We all know that publishing is getting more competitive. We all have seen that we need to make the most of every opportunity and advantage. With that in mind, I am going to explain how to create and use single-title profit and loss spreadsheets (title P&Ls), because the title P&L tends to be the tool with the most impact on your
operations.

For example, I find it helpful when:

• signing a new title (especially when debating whether the terms proposed will work)
• looking at a manuscript that has finally come in, and at the design and artwork required to make it marketable, as well as the marketing campaign required to reach a reasonable portion of its audience
• deciding on a print run
• deciding which deals to accept, including deals involving special sales, foreign rights, book clubs, etc.
• designing a marketing campaign

Building a basic title P&L is simple. You start with sales and discount figures and subtract variable and fixed expenses until you can calculate a title’s contribution margin. (Because the title P&L doesn’t include company-wide expenses, such as overhead, its bottom line is the book’s contribution to overhead and profit, rather than pure profit or loss.)

You will need formulas for calculating relationships between variable expenses and change in revenues in as much detail as possible. A little bit of programming at the beginning ensures fewer mistakes later, when you will be comparing many different possibilities. Templates are available for purchase (including the template you’ll see here), but you may want to design your own.

Input

First, gather all the data you might need. The examples below show large numbers of inputs. When you start a project, most of these numbers will necessarily be estimates based on your experience and/or research. You will need values for sales, rights sales, royalties, production costs, and other costs.

Inputs are as follows:

For sales:

• List price
• Average discount given
• Copies printed
• Copies sold, gross (before
  returns)
• Copies returned

“Average discount given” can be a volume-weighted rate. Alternatively, you can have separate sections for distribution channels that have different discounts.

For rights sales:

• Rights revenue expected
• Percentage due author

Sub-rights revenue can account for a large portion of a publisher’s profit margin, so plan to try to reap these rewards. Otherwise, you are selling yourself short (or, in this case, not
selling).

For royalties:

• Paid (use a toggle here, entering 1 for “on list” and 0 for “on net”)
• Royalty advance
• Royalty splits

First level is 0 to X

Second level is from first to X

Third level is from second up

Royalty rates as a % of base value, net of returns

First level

Second level

Third level

Contract terms with translators, illustrators, and the like, as well as with authors, go here.

For other costs of goods sold:

• PPB per copy printed
• Plant (enter total here or itemize
  on a separate Plant spreadsheet)

PPB covers not only paper, printing, and binding, but also anything else that’s on the printer’s bill. Plant costs are the fixed costs of bringing any book to market, such as cover
design, editorial work, proofreading, and art.

For other costs:

• Marketing budget
• Sales commissions (as a % of net
  revenue)
• Fulfillment cost per copy sold,
  net of returns
• Additional costs (as a % of net
  revenue)
• Additional costs per copy sold,
  net of returns

Sales commissions include any cost of getting the book out the door that is a percentage of sales. Fulfillment expense is similarly broad. The “additional costs” lines are for those oddball expenses that occur every so often. An example might be the cost of doing a special point-of-purchase display.

A Special Sale Makes a Difference

This sample spreadsheet shows how a title P&L can help you optimize your profits. It separates the incremental costs and revenues from the basic operation. Looking at only the
portions that change can help reveal the most essential elements.

The special sale reflected here does not change the core operation and involves only a few items on the P&L. Although premium sales and other special sales usually increase regular sales—because the company advertises your book to a population that seems likely to want it—I am not taking that echo effect into account in this first pass.

Excerpted from a DIY package, with permission of Gropen Associates.

As you can tell from the list price, this is a trade paperback. Despite the fact that this special sale involves 2,000 copies at 80 percent off, the extra print run will be only 1,500, since the original print order projected overprinting by 500.

The PPB is lower because the entire reduction in PPB across the whole print run will be credited to the extra books printed for the special-sales buyer.

Under the incremental approach, we apply all the developmental costs to the basic business. The special sale doesn’t require any design changes.

