Contract Red Flag: Net Profit Royalty Clauses

Posted by Victoria Strauss for Writer Beware

In the comments thread of a previous post, a reader asked whether there is a difference between royalties paid on net income and royalties paid on net profit. There most definitely is a difference–and, depending on the circumstances, royalties paid on net profit is a major red flag.

LIST PRICE

The ideal royalty is paid on list or cover price–the actual retail price of the book. So if your list price is $20, and your royalty is 10%, you’ll get $2 for every book sold. For big trade publishers, including larger independents, royalties paid on list price is standard for domestic sales.

NET INCOME

Smaller publishers, on the other hand, are more likely to pay royalties on net income or net sales proceeds–the money they actually receive for the book (list price less any discounts charged by retailers or wholesalers). This means your royalties will vary, depending on where your book is sold–but they will vary in predictable ways. Again using a $20 book and a 10% royalty as an example, sales at full list price from the publisher’s website would generate a royalty of $2; sales to physical retailers at a discount of 40% would generate a royalty of $1.20; and sales to wholesalers at a discount of 50% would generate a royalty of $1.


Royalties paid on net income aren’t as desirable as royalties paid on list price–obviously–but they are common in the small press world, and don’t necessarily ring warning bells. However, you do need to carefully parse the contract language, and understand what you’re signing. For instance, here’s a net income royalty clause that could look like a list price clause if you don’t read carefully:

“The Publisher shall pay the Author or his duly authorized representatives…a royalty of seventeen percent (17%) of the retail price thereof on the Work, less returns, less discounts, and less distribution fees.”

Always look for a precise definition of the amount of money on which the publisher will be calculating your royalties–for example:

“The Author’s royalty will be 20% of the Publisher’s actual cash receipts (the list price of the book less any discounts due to vendors.)”

Beware of contracts that use terms like “net income” or “publisher’s proceeds” or “sales price” or “gross income” without clearly stating what they mean. Another thing to watch for: some publishers deduct not just discounts, but taxes, transaction fees, and/or shipping and handling fees–all of which further reduce the amount of money on which your royalties are calculated.

NET PROFIT

Royalties paid on net profit are an entirely different animal. In this case, the publisher pays on whatever is left after a menu of additional expenses–manufacturing, publicity, warehousing, even editing–have been subtracted. This can substantially deplete the amount on which your royalties are calculated. For instance, for that $20 book with a 10% royalty, the publisher’s net income (let’s say $10, based on a 50% discount) might be further reduced by deducting shipping and handling (say $2) and manufacturing costs (say $4). That would leave just $4 available for royalty calculations, for a royalty of $0.40.

Publishers that pay on net profit often pay higher royalty percentages than average, and if the percentage is large enough–50% or more–it may offset the deductions. But be sure you know exactly what those deductions are. Deductions should be precisely defined, so that the publisher can’t add expenses at will (no vague “associated costs”, and if “book production costs” will be deducted, do those include editing and other fixed expenses as well as printing?), and the publisher should be willing to give you at least an estimate of the actual amounts involved–average manufacturing costs, for instance.

Be aware also that publishers that pay on net profit rarely use that actual term, so you need to be on your guard for telltale language. Below are examples of net profit royalty clauses, taken from contracts in Writer Beware’s files, with the relevant terminology bolded.

“For each Edition of the Work when sold at discounts of FORTY PERCENT (40%) to SIXTY PERCENT (60%) of list price, the Publisher shall credit the Author’s account with a royalty equal to TWENTY-FIVE PERCENT (25%) of the amount determined by deducting all manufacturing costs of the copies so sold from the amount received by the Publisher, net of returns.”

“The Publisher shall pay the Author twenty percent (20%) of the wholesale price received for every copy of the Work sold in Hardcover, Trade Paperback, or Mass Market Paperback edition, less costs of printing, returns, and other associated warehousing costs.”

“Royalties…shall be calculated on the basis of monies paid to and received by Publisher, less any transaction fees (e.g. Paypal), shipping & handling fees, sales or other taxes, import or export duties, commissions or other charges payable to third parties, and less editing fees of fourteen (14%) of the Publisher’s retail price of the work.”

“[Publisher} will pay the author 25 percent of net revenues from the sale of The Work. Net revenue is defined as the total receipts less book production costs.”

“The Publishers shall pay to the Author the following royalties…On all copies of the Work sold through bookshops…ten percent (10%) of the Publishers’ Net Receipts less bookseller’s discounts and manufacturing costs. On all copies sold through the Publishers’ website: ten percent (10%) of the Publishers’ Net Receipts less maufacturing and distribution costs.” [Net Receipts has previously been defined as “all amounts received by the Publishers less production costs & digital storage with the printers.”]

“Royalties are calculated as a percentage of the Net Retail Price (discount rate minus printing costs.)”

This last one is my favorite, not just for all the stuff that gets deducted, but because it’s so unnecessarily complicated:

“[Publisher] shall pay Author a royalty of 25% (twenty-five percent) of Net Work Revenues on sales of the Work during the Term of this Agreement.
a) Net Work Revenues means Gross Work Revenues after the deduction of Work Expenses; Gross Work Revenues means all amounts actually received by [Publisher] for its own account from the exploitation of the Work that are identifiably attributable to the Work as a standalone work;
b) Work Expenses means all reasonable amounts actually incurred by [Publisher] in connection with the exercise of the Granted Rights that are identifiably attributable to the Work as a standalone work, to a maximum amount equal to 25% of Gross Work Revenues. By way of example only, Work Expenses include the costs of creating versions and copies of the Work (including, without limitation, manufacturing costs related to the Work and the costs of manufacturing ancillary products), shipping costs, advertising expenses related solely to the Work, and charitable contributions derived from sales of the Work, but do not include expenses related to the general overhead costs of Publisher.”

Comments are closed.