There has been a lot of debate over the last few years over how much publishing houses should charge for their e-books. Some people are adamant that the e-books should be significantly less than the physical copies of the same book. Being an accountant (blah), I’ve sat back and tried to think of how much should a company (or an individual) charge for their electronic books. The days of an author writing a novel, submitting it to the publishing house and walking away are long gone along with the dodo. The advent of electronic publishing has helped to establish a new market for authors and companies to explore.

There has obviously been some difficulty in the formative years, as there will be in any new ventures or markets. I won’t bore you (or me) with a lengthy explanation of business practices or breakeven points which is important in any sort of business decision. As an author/business, you need to make a decision whether you want to publish for fun and maybe make some money out of the venture or if you want to take it seriously and want to make money. At this point, everyone is screaming at me that of course they want to make money. Am I retard? No, I am not. But that decision plays a key role in everything else which follows.

Skin in the game
If you want to produce a quality product, you are going to have to put some skin in the game. By skin in the game, I mean that you’re going to have invest something into the novel in order to give it the best chance out in the wild world of publishing. The first step is to obviously write the best damned book you can. But people can only do so much by themselves and you’re going to have the manuscript looked over by an editor or maybe two. Then you’re going to have to get someone to do the perfect cover for it. Some of us are gifted with the ability to this for ourselves, but the vast majority of us will need someone who can do it for us.

Then there is still the advertising you will have to do for it. Some of it, like virtual blog tours, will be for free but if you want to do any sort of marketing for it you’re going to have to fork out some cash to do it. All of this adds up to the capital investment in the project.

As below, so above
The same costs described above are all costs that are covered by the bigger publishing houses. But they also carry other costs which a self-published author won’t necessarily factor into their calculations of how much it costs to develop a book. Publishing companies have to pay things like rent and salaries, something which the average self-publisher won’t have to think about – unless they really want to go big with staff and a separate office to do all of their writing in.

Variable expenses
There are some variable expenses which can be eliminated when the transition is made to the electronic format which can be removed from the equation. But they are not the largest expenses in the whole process. I have worked out an example using “actual” figures. They’re actual so far as you can see their effect, they are by no means actually how much any publishing house pays for anything. If you assume it will cost $0.50 to ship a book and $3.50 to print a book, a company’s costs to produce a hundred thousand books will look as follows:

Office rental

$200 000.00

Salaries

$500 000.00

– Editors

$100 000.00

Other fixed expenses

$100 000.00

Shipping costs

$50 000.00

Paper costs

$350 000.00

Total costs

$1 300 000.00

 

I’ve highlighted the variable costs for ease of reference. If you look at the above figures, it works out that it will cost the company $13 to produce a single book. If they charge $15 per book, they will have to sell 86,667 just to cover their expenses. If you remove the variable expenses:

Office rental

$200 000.00

Salaries

$500 000.00

– Editors

$100 000.00

Other fixed expenses

$100 000.00

Total costs

$900 000.00

You can see that it will cost the company $9 for a hundred thousand books without any actual books being prepared. Therefore, if you look at electronic publishing there are a few additional expenses the company might have to expense before they produce electronic books. In the table below, I’ve only included the salaries for the additional employees who will be needed to set up the books in the electronic format. You could probably look at training some of your existing staff to do it, but then you’re going to have to pay them additional money because their job role has increased… along with their knowledge base. I have highlighted the additional cost.

Office rental

$200 000.00

Salaries

$500 000.00

– Typesetting

$100 000.00

– Editors

$100 000.00

Other fixed expenses

$100 000.00

Total costs

$1 000 000.00

In this example, it’s difficult to say that it costs the company x amount per book because electronic books don’t have to have a specific print run. It is their advantage.

However, it has to be assumed that you’re not going to sell any more copies simply because the book is in electronic format. The market for any book is only so big. So let us assume that the electronic book will also sell 100,000 units (that would mean the market for electronic books is as big as the demand for physical books, but let’s just assume). We’re also going to assume the company is going to sell either physical or electronic and it isn’t going to mix the types.

Taking that into account, it would cost the company $10 per electronic copy. That means that if it sells for $12 a copy, the company will have to sell 83,333 copies just to cover its costs. Admittedly, it is a little smaller. But in auditor’s parlance, it’s not material.

If you split out the costs for electronic and physical into separate streams but you assume that the TOTAL books sold will still be 100,000 but with 80,000 being physical and 20,000 being electronic. The total cost will be:

 

Total

Physical

Electronic

Office rental

$200 000.00

$160 000.00

$40 000.00

Salaries

$500 000.00

$400 000.00

$100 000.00

– Editors

$100 000.00

$80 000.00

$20 000.00

– Typesetting

$100 000.00

$0.00

$100 000.00

Other fixed expenses

$100 000.00

$80 000.00

$20 000.00

Shipping

$50 000.00

$50 000.00

$0.00

Printing costs

$350 000.00

$350 000.00

$0.00

Total costs

$1 400 000.00

$1 120 000.00

$280 000.00

       

Volume

 

80 000

20 000

       

Cost per unit

 

$14.00

$14.00

I’ve split the costs that can be allocated to both 80/20. Both costs per unit of expected sales is exactly the same.

I know I was as shocked.

 

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