The commission in this case goes to a special-sales rep rather than a full-service distributor. Books will be drop-shipped from the printer to the customer, eliminating the intermediate expense of shipping to a warehouse.

Excerpted from a DIY package, with permission of Gropen Associates.

The $6,000 net revenue looks pretty sad until you realize that the rest of the incremental expenses are so very low.

In the end, this special sale will save what otherwise looks like a total dog of a project. It will still be very close to break-even. Nonetheless, with an increase in total sales resulting
from the special-sales buyer’s advertising and publicity plus the contribution from the sale itself, you will probably do better with this in your catalog than without it.

Also, of course, you might change some of the variables in the interests of making a little more money. Would increasing your marketing budget increase sales substantially? Is your audience strongly price-sensitive? If so, dropping the price a dollar or two might improve the bottom line. If not, raising the price might make sense. Go back through the process a time or two or three, and see what else you might change, and where that change might lead you.

Pricing

The first step toward setting the right price for your book is trying to derive a curve showing price elasticity, or changes in numbers of copies sold with changes in price.

To do this, you will need sales data on titles that compete most directly with yours, which you can get in several ways. For instance:

• Go to Ingram’s iPage or call its 800-number, and look up those books’ sales. Of course, these figures will not include sales the publishers made directly, but they should be representative of sales through traditional channels.
• See if your distributor has a membership in Bookscan and can give you selected data from its reports on sales in a large percentage of U.S. bookstores, or take advantage of the discount for PMA members.
• Check sales rankings for selected titles at Amazon. They go up as sales go down, in a consistent way. With some mathematical manipulation and total sales figures for one of them, you can estimate the relative change in sales caused by a change in price.

Whatever sources you use, remember that many niche books sell well in channels where you can’t get figures, so they will be undercounted in figures you do get.

Once you have an idea how sales quantity may change as a function of list price, pick prices in the high, middle, and low range for competing titles and use a spreadsheet like this one
to try to find the price that will provide the highest contribution margin for your book. We’ll use round numbers here.

Excerpted from a DIY package, with permission of Gropen Associates.

Note that the middle price we picked isn’t the average of the high and low, but one that is closest to the general run of the competition.

The PPB will change radically with the total print run, although increases are less steep as the number printed rises past 5,000.

Note that the plant and marketing budgets also change with the sales projections. That is because you often need to pump up the excitement in the design to pull eyes to your book, and because your title will need more marketing support to sustain increased sales. This
will be especially true if you start to do co-op advertising and pay for better placement in the bookstore.

Looking at the calculations of revenue, expenses, and margin, we see that the revenue is highest for the lowest price point, but that the margin is highest for the middle price
(below).

To try to improve the contribution, go back and look for places where you might cut costs. If the book is still not as profitable as it should be if your company is to be profitable, you should probably rework it, or, if the deal isn’t set yet, reject it.

Don’t Trust the Numbers Too Much

Publishing involves juggling large arrays of loosely interrelated numbers, and the title P&L spreadsheets you create should help you remember to track and estimate all of them, and avoid common mistakes. Still, nothing replaces your judgment. You need to use your experience and research skills to generate the inputs, and you need to keep asking yourself if the results make sense.

Don’t limit yourself to one scenario or even just a few scenarios. Look at possibilities and variants until you are confident that you have a feel for the way changes interrelate and percolate down to your contribution margin.

Most important: be wary of these numbers. They look solid and real. They aren’t. Remember the old programmer’s adage: Garbage In, Garbage Out. Your data will be estimates and guesses, with wide margins of error. Your conclusions will be useful, but only to the extent that your estimates and guesses were good.

Every so often, you should compare the end results with your projections. With practice and these updates, you should get quite good at estimating, at evaluating your options, and at
increasing your profit.

Marion Gropen consults with micro- to moderately sized publishers on financial and operational issues and participates in email communities for publishers. This article is based on a seminar that she gave at PMA-U. For further information, visit www.GropenAssoc.com or call 888/3GROPEN.