When Royalty Language in Publishing Contracts Isn’t What it Seems

Recent complaints to Writer Beware about a couple of different publishers’ royalty practices has alerted me to the fact that writers may need to demand more clarity around royalty language in publishing contracts–even if that language looks completely standard.

First, though: an overview.

WHAT’S STANDARD ROYALTY LANGUAGE?

Royalty language varies widely from contract to contract, but good royalty clauses should include, at a minimum:

1. The royalty percentage you will be paid.

This should be broken down by book format (hardcover, paperback, ebook, etc.), since royalty rates typically are different for each. Be wary of a publisher that pays the same royalty percentage for all book formats, or lumps all formats under a blanket percentage: you’ll likely be getting shortchanged on at least one.

2. How that percentage will be calculated.

It could be based on cover/retail price, the publisher’s actual sales income (cover price less wholesalers’ and retailers’ discounts), or net profit (actual sales income less other expenses, such as production costs).

A note on net profit royalties: they may be worth considering if the publisher provides a 50/50 split, and depending on what expenses are deducted. But overall, they are the least favorable kind of royalty, and offer the potential for the publisher to manipulate deductions so that payments are as small as possible.

3. A definition of terminology.

“Cover price” or “list price” is self-explanatory, but publishers have all kinds of different ways of describing other payment methods: net income, net sales, net proceeds, actual price, gross sales, actual cash receipts, publisher’s net…the list goes on, and publishers don’t always use these terms to mean what you think they mean: for example, “net income” or “gross sales” can be used to mean “net profit”. Whatever term the publisher employs to describe its royalty calculations, a precise definition is very important–otherwise, you may not know what you’re getting.

Here are some definition examples (all examples below are from contracts that have been shared with me). This one is straightforward:

For the purposes of this Agreement, the term “Publisher’s Net Receipts” shall mean revenue
received by the Publisher in respect of sales of the Work, net of discounts and returns.

This one is also very typical; it includes some additional deductions that you’ll probably only see if the publisher sells print editions direct into foreign markets:

“Net revenues” as used in this Agreement, refers to funds received by the Publisher for the
sale of copies of the Work, net of returns, after deduction of shipping, customs, insurance,
currency exchange discounts and costs of collection

In this example, the publisher says “net income” but actually means “net profit”. Without this definition, you wouldn’t know that the cost of printing is deducted before calculating royalties (which, as noted above, means a lower royalty):

For all editions and formats, the term “Net Income” shall mean the actual proceeds received by the
Publisher from all third parties such as distributor, retailer, media outlet, and other licensees, minus
printing costs and Direct Sales Costs, if any.

Here’s another net profit clause. The author/publisher split is generous…but what exactly does “profits” mean? To assess whether this is a decent deal, you really, really need a definition–but this publisher doesn’t provide one.

Author shall be paid 70% of all profits stemming from the Works under this Agreement (the “Royalties”), with [publisher] retaining the remaining 30%.

4. A schedule of payment and accounting.

This should include royalty periods (generally every six months for big publishers, quarterly for smaller houses) and the month and day by which payments and royalty statements will be sent out (widely variable depending on the publisher, anywhere from 15 days to three months after the close of the royalty period). An example:

The Publisher agrees to provide quarterly statements of account and to make payments
within thirty (30) business days following the end of the quarter:

• January through March payments will be sent in April.
• April through June payments will be sent in July.
• July through September payments will be sent in October.
• October through December payments will be sent in January.

Some publishers pay and account just once a year. That doesn’t mean the publisher is questionable, but it does make you wait longer for payment, and less frequent reporting makes it more challenging to track sales.

Also, be sure the contract requires the publisher to provide a royalty statement as well as payment (ideally according to the same schedule). The bottom line of any author-publisher relationship is always the exact contract language, and if the contract doesn’t require the publisher to provide a royalty statement, it may decide it doesn’t have to (I have several real-life examples of this).

