Last week I showed how a tool used by traditional book publishers—the Title Profit & Loss projection—can be adapted for budgeting a Kickstarter-funded book project. I kept the example simple by assuming that the books would only be distributed as rewards for project backers and sold directly by the project creator. Some Kickstarter creators may want to sell their books through bookstores as well, so this week I elaborate the basic budget to incorporate that sales model. First, however, some warnings about selling to bookstores.
Selling Through Bookstores: Caveats on a Complicated Business
Selling through bookstores is complicated, risky, and, frankly, not very profitable for publishers unless they publish a lot of titles every year so that they have a few financial successes to carry all the others. Nonetheless, in the U.S. most books get sold this way, as follows:
- A publisher signs an agreement with the author of the book to publish it. The publisher designs, edits, and markets the book.
- The publisher contracts with a book distributor to sell the book to bookstores and book wholesalers. Because the network of wholesalers and booksellers is called “the book trade,” the distributor who serves these markets is called a “trade distributor.” The biggest publishers do their own distribution.
- If a wholesaler buys the books, they in turn sell it to their customers, who are bookstores and other retailers who sell books. Bookstores, who obtain books both directly from the publisher and from wholesalers, sell them to consumers.
- The key idiosyncrasy of the U.S. book trade is that books are sold on a returnable basis, meaning that a bookstore can return them for full credit to the wholesaler or publisher. A wholesaler can also return books to a publisher for full credit. This means that a publisher might get orders from bookstores and wholesalers for 2,000 copies of a new book, and have absolutely no idea how many are actually going to sell and how many will be returned for credit. The books that are returned will likely be shopworn and not really salable as new books. The publisher still absorbs the cost of printing those books, as well paying for shipping them to and fro. It can easily take up to a year for a publisher to know how many books have actually sold, as they trickle back in the form of returns.
Because of returns, selling through the book trade is much more risky than providing them as rewards to Kickstarter backers and selling direct yourself at events, through your website, and perhaps as an Amazon merchant.
In addition, you make much much less when you actually do sell a book through the book trade because all the middlemen—distributors, wholesalers, and bookstores—take a percentage of the sale at every step. Compare how much you make when you sell a $20.00 book direct yourself versus selling through the book trade in a typical transaction:
|S&H you charge
|Less fullfilment cost
|(before paying author, paying for printing, publishing costs, etc.)
|Selling Through Book Trade
|(40% of list)
|(15% of list)
|(20% of net sale is on the low side)
|Cost of returns
|(30% is average)
|(before paying author, paying for printing, publishing costs, etc.)
In this example, which is not atypical, the publisher makes only $4.20 on average for a trade sale, compared with $19.35 for a direct sale; and that $4.20 has to cover the cost of printing the book (including the copies that were returned unsold), paying the author royalties, paying for design and editing, etc. So why don’t publishers sell directly to readers? Well, its hard to reach readers to sell to, for one thing—which is why the Kickstarter model is so cool, because it incorporates both marketing and fundrasing. But then again, it is also hard to sell books through the book trade. Based on what I’ve seen, if a publisher has been reasonably successful—i.e., survived—selling into the book trade, it really doesn’t make any sense for them to switch to a direct sale model. Which is not the same thing as saying that a new independent publisher isn’t smarter to figure out a model for selling direct to readers instead of selling through the book trade: a few, like OR Books, have done so.
So you have been warned: selling through bookstores is really really tough. Assuming you still want to do it, the rest of this post is about how that works from a budgeting point of view.
To ensure that everything I present here is clear, I’m going to repeat a lot of information from last week’s post. For those of you who read last week’s post, here are the main differences.
- The sales model now includes selling into the book trade as well as selling direct.
- Because the book trade publishing model includes a huge uncertainty about how many books are actually going to sell, and because the middlemen take so much out of the sale, you have to focus on reducing the cost per book for printing. This means printing more books right off the bat and printing at an offset printer. It also means more risk and not much flexibility in terms of reprints. Instead of printing being a cost that varies with the number of books you actually sell, it really becomes a fixed cost, because you’re going to have to print several thousand to get the cost down.
