FAQ – Advance and Royalties

How do advances and royalties work?

An advance is a non-refundable sum paid in expectation of the royalties a book will earn, royalties being your percentage payment from each book sale. As you have already been paid ‘in advance', the royalties from your book sales will need to exceed the amount of your advance before you are due further monies, ie the advance needs to have been ‘earned out'.

Advances or alternatively one-off payments are also payable on rights sales; your contract will specify the author/publisher splits (if subagents are involved there may be deductions at source). Your contract will also specify whether such monies are to be offset against your main advance (as royalties are), or whether there is 'flow-through'.

Royalty rates vary according to the type of publisher and book. Titles with colour illustrations integrated throughout will typically have lower royalties due to the higher production costs. And royalty rates for professional, education and academic markets tend to be lower than those for general trade titles. Finally, royalties on paperbacks differ from those on hardbacks.

Two key concepts in calculating royalties are:

• ‘escalators' and
• the basis on which royalties are calculated.

An escalator means that the royalty rate rises after an agreed sales threshold has been reached, as in the following example (for a hardback) - '10% to 4,000 copies, 12 1/2% up to 8,000 copies. 15% thereafter'. This allows authors to share in the success of a book once production costs have been absorbed.

The other key concept is whether royalties are calculated on published price ('pp') or on the price received ('pr'), ie the price net of the bookseller's discount.

The pp formula - dealt with in more detail in the next FAQ - allows for variations on royalty rates in cases of high discounts. Although an article of faith for literary agents, this method of calculating royalties is looking increasingly illogical, given the spiralling of booktrade discounts. It is something of a throwback to the days of the 'Net Book Agreement', when prices were fixed, price promotions rare and discounts to booksellers significantly lower.

The way to square the circle is to have royalties based on price received but with a higher starting royalty rate.

The acknowledged reference source for publisher-author contracts is Clark's Publishing Agreements (seventh edition), edited by Lynette Owen and published by Tottel Publishing.

The Society of Authors also offers a free contract-vetting service.

What are pp and pr and why are they important?

As mentioned in the last FAQ, pp and pr refer to the ways royalties are calculated. PP stands for ‘published price', ie the price listed on a book's cover. PR stands for ‘price received', the price the publisher receives from the bookchain, wholesaler or other book retailer after their discount has been deducted. Currently, author contracts include royalties based on both pp and pr, the latter conventionally used for export and some high-discoun' sales (which these days means much of the booktrade).

The pp v pr debate is the Emperor's New Clothes of publishing. As Victoria Barnsley, CEO of HarperCollins UK, commented to Publishing News (29 August 2003), royalty payments are based on a system 'that doesn't reflect today's business reality. Once the NBA [Net Book Agreement] went, royalties based on RRP [Recommended Retail Price] should have gone with it...It is ludicrous to have everything set in stone when the business is fundamentally different than it was twenty years ago.'

In other words, the pp v pr formula was developed well before the collapse of the Net Book Agreement. In those days, because books' retail prices were maintained (ie bookshops were not allowed to price promote), discounts given to bookshops tended to be much lower.

In today's publishing environment of central deals, discounting and promotions such as Waterstones' ‘3 for 2', this is no longer the case.

Publishers, distributors and salesforces all derive their income from the price received. The success-fee part of my income is similarly based on price received. Agents alone argue that their authors (and by extension themselves) should derive their income from royalties calculated on a theoretical published price. This is patently nonsense – turnover equals turnover equals turnover. It also breaks the cardinal business rule - that all parties' interests should be aligned.

And finally, the present system is a complicated one with some royalty rates switching direct from pp to pr (eg export sales) and others (eg UK high-discount sales) going through a sliding percentage of the pp rate. For example, the advice given in Clark's Publishing Agreements is:

'The trend is to agree that a royalty of four-fifths of the prevailing home royalty takes effect at discounts of 50% and over for hardback editions (although some publishers may go as high as 55%), decreasing to three-fifths at discounts beginning as low as 57.5% (although others will go as high as 62.5%). It is also not uncommon for the three-fifths layer to be replaced by a royalty based on net receipts.'

However, this not only makes for opaque royalty statements but is increasingly looking like a time-expired formula, especially now that the move to remove prices from books is gaining ground.

As mentioned in the previous FAQ, the logical approach would be to base all royalty rates on price received but with a higher starting rate. The usual escalators would apply, at a threshold where the publisher's fixed costs had been absorbed. This would remove at one stroke the current adversarial set-up and encourage all to be on the same side. It would also enable publishers, agents and authors to examine the current proposal of whether cover price should be removed from books on its merits.

A change is long overdue.