Different publishers organize royalty language differently: you may find everything under a single “Royalties” heading, or it may be broken out under different headings, such as “Royalties” and “Accounting”. Additional income you may receive from the publisher’s use of your subsidiary rights (such as translation rights) or the licensing of subrights to others is usually covered under a separate heading, such as “Subsidiary Rights” or “Licensing Rights”.

WHAT IF CLEAR LANGUAGE ISN’T ENOUGH?

Back to the two publishers mentioned at the top of this post. The first pays royalties on net revenues; here’s the definition it provides, which looks completely standard:

“Net Revenues,” as the term is used in this Agreement, means money actually received by Publisher for completed sales of copies of the Work, less any returns or deductions, from distributors, wholesalers, or third party sellers.

You probably would assume that “less any returns” means that royalties paid on books that are later returned (i.e., royalties that are overpaid because there was no customer sale) are deducted from the author’s royalty account (This, by the way, is why many publishers maintain a reserve against returns: a portion of royalties owed to you temporarily held back to allow for returns, with the balance released to you at regular intervals). And most of the time, you would be correct.

This publisher, though, has a different interpretation. It uses IngramSpark, which allows it to make its print books returnable. But that incurs cost: Ingram charges the wholesale price of returned books back to the publisher (plus shipping and handling if the publisher wants the book sent to them rather than destroyed). Especially for a title with a lot of returns, it can be an expensive proposition. Rather than absorbing the expense as part of the cost of doing business, as many publishers do, this publisher deducts part of it (along with any overpaid royalties) from the author’s royalty account.

Forcing authors to bear the cost of returns isn’t common practice, but it happens: I’ve gotten a number of reports over the years. Even if you aren’t in the same fix as the author who contacted me with this most recent example–Ingram returns credited against their royalty account had pushed them into negative numbers and the publisher was attempting to bill them for the balance–it’s an unpleasant surprise to discover on your royalty statement…especially if the publisher didn’t see fit to inform you in advance.

Publisher number two also pays on net revenues, and also offers what seems like a straightforward definition.

“Net revenues,” as used in this Agreement, refers to funds received by the Publisher, for the sale of copies of the Work, net of returns, after deduction of distribution costs, shipping, customs, insurance, and currency exchange discounts.

There’s a bit of a “gotcha” in here if you don’t know to ask about it or the publisher doesn’t explain: distribution costs. This publisher works with a distributor (in addition to a wholesaler like Ingram and retailers like Amazon), which charges a 25% distribution fee on customer sales, plus a 10% re-stocking fee on returns. Working with a distributor is an advantage, as it raises the likelihood of the publisher’s books making it into brick-and-mortar stores, which in turn may result in better sales–but it also lowers royalties, since those fees, deducted by the distributor, reduce sales income to the publisher and thus the amount on which your royalties are calculated.

There is nothing shady about this. However, this publisher also has a practice of additionally deducting printing costs from sales income–which is not disclosed anywhere in the contract. The several authors who reported this to me didn’t discover it until they received their royalty statements. Between the disclosed deductions and the extra-contractual ones, their royalties were reduced to a pittance (or, in some cases, less than zero).

BE PROACTIVE

Again, forcing authors to pay for returns, and deducting expenses not mentioned in the contract, are not common practices. Even so, I don’t think you can assume you will never encounter them. So when compiling a list of questions to ask a publisher that has made you an offer, I’d suggest you add these:

– When calculating royalties, do you or your distributor(s) deduct any costs or expenses other than those mentioned in the contract?

– For a publisher that uses IngramSpark and accepts returns: Will Ingram’s return fees for print books be passed on to me? If so, how?

If the answer to either of these questions is “yes”, you may want to re-think your enthusiasm about the offer. If you decide to go forward, the ideal outcome would be to get any additional fees or expenses written into the contract; depending on the publisher’s openness to negotiation, that may not be possible, but try at least to get the publisher’s response in writing.

– For a publisher that works with a distributor: What are the distribution costs, and how will those be figured into royalty calculations?

And of course, if the contract includes royalty terminology or other language you don’t understand or that is ambiguous, ask about that as well.

Hopefully the publisher will answer honestly.