Macro publishing refers to decisions that apply across the house. The best-known example is the house style manual that applies to all manuscripts regardless of topic or author. The standardization visible here reduces costs, especially if also applied to book design and manufacture. If all books were manufactured according the same specifications, costs might be reduced. Standardization is often an effective way to reduce costs. At the same time, it may help with brand identity by giving all products a similar look.
Micro publishing refers to decisions that apply only to individual works. For example, book A will use this paper and book B will use that paper. Individualized decision-making can make product creation and distribution more costly, but also makes individual items more distinctive and perhaps truer to their topic.
Although not entirely true, publishing was thought to be somewhat hostile toward budgeting, analysis, and planning in the old days. The gentlemen who were publishers were thought to be in something that was not really just a business. For whatever reason, many publishers were not effective in expense and cost management.
As book publishing has become more centralized with a few large multi-national firms, some of whom are publicly held, financial management, return on investment, and other bottom line matters have become more visible and more important. As publishers have become more business-like in their operation, management of costs or expenses has become more important and much more visible.
"Cash flow" is the process of creating a product, selling that product, and having the income from sales flow back to the publisher where it is used to pay off expenses and begin creation of a new product. The hope is that the cash will flow soon enough and that there will be enough to pay off the costs of book1 and of book2 now in process. If cash flow is slow or inadequate, debts will not be paid off, money will not be available to create new books and the publisher may go out of business.
While cash flow is a problem for all publishers, especially those with substantial returns, it is particularly difficult for small publishers or new publishers who have difficulty in raising money, whose products may take longer to sell, and whose income may be limited. With good cash flow, a publisher can stay in business for a long time. Back list titles usually contribute substantially to good cash flow. Without good cash flow, the firm will soon be out of business.
One way [hopeful] to increase the odds of reasonable cash flow is to publish more books so that the odds of a big hit seem higher.
While ease of entry makes publishing attractive, money must still be raised to pay for the expenses associated with creating the book and having it manufactured and sold. While the amount needed may be just a few thousand dollars, the money still needs to be raised. Large, established publishers may raise money by issuing stock shares or going to a commercial lender. New publishers often borrow from their savings, relatives, and friends or even use multiple credit cards. Commercial sources are often reluctant to lend money on the basis of intellectual property where there is no previous record of sales or business success. One of the attractive aspects of the ebook is that it reduces expenses and substantially reduces the amount of money that the new publisher must borrow. While you need money to make money, debt can be difficult to clear.
As a publisher, you will focus on income possibilities BEFORE decisions are made about publication. Gross sales include all books shipped from the publisher. Net sales include only those books actually sold or gross sales - returns. If your books could be sold on a non-returnable basis, you would begin with net sales. Other income would include subsidiary rights sales and even the income from that banner advertisement on the house website. Substantial other income, usually via subsidiary rights, often makes the difference between profit and loss. Many publishers spend considerable time exploring other income potential. Still, many new books are a net loss -- there is no income.
Most publishers require the completion of a profit and loss statement before a book is published. The statement for a major publishing house would require a fairly clear indication of how many copies would be ordered by typical outlets. Laydown is the number of books that you plan to ship to wholesale and retail outlets. Since many books with a P&L statement are published and lose money, this process may be based more upon hope that persuasive data.
Traditionally, expense categories are based on the manufacturing process since it is usually the single largest expense category. Thus, we can look at expenses that happen BEFORE the presses run, WHEN they run, and AFTER they run.
These expenses are one-time ones. This means that the cost is the same if there is a print run of 500, 5,000, or 50,000. Typical prepress expenses would include:
Unlike the prepress expenses, production or manufacturing expenses become less expensive as more books are produced. Here economies of scale are clearly evident. The costs of freight to get books to the publishing house warehouse also fall under this category. Paper, printing and binding = PPP.
The manufacturing costs associated with the book are about ten percent of the list price.
