Words as evidence -- I found the letter

(Note:  I have removed addresses and phone numbers, even though I've moved, and fixed the paragraph formatting for ease of reading, but nothing else.  If there are typos, they remain from the original.  The body of the letter regarding the cost accounting for book profits was published almost as-is in PANdora's Box.  I've included the original here, without any changes that were made for publication.)

Linda Hilton

P.O. Box

Buckeye, AZ 85326

(602) 　

20 July 1993
　
Margaret Brownley
PAN Liaison

Dear Margaret:

I'm sorry I didn't get these off to you last week as planned. My schedule from now until St. Louis is going from frenzy to chaos.

However, here are the copies of the covers and some inside material from the two Leisure books my friend Kim picked up from Book Margins, Inc.

As you can see Gloria Pedersen's Nighthawk's Embrace has no logo or publisher's name at all on the cover. On the inside, however, the title page and copyright page say "Leisure Books." If this were an unsold "remaindered" copy, it would have the Leisure logo -- and the price would not have gone up to a very current $4.99. As recently as 1991, Leisure was still selling books for $3.95, and this one is from 1987.

The Golden Threshold which is copyrighted by Leisure rather than the author, clearly has a "BMI" logo by the price on the cover and on the spine. The title page lacks any publisher information, but the copyright page reads "Published by special arrangement with Leisure Books." The BMI version doesn't have the gold foil embossing for the title on the cover, and the ISBN is different from the original. The new one from BMI only has a publisher's ID number, 83148, the same as on the other Leisure book. Leisure's ID, by the way, is 08439. And again, the price is $4.99, up from the original. Also, the original edition included four or five pages of advertising material for other Leisure titles; this material has been cut from the BMI edition


I called BMI last Friday after talking with you. "Stan" had already left for the week-end, but I was told he would call me probably Wednesday. Naturally, I'm going to be gone all day tomorrow, but my son is capable of taking messages, and there is always the machine...

After you and I talked Friday about the home subscription situation, I received something interesting in yesterday's mail: my entry in the Harlequin $1,000,000 Sweepstakes! According to the outside envelope, I'm guaranteed a cash prize. The inner material, of course, reveals that this cash prize can be as low as 50 cents.... Still, one wonders how Harlequin can expect authors to accept 2% royalties on a marketing venture that supposedly loses money -- in order to give some reader a million bucks! And 50 cents is more than Harlequin pays its authors, even at 6% royalty!

What many authors may not know is that some of the financial figures on home subscription sales are readily available, and they do not bear out the publishers' complaints and justifications. I know you said you had some figures, but I thought I'd take this opportunity to give you what I compiled about two years ago, to see how they compare.

The typical retailer gets approximately a 40% discount on paperbacks, sometimes a bit more. The wholesaler from whom the retailer buys gets another 5% to 10%, so let's split that to take into consideration the higher volume discounts some retailers get and say that the total discount (wholesale and retail) is 47%. If the author receives the standard 6% (though many only get 4%), this leaves the publisher with 47% of the retail price to cover his costs and make a profit. (In some cases, the publisher may also have a distributor, as Zebra does with Penguin, but the percentage there is almost negligible, so we'll just lump it in with everything else.)

Zebra currently offers its Lovegram subscribers approximately a 17% discount; Harlequin offers Intrigue subscribers a bit more than 13%. If we add 25% for shipping, handling, bookkeeping, etc. (a rough estimate and probably high), the net to the publisher after the standard 6% royalty becomes 52% to Zebra, 56% to Harlequin, higher than the net on normal retail sales. If the bad debt level is so high that they can't afford even 4% to the author, then perhaps the whole idea of subscription sales should be done away with.

Then perhaps again, the proposition is more lucrative than the publishers would like us to believe. Perhaps, since these things are frequently distributed through the U.S. Postal Service, audits of the publishers would reveal just exactly how many subscribers there really are -- and how many of them are deadbeats.

The real point, however, is that publishers apparently expect us to believe that they lose money on this mail-order scam and therefore we have to help them cut their losses by accepting lower payment because they choose to sell our books at a loss. I for one do not think any of this is true.
Here's a quick lesson in cost accounting: As in any other business, advertising expenses and bad debts are figured right along with material and labor and other overhead into the cost of manufacturing the product. This total cost is then used to establish a selling price. Publishers are no different from steel mills or lingerie factories in this regard. They cover all their costs first, add a profit, and come up with a selling price. Cutting our royalties does not cover costs; it increases profits.

Another "business" lesson: Many retailers, especially grocery stores, feature loss leaders in their advertising. A staple product, such as bread or milk, is promoted at a selling price well below what the store pays for it from the dairy or bakery. The dairy or bakery may give them a volume discount, but they do not absorb the grocery store's loss on the item. The attractive price, however, is used as a lure to bring consumers into the store so they'll buy other things on which the profit margin is higher. Why do you think bread and milk are inevitably in the back of the store and as far apart from each other as possible? People have to pass a lot of other merchandise on the way to the bread and milk!

A third lesson: I have some numbers on the cost of publishing a paperback, partially based on figures taken without apologies from agent Natasha Kern's posts on Prodigy.

Using Ms. Kern's percentages, I've extrapolated the costs for a typical single-title mass market paperback, retailing for $4.99.

Cover price: 5.00
Retail discounts @ 45% 2.25
Printing cost 0.85*
Typeset/design 0.25*
Overhead 0.70*
Royalty (6%) 0.30 4.35
Total net to publisher 0.65

The * items are based on the figures Ms. Kern gave for a 5,000 print run of a $22.00 hardcover. If you bump that print-run figure up to 50,000 (which is probably minimum romance paperback from what I can guess and I'm sure there are people somewhere out here who have better numbers than I), then the Typeset/design and Overhead figures get cut to 0.025 and 0.07 respectively, and the publisher's cut jumps from 65 cents per book to $1.505 per book! This, of course, is based on a 100% sell-through, but when you consider the number of romance novels that sell more than 50,000 copies and the fact that even the above listed $.65 (at 5,000) is twice what the author makes, something is fishy!

Here's another way to look at the same numbers, only this time we'll take into consideration a 50