Stories is to focus on some of the aspects about publishing that a new author may not be aware of. I hope to have a full series of “Pulling Back the Veil” posts. Today, I’m going to focus on Return Reserves but to understand that, I’m going to have to talk a bit about print book distribution…so bear with me as everything will make sense in the end.

Bookstores and libraries don’t like cutting hundreds of checks to different publishers so they buy most of their books from distributors like Ingram (for bookstores) and Baker and Taylor (for libraries). The publishers do a print run (in the old days these were large (and still are for big titles) on the order of magnitude of several hundred thousand or even a million), but nowadays advances in printing technology have made shorter runs of 2,000 or 3,000 more common.  Today, turnaround times for these shorter runs can be a week or two (rather than many months) so publishers are reducing costs (warehousing fees are based on numbers stored) and limiting risks (less likely to remainder* or pulp* (more on this at the end of the article)) by doing these smaller runs.

Publishers have “seasons” some might have two a year (Spring/Summer and Fall/Winter) and others four (one for each season). When acquiring a book a decision is made as to what calendar to target the book for, and this could be very far in the future (if the prior calendars are already full or if the editor suspects that there will need to be a lot of editing).  A catalog is produced (usually printed and sent to corporate book buyers although many are adopting online or electronic catalogs) which show all the front list titles (those that are new to this season, as well as  back list (books that were featured in a previous catalog but are still selling well). The publisher employs sales people whose job it is to use the catalog, their contacts in the industry, and what they know about what will be “hot” to obtain pre-orders. This actually helps to determine how many books will be printed for the first run, and as I’ve already said “reprints” can be done fairly quickly if demand proves higher than expected.

Orders that the bookstore places (either during pre-ordering or later once the book is actually available) aren’t really sales. All that has really happened is the books have moved out of the warehouse of the distributor and into another warehouse (for a big organization like Barnes & Nobles) and also onto shelves in stores. Which brings us to a good time to explain two of the terms in the post’s title:

•  Buy-in – indicates books that have left the distributor’s warehouse and are now in the possession of the retailer.  They aren’t really “sales” because they are part of the stores inventory, and if all works as planned they will eventually become sold.
• Sell-through – is when someone goes into the bookstore and actually buys the book (assuming they don’t later return it).  It’s this “point of purchase” sale that everyone cares the most about as it means “actual” money has gone from the consumer to the bookstore and that money will eventually make it to the distributor and then to the publisher.

The classic publishing flops are books that had huge buy-ins but poor sell-through and no one in the distribution chain: bookstore, distributor, publisher, author like to see that happen as it generally means a huge loss of income potential in the form of pulping* or remaindering* (again see bottom for definition of these terms)

So bookstores really don’t buy books — they get them on consignment, which means they have 90 days to pay the bill or send them back to the distributor. What usually happens is they pay for books that are actually sold, and “return” the books that didn’t. This liberal return policy has historically meant a great deal of waste. In the case of mass market paperbacks the bookstore merely tears off the covers (known as stripping) and mails just the covers for credit. This is because shipping these types of books can cost more than the printing.  In the case of trade paperbacks and hard covers, they are more expensive to produce so these books are actually shipped back (and the shipping charges are covered by the publisher).

It is even common practice for the bookstore to send back a bunch of books and then immediately place another order for the same titles (but perhaps less copies of each). They do this for titles that they think will eventually sell. In this way they are just extending the 90-day window and giving the books more of a chance to actually sell.

So, that’s the background information I needed to cover first. So let’s go back to Return Reserves. The bottom line is a publisher knows that they won’t sell all the books that they print. In the old days when there were many bookstores and a lot of books stocked, returns were a very big problem. In fact, for mass-market paperbacks publishers would often have to print up three times as many books as they expected to sell and for hardcovers they would see returns of 50% to 80%. What this meant is any book that wasn’t in a readers hand represented a potential liability as it had a good chance of coming back as a return. Making this even more difficult, publishers don’t get accurate data on sell-through they only have number for buy-in.

Now compensation to the author comes from royalties although some think it is from advances (which is true to some extent) so it’s time for some more definitions:

• Royalty – the amount of money that the author makes for each copy of their work that is sold. This is usually a percentage which can be based on the retail price (common for print books), net income (common for ebooks), or net profit (which should really be avoided as it’s easy to adjust the expenses and guarantee that no “profit” is made and hence no royalty due.
• Advance – a fixed sum of money (usually paid in 2 – 4 installments) which representatives a firm “minimum” amount an author will earn. It is essentially a loan against income generated by future royalties.  In many cases (70% – 80% of all books acquired) this is the only money the author will ever receive as the royalty from sales never surpasses the advances. In this case the author generally does not have to repay “unearned advances” although you should watch the language in your contracts carefully so you don’t wind up having to write a check back to the publisher for a poor performer.
• Earning out – is the goal for all writers. This simply means that the royalties have exceeded the advance and now in addition to getting a semi-annual royalty statement they also receive a check for the amount of money earned in that period above and beyond the advance.

So now come the rub.  If the author is paid on “books sold’ and there is a gap between buy-in and sell-through there is a potential problem. If the publisher paid royalties based on buy-in (the only accurate numbers they have), and the returns are very high, it is possible that the author will be “overpaid.”  Unlike advances, which don’t have to be repaid, getting too much royalties are due back to the publisher. It’s really hard for publishers to collect money back from authors so they have developed a system to limit the chance of this happening…enter the Return Reserve.

Generally your contract will allow the publisher “a reasonable return on  reserve,” although few will place a % limit on “what is reasonable” (a big problem in the industry in my opinion).  What this means is you won’t be initially paid for all the books that were “bought-in”.  Basically they will “hold back” what could be some substantial money so the “money at risk” is in still with them and they won’t have to collect it from you if returns are excessive.

What does this mean to the author?  Well it means that managing cash flow (which is already hard because royalties are only paid twice a year) is even more difficult because much of your money isn’t in your bank account it is being held by the publisher “just in case.”   What kind of money are we talking about?  Well it will vary on the publisher, the popularity of the books, the selling history of the author, and all kinds of other factors. But I’m glad to share some of my own experience.  The following data is for my debut series which was published as follows:

• Theft of Swords (Nov 2011)
• Rise of Empire (Dec 2011)
• Heir of Novron (Jan 2012)

To date I’ve received two royalty statements one that cover the sales made on the first two books in November and December 2011. And the other  for all three books during January – June 2012.  I’m going to only report English US sales of PRINT books even though my royalty statement during this period included UK sales, ebook sales, and advance for subsidiary sales such as book clubs and audio contracts.

For the first royalty statement:

For the second royalty statement:

The “Free” column indicates copies given away for promotion such as my signing at Book Expo, or provided to reviewers and book bloggers. Notice that the amount of reserves in the first reporting period is MUCH higher than the returns for the second one. Basically as the publisher has more data on returns they should adjust the reserve to be more reflective of actual returns.  Even so the they are likely to retain more than is necessary, and the only consolation is the money will eventually be paid.

For instance if we look at the two books that are into their second reporting period we see that

• Approximately 40% is still in reserve even though the actual returns are 4.4% – 8.4%
• I’ve “sold” almost 11,000 books that I’ve still not been paid for.

My guess is the publisher doesn’t bother to adjust their formulas on an author by author basis so I may be being penalized for other authors with higher returns. But I also believe that bookstores have changed their buying behavior and as such the “potential liability” for books being released today is not as high as it once was, but the accounting practices haven’t changed. When my books were first released the book stores only bought them in reasonable quantities of 3 – 5 books initially.  Now that we are more than a year out they are ordering them one at a time, so there aren’t much in the way of returns.

But there is no incentive for the publisher to keep less reserve. The contract only says that the reserves should be “reasonable” and they have past historical information to show that returns could be substantial.  Bottom line…they want to hang onto the author’s money as long as possible and the author has little leverage to make them pay quicker.  If possible, consider getting a finite limit (say 20%) cap put in your contract rather than the standard “reasonable” language that is commonly used.

I hope you find this helpful, and check back in the future for more insider insights about book publishing.

•  Remaindering –  Sometimes a publisher will overestimate the potential popularity of a book and at some point it becomes apparent that they will never sell all the books sitting in the warehouse. Since warehouse fees are expensive, they may decide to put a book “out of print” and in order to recuperate some of their losses, they’ll sell the books cheaply (usually by weight) to organizations for the “used book market.”
• Pulping – The first option is to remainder a book, but if the publisher gets no “takers” then they will destroy (or pulp them). The term comes from the fact that the books are essentially chopping up in a big machine similar to a wood chipper, and then this can be sold back to paper manufacturers or thrown away.