First, some awesome news: I learned recently that I Killed Zoe Spanos earned out its advance!
But what does that even mean? Unless you’re an author yourself or work in book publishing (and even then it can be murky) the ins and outs of book advances and royalties and earning out can be more than a bit opaque. But it’s interesting, I think, to more than just authors. As a pre-published writer, I was definitely hungry to know how it all worked, and as I often have friends and family ask me questions about the financial aspects of publishing, I know there’s a lot of curiosity out there among readers and bookish folks in general. So in honor of this career milestone, let’s go behind the scenes of what it means to earn out a book advance.
There are two ways to go about answering this question, and I’m going to start with the loftier, yet far more straightforward, of the two. On a career level, what it means for me is that my book not only made money for my publisher, but it’s made a not insignificant amount of money. (Books start earning money for the publisher long before the author earns out their advance, so if your book earns out, it means the publisher is definitely happy.) So, while there’s no such thing as job security for novelists, earning out does mean that I can breathe a bit easier, feeling confident about the investment my publisher made in this book. That’s the nice, simple answer!
Now let’s turn to the much more complex financial and logistical explanation. I’m going to break it down as best as I’m able, in layperson’s terms. (Disclaimer: What follows is painted in very broad strokes, and the terms of publishing contracts vary. This is simply a general overview from an inexpert author’s perspective, and the scenarios described below are examples not tied to any specific book. I’ve tried my best, but mistakes are possible!)
Okay, that said. A book advance payment is an advance against future royalties. So, if an author is advanced $20,000 from the publisher for the print and ebook publication rights to their book (those two usually go together), that is money the author gets to keep (minus the 15% commission that goes to the author’s agent) regardless of how many copies of the book are ultimately printed or sold.
An author’s royalty rate is determined in the publishing contract. In our example, the book is initially published in hardcover. For the sake of simplicity, let’s forget about the ebook and possible paperback editions and just focus on the hardcover. So, for this book, the hardcover royalty rate is 12.5% of the $18.99 retail price.
OK, so how does an author earn out their advance? Does it mean selling $20,000 worth of copies? Nope, it means selling a lot more than that! Because to earn out one’s advance, the book needs to sell enough copies to earn back $20,000 at the 12.5% royalty rate. That means only 12.5% of each sale goes toward earning out the advance payment. So, using this very simplified metric, $2.37375 of each $18.99 sale goes toward earning out the author’s advance. The book would need to sell 8,426 copies (total retail value $160,009) in order for the author to earn out a $20,000 advance.
(If the advance is higher than $20,000, the book needs to sell exponentially more copies to earn out. If it’s lower, the book needs to sell fewer copies, but a smaller advance may also mean a smaller print run and narrower distribution for the book, limiting its reach. Bottom line, it’s hard to earn out no matter how you dice it. This is why earning out is such a castle in the air for so many authors.)
Still with me? I’m about to make things a lot more confusing (sigh), but what follows is integral to understanding book advances and royalties and earning out. When I refer to “sales” above, I’m not talking about book sales at the store register (or to your online retailer cart), also known as point of sale transactions (POS). This is still an important number for authors, as POS transactions are what gets reported to BookScan, the database publishers use to look up sales trajectories of an author’s previous books before offering (or not offering) to buy an author’s new book. But that’s a whole separate discussion, so let’s set POS and BookScan aside for today.
What I’m referring to by “sales” is this: copies of the book shipped by the publisher out to retailers (also known as sell-in), minus copies returned and minus the percentage of the author’s earnings reserved by the publisher for future returns.
What now?
I know, just when you thought you had a solid grasp on this. Book publishing works on a returns model, meaning retailers reserve the right to return unsold copies to the publisher, and authors don’t earn royalties on those returned copies. So if a retailer orders 5,000 copies of a book and only sells 1,000 copies in the first few month’s of a book’s life, that retailer can return the unsold 4,000 copies to the publisher for a full refund. Womp womp.
Publishers try to account for these returns by reserving (i.e. holding back) a percentage of the author’s earnings on the number of copies shipped out to retailers. On royalty statements, this is called “reserve for returns.” I’ve seen anywhere from 5-30% of earnings reserved for returns, using a metric I don’t entirely understand, but generally a publisher reserves a higher percentage of earnings on copies shipped in the first earnings period after a book goes on sale (the presumed logic being that retailers will hang onto unsold books for a certain period of time, while still actively trying to sell them, and those returns may not have come in yet) and then a lower percentage is reserved in subsequent earnings periods, as more actual returns are accounted for (or, hopefully, copies are actually sold and not returned!) and the publisher deems it less necessary to hold a large percentage of earnings in reserve in case of future returns. Whew. I know, it’s not simple.
But with all that said, let’s revisit the original metric for determining a book’s sales as it applies to earning out and earning royalties: copies of the book shipped by the publisher out to retailers, minus copies returned and minus the percentage of the author’s earnings reserved by the publisher for future returns.
I said above that our book would need to sell 8,426 copies to earn out a 20,000 advance, but that was over-simplistic, and here’s why. For our example book, let’s say the publisher ships out 12,000 copies to retailers. In the first earnings period after the book goes on sale (again for the sake of simplicity, we’re going to say the book goes on sale right at the start of the earnings period and the first royalty statement captures the first six months of sales exactly) 1,500 copies are returned to the publisher. So, that’s 10,500 net copies sold, and at the author’s 12.5% royalty rate on a book with a $18.99 list price, that’s $24,924 of earnings—great news! Higher than the $20,000 advance! But don’t forget the publisher holds a percentage of the author’s earnings on those 10,500 copies in reserve for returns, and since this is the first earnings period, it’s going to be a higher reserve rate, so let’s say 30% is held in reserve for returns. 30% of the author’s $24,924 earnings is $7,477, meaning the author’s actual earnings after reserve for returns are $17,447. That’s pretty darn good, but the book has not earned out in its first earnings period, and the author is due no royalties. Sob!
Now let’s move to the second earnings period, capturing months 6-12 that the book is on sale. In this earnings period, let’s say 500 further copies ship out to retailers, and 1,000 more copies are returned. Not bad. That means we’ve got 10,000 of the initial 12,000 copies still out there—either sold by the retailers to consumers or still on retailer shelves. And because the book has now been on sale for an entire year and the publisher predicts that the majority of returns that are going to come in from retailers have already come in (retailers generally only shelve a book for 3-6 months, sadly) they drop the reserve for returns rate significantly on this second royalty statement, down to 12% held in reserve. So let’s do the math again. We’re at 10,00 net copies sold, and at the author’s 12.5% royalty rate on a book with a $18.99 list price, that’s $23,737 in earnings. 12% in reserve of the author’s $23,737 earnings is $2,849, meaning the author’s actual earnings after reserve for returns are $20,888. It’s a squeaker, but our book has earned out! The author will now receive $888 in royalties (minus the 15% commission to the author’s agent) for this earnings period. That’s not a lot, but the even better news is now that the book has earned out its advance, if it continues to sell in subsequent months and years, the author will receive royalties on future earnings as well. Huzzah!
For anyone who has made it this far and isn’t thoroughly confused, congratulations! If you happen to be thinking, “I get it! It looks relatively easy to earn out an advance,” I cannot overemphasize how often scenarios like the example described above do not happen. Often not enough copies are printed and shipped out to retailers in the first place to make it possible for the author to earn out their advance, even if there are very few returns. (Sometimes this is the publisher’s fault. And sometimes the publisher’s sales team does their best to pitch the book to retailers, and retailers simply don’t order enough copies to justify a larger print run.) Or, the return rate is much higher than the relatively low rate of returns enjoyed by our example book, so even if enough copies have shipped out, if a lot come back, it tanks the chances of the book earning out. (Again, this can be due to a lack of investment on the part of the publisher—not enough marketing or publicity—or due to a variety of other factors that I won’t pretend I know enough about to explain. Often these factors are mysterious to publishers as well. Something you hear a lot in book publishing is that a book just didn’t “work,” meaning it didn’t sell well, but try to dig much deeper into why a book didn’t “work,” and you’ll get a lot of shrugged shoulders.) But bottom line, the reality is that only a small percentage of books earn out their advances (anecdotally, and don’t quote me on this, I’ve seen agents toss out numbers in the 25-30% range, which means something like 70-75% of books do not earn out their advances) and earning out is largely out of the author’s control. (See above factors.)
So what does it mean to earn out? Earning out is a huge cause for celebration, but it’s only a “goal” in the way that, for instance, hitting the New York Times Bestseller List can be considered a “goal.” It might be something you want a lot, and you’re trying as hard as you can by writing the best books possible and doing your own small part to promote them, but ultimately there are giant parts of the equation that are entirely out of the author’s control. So when a book doesn’t earn out, it’s not a failure on the author’s part. Most books do not earn out. Speaking to myself here, and to any other writers who are reading this, if you do get that win—earning out, hitting the list, or similar—it’s wise to view it as your hard work and talent paying off—because it is that!—but also to remember the healthy dose of good luck and good timing at play, those powerful and elusive forces contributing mightily to most every success in book publishing. Because it’s that too.
Finally, I want to close out with a big, giant THANK YOU to each and every one of you who has read, bought, borrowed, and/or recommended I Killed Zoe Spanos to others. Book sales happen in large part due to word of mouth, and I am forever grateful for your support. If you want to do one thing to keep Zoe in circulation, buy a copy if you can, and if you’ve read and enjoyed it, please recommend Zoe to a friend!
If you found this post useful, I run a monthly author newsletter called These Little Secrets. “What It Means to ‘Earn Out'” originally appeared in the September 7, 2021 issue. My newsletter often includes behind-the-scenes articles like this one, so if you want more content like this, please sign up!