- Because selling through the book trade requires informing so many more people about your book in order to drive sufficient sales to make the money part work, the marketing portion of the budget is pumped up in this example. (Remember, by the way, this is only an example, and you’re going to have to figure out the most accurate estimates you can for all these budget items.) Selling several thousand books through the book trade is really hard.
As I noted last week, if you’re using Kickstarter for your book publishing project, making an accurate budget is important. You want to set your fundraising goal at a reasonable level, but you don’t want the project to fail because you underestimate the real costs. Book publishers have a very useful tool for addressing just these questions: the Title Profit & Loss worksheet, which is created for each new book the publisher is considering publishing. These P&Ls lend themselves well to creating a Kickstarter budget, with appropriate modifications.
You can download this basic Title P&L worksheet modified for a Kickstarter project and including trade distribution here or at the end of this post. There are no doubt items in this sample P&L worksheet that aren’t relevant to your project, and probably relevant items that are missing. It’s easy to import and modify the worksheet to fit your project in Excel, Apple Numbers, or any other spreadsheet program. Be sure and check your work carefully after modifying—it is very easy to introduce errors into worksheets!
The Book P&L
Because book publishers have limited capital to invest in book projects, they examine the income potential for each new book prior to publication. If they don’t do this they go out of business, because they publish too many books that lose money. Its just that simple. This applies to both for-profit and nonprofit publishers: it doesn’t matter whether the capital comes from sales or donations or both, it is always limited. The main tool for evaluating a new book’s potential is the title P&L which, when suitably modified, is the perfect tool for building a budget for a Kickstarter publishing project.
Title P&Ls are built in five sections: 1) Sales estimates 2) Income, 3) Cost of Goods Sold, 4) Overhead, and 5) Net profit (or loss). To arrive at the net profit is simple arithmetic:
Income — Cost of Goods Sold — Overhead = Net profit
I’m going to change the terminology a little bit because:
- You may very well be putting your project together as an individual artist or as a one-time collaboration rather than as an established organization with ongoing expenses, so instead of “Overhead” I’ll call fixed expenses “Project Expenses.”
- Book publishing profits are highly sensitive to the number of books sold, so it is useful to strictly segregate costs that vary with the number of books sold, like printing and freight, from one-time costs like cover design. These kinds of costs are called “Cost of Goods Sold,” but to be crystal clear I’ll call them “Variable Costs.”
- Net profit may not be exactly the right term, because you may very well not be in this for profit. I’m calling it “Surplus” instead, or “Shortfall” if it is a negative number.
Here’s the bones of a simplified title P&L modified for a Kickstarter project:
Income — Variable costs — Project expenses = Surplus (or shortfall)
The Title P&L, Modified for a Kickstarter Project
Here’s a simplified P&L with hypothetical numbers plugged in. The first section estimates book sales through various channels, including the book trade. The downloadable spreadsheet has more detail in it. Explanations of each item follow.
|TITLE PROFIT & LOSS
|Copies sold to individuals at $45.00
|S&H charged to individuals at $5.00
|Copies given to backers at $0.00
|S&H for backer copies at $0.00
|Project copies for artist/team
|Copies sold to wholesalers & Amazon at $20.25
|S&H charged to wholesalers/Amazon at $0.00
|Copies sold to retailers at $27.00
|S&H charged to retailers at $0.50
|Less allowance for returns (35% of trade sales)
|Sales net of returns
|Less distributor fee (20% of net trade sales)
|Total Sales Revenue to You
|Book sales income
|Less Kickstarter fee (5%)
|Less card processing fee (3%-5%)
|Shipping, direct sales and backer copies
|Fulfillment services, direct sales and backer copies
|Credit card fees on sales at 4%
|TOTAL VARIABLE COSTS
|Text design and layout
|Printing setup charges
|Printing, all books; 2,500 at $12.00
|Printing, freight to warehouse
|Marketing & Promotion
|Bookkeeping & Accounting
|TOTAL PROJECT EXPENSES
|PROJECT SURPLUS (SHORTFALL)
In this P&L, books are sold directly by you in person or through your website, as well as through trade channels. Be aware that if you sell through trade channels, the retailers—especially Amazon—will likely discount the price so that nobody will want to buy from your website for full price. That’s part of the price you pay for selling through the book trade. I also include the no-revenue copies for backers and staff here, because doing so facilitates keeping track of total number of copies required.
Income is all the money coming into the project, including the book sales income calculated above and your Kickstarter funding. I’m showing Kickstarter’s fees and credit card processing fees as negatives in the Income section because those will reduce the total amount of cash you have to work with right off the bat.
Variable costs are all those costs that theoretically vary with how many books you sell and ship.
Printing: It gets tricky with book printing because printing cost per book depends partly on how many books you print in a run; so on one hand, you don’t want to print too few at a time and see your printing cost per book go too high, and on the other hand, you don’t want to sink money into printing books that will never sell or otherwise be distributed. Book publishers face this dilemma all the time: they never know how many copies of a book are actually going to sell, and therefore how many to print. Kickstarter actually makes the process a bit more rational, because you can estimate up front how many copies to give to backers based on your fundraising target and estimated average donation amounts. (Kickstarter has lots of data about average donation amounts and other stats.)
Shipping/Postage: You can estimate these by using the USPS or UPS websites using an estimate of the book’s weight. (See handy online book weight estimator.) Err on the high side here: it is very easy to underestimate shipping costs!
Fulfillment Services: There are services that will provide pick, pack ship services at reasonable cost. Here’s one: Itasca Books. (Full disclosure: Itasca is Bookmobile’s book distribution sister company.)
Credit card fees: It is probably wise to assume that people will be paying you with a credit or debit card. Square is handy for small organizations and projects.
Gross margin is Income minus Variable Costs. In a classic Title P&L, this can be useful in determining how many books you need to sell to break even. I do not address a breakeven calculation here because the revenue from Kickstarter makes the calculation more complicated than it is useful for a simple budget.
Project expenses are those things that need to be done whether you sell one book or one million. The cover design, for example, only needs to be done once. Note that I have included fundraising expenses, so that the budget really covers the period prior to Kickstarter funding as well as after.
Surplus (or shortfall)
Surplus (or shortfall) is what’s left after all the costs and expenses are subtracted from the income. Obviously it can be a positive (surplus) or negative (shortfall).
Download the sample P&L here. The great thing about worksheets is that you can try all kinds of scenarios with different selling prices, sales quantities, fundraising goals, etc. However, there are two seriously bad things about worksheets:
- It is extremely easy to have an error in a formula that is hard to detect without systematically checking all formulae in the worksheet. In fact, two very influential economists got egg on their faces for just this. You have to double-check formulae!
- It is extremely easy to fool yourself by building a plan based on a worksheet with too-optimistic sales or cost assumptions. (This is the bitter voice of experience speaking here!) You have to be optimistic or you wouldn’t do a Kickstarter project to begin with, but strive for realistic assumptions and ways to minimize risks.
Do your research and use the best numbers you can in the worksheet: the numbers in the worksheet are not meant to represent reality, though in some cases they may not be far off! Also, I make no guarantees that the worksheet is 100% perfect, and it is very easy to mess up a formula when you make changes to a worksheet. As I say to my fourteen-year-old regarding her math lessons: check your work!
Careful: A Project Surplus Does Not Equal Cash Flow!
This Title P&L shows the project surplus (shortfall) at the completion of the whole project. The numbers can work beautifully in this kind of projection yet you can still have periods in the middle of the project where your cash outlay is more than your cash coming in. Two things can help make sure this doesn’t happen: 1) set your fundraising minimum to cover all anticipated Variable Costs and Project Expenses, and 2) break out your cash flow month by month, showing money coming in from all sources and all money going out.
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Don Leeper is founder and CEO of Bookmobile, which has provided design, printing, eBook and distribution services for book publishers since 1982.