Publishers’ Favorite Tools for Assessing Company Health
by Marion Gropen
Last month’s article about metrics covered my three favorite tools for measuring the health of a publishing company—contribution margin, total overhead expenses, and rate of accuracy of your projections. At the end of that article, and in several other venues, I asked people in independent publishing companies to tell me what metrics they use.
Responses indicate that publishers’ favorite metrics include measures of sales, collections, contribution margins, cash flows, and Web statistics, and assessments of the type of customers buying books and of market share.
Publishers use many different metrics to examine sales. Mark Long, publisher of Texas State Technical College Publishing, reports that the company tracks its 40 to 45 titles with YTD (Year To Date) and quarterly reports of sales by customer, by title, and by frontlist vs. backlist. Then they look at the percentage of total sales that each title and customer represents.
This combination of metrics helps them see developing trends and fine-tune their list and their inventory.
Gretchen Goldsmith, president of Rose Publishing, a Christian press, says she examines sales rep commission reports every month. This lets her track sales, evaluate rep performance, and spot both books that are doing well and books that are approaching the end of their life cycle.
Steve Karris of Orchard Publications, a textbook publisher, tracks sales using bar charts to compare YTD and monthly sales with prior years and to identify trends.
Collections are a perennial problem when you’re selling to bookstores. Mark Long examines his accounts receivables aging report on a weekly basis, so that he can keep any account from owing too much for too long.
Collecting accounts receivable, and keeping the balances low, is a priority for Goldsmith, who watches them in monthly, and sometimes weekly, examinations of major balance-sheet items.
Karris must deal with an added complication because many of his customers are overseas, and collections are much more difficult across borders. He addresses this problem by asking all first-time customers to prepay, and he continues to require prepayment until he knows a customer well. Only about 30 percent of those who query his company about purchasing books respond with prepayment, but he feels that this reflects the percentage of inquiries that come from serious buyers.
Contribution margins, a classic metric for all financial analysts, are usually defined as sales (net of all returns and discounts) less Cost of Goods Sold, distribution fees and commissions, and marketing costs. This number shows how much of your revenue is left over to support overhead and provide a profit.
Jonathan Laden—the circulation and financial director of the Biblical Archaeology Society, which produces a major journal and videos as well as books—measures the success of the book publishing division by its contribution to overhead for the nonprofit group. He also examines the division’s ability to make an impact.
Perry Donham, Publisher of KidPub Press, looks at contribution margin and gross margin in a number of different ways. He knows he needs an aggregate gross margin of 40 percent if the operation is to be profitable. He also looks at the contribution margin per title on a monthly basis, as total dollars, and as a percentage of revenue. Then he allocates marketing resources more heavily to titles producing a higher contribution margin. And if a title has a low contribution margin, he knows he needs to identify the problem, and find a way to avoid it in the future.
Contribution margins are also a key part of KidPub Press’s pricing strategy. Donham starts with the target margin per copy and works backward to ensure that the intended price is acceptable.
Cash flows are particularly difficult for book publishers. We invest in our books well before they’re ready for sale, and then wait for months after the sale before bookstores pay our invoices.
Almost every respondent said something about cash, and Long of Texas State Technical College Publishing said it best:
It’s critical for any book publisher—but especially small ones—to gain an understanding of how cash in and cash out works as early on as possible. Most people get into book publishing because they love books, not because they love staring at spreadsheets . . . but the margins are so thin in publishing that without ongoing, vigilant financial oversight, it is entirely too easy to quickly dig a hole for yourself that is impossible to get out of.
As Web-based marketing becomes more critical to success, more publishers are looking for ways to evaluate it.
Robert Hickey, deputy director of The Protocol School of Washington (DC), which publishes reference books, tracks hits on its Web site, and notes which pages are suddenly popular. This enables the publisher to issue releases that get more coverage for its books when an issue is suddenly interesting.
Another approach is that of Goldsmith of Rose Publishing. She uses Google Analytics to study her company’s Web-based sales and to fine-tune its offerings.
Type of Customer and Market Share
Metrics that help you understand your customers give you information about how to market, about what books to publish in the future, about pricing strategies that might work, and about many other things.
Hickey analyzes the kinds of customers who are buying through Amazon. He’s especially interested in the fraction of total sales going to each type of customer. Using this information, he tries to understand which audiences are responding to current marketing campaigns and to identify groups that may be receptive to future campaigns.
Steve Brown of Chick Springs Publishing uses data about responses to in-person events, especially book signings, in innovative ways, partly because his publishing program is unusual; he sells novels only within his own state. Chick Springs keeps records of every sale of every title at these events, and measures the foot traffic too. This lets the company see trends the rest of us might miss.
For example, in early 2006, Brown saw a fall-off in traffic generally but more traffic coming from teenage girls. “There were not more teenage girls than normal,” he says. “Teenage girls didn’t know there was a recession, and when you strip away all the other traffic, these girls and their antics stand out.” Of course, this pointed the way to an opportunity.
All in All
Responses to my requests for information reflected a few obvious trends. Sales and the marketing that can generate sales are vitally important to every publisher. Cash flow, while less intrinsically interesting, is critical to survival. And watching the contribution margin on each title may require a little more computation, but it seems to reward the companies that do it.
One thing that all the responding publishers mentioned is that it’s important to them to make an impact, to get their books into the hands of their ideal readers. This is not something that they feel they can easily measure, but it is one of the reasons they’re in the publishing game.
And one thing that few publishers mentioned is worth emphasizing: Graphics are exceptionally useful. Even if you are naturally adept with numbers, it’s much easier to spot significant trends and differences with an appropriate chart or graph.
My thanks to each respondent, whether quoted or not. All were generous with their time and assistance, and the information everyone provided was interesting and informative as well as helpful for other publishers who are looking for good metrics to use and good ways to use them.
Marion Gropen of Gropen Associates, Inc., has been in publishing for 18 years. For the past few, she has been offering publishers financial and management advice on a by-the-question basis. You’re invited to send comments and questions on this article or on other topics to her at Marion.Gropen@GropenAssoc.com. For further information, visit GropenAssoc.com, or her blog (on that site).