These are the costs associated with warehousing and shipping orders, including incentives for wholesalers to stock the book. Typically, about half of the list price of the book goes to wholesalers and retailers for selling the book.
Marketing costs vary notably from house to house and from title to title. Typical expenses might include:
Sales expenses are usually considered apart from marketing. Royalties, sales commissions, and the discount given to wholesale and retail outlets are examples of the cost of sales.
Fulfillment is the cost of receiving and filling orders. Besides the costs associated with warehousing titles and monitoring inventory, there may also be customer management costs.
Overhead includes all those general, fixed expenses of running a business, such as rent, lighting, telephone, equipment and heating expenses, which cannot be charged or attributed to a specific product or part of the work operation. For example, a house library would be an overhead cost. Overhead charged to a new book might be ten to fourteen percent. This may be somewhat arbitrary.
The author typically receives about ten percent of the book's list price in royalties. If there was an advance, the royalties are not received until the advance has been paid off.
In general, three factors reduce profitability:
Although concerns vary with the state of the economy and how affluent consumers feel, publishers are often concerned with their ability to raise list price to offset increased costs of doing business or to make the business more profitable. When publishers feel that customers will experience "sticker shock" and fail to buy the book, they are more likely to engage in vigorous cost reduction initiatives. One common initiative is to reduce the number of front and back list titles.
Typically, production costs constitute the single largest expense in creating and selling the book. Eliminating manufacturing and binding, as in the case of the ebook, would certainly reduce production costs. There is considerable disagreement in the literature about the degree to which such a change would allow the publisher to substantially reduce the list price of the book.
Standardization of the book ingredients will reduce both production and design costs. It may also reduce the time that it takes before the book is ready to be sold. Some manuscripts include "snags" by requiring special features. Again, standardization would reduce the number of exceptions to the standard package.
Another approach would be to change the ingredients or the specifications. For example, lower quality paper or binding might be used. White space could be reduced to allow more words per page. Smaller type would also allow for fewer pages.
Book manufacturing is now a global business and the production manager may reduce costs by bidding more frequently and using lower cost vendors located abroad. While this complicates the production sequence, it may offer the opportunity for substantial cost savings.
More accurate sales forecasting would allow the production manager to avoid reprints and produce enough books but not too many. While the cost per book declines with larger print runs, inventory that is returned and cannot be sold remains a serious problem for most larger publishers. The fact that many mass market paper titles sell only one for every three copies printed is a business failure.
There are a variety of ways to reduce the other expenses mentioned above. Overhead might be reduced my moving to a location where space is relatively inexpensive. Sales expenses might be reduced by reducing discounts and royalties. Prepress expenses might be reduced by outsourcing editorial and design functions. Marketing expenses might be reduced by reducing advertising and publicity and sending fewer representatives to trade shows. Better market and competitor analysis should result in better new title publishing decisions.
Cash flow management begins with selecting manuscripts that are likely to sell soon and well. Returns need to be reduced. Accounts need to be persuaded to pay for books within 30 or 60 days instead of 90 or 120 days. Slow payment by wholesale and retail outlets is a continuing problem. Any cash on hand must be invested as soon as possible.
As mentioned elsewhere, almost every function in the publishing house can be outsourced. Outsourcing almost always reduces the cost of doing business and provides the publisher with more flexibility in budgeting and financial planning.
In the longer run, automation of publishing processes is likely to reduce cost and increase efficiency. Lack of standards has been a problem, but perhaps that will change in the future. Today, the manuscript is almost always received as a digital file and that allows many steps in book improvement and production to be done more quickly and with less human intervention. Bar codes and ISBNs provide better control of inventory and sales. Publishing on demand solves a variety of inventory problems.
As a medium-sized publisher uncomfortable in raising list price, discuss the expense reduction strategies that seem best to you and why you would select these and not others.
To what degree is "sticker shock" a real problem for book publishers?
Some argue that book publishing would be much more cost-effective, if books were sold on a non-returnable basis. Your thoughts?
Last major revision: July 2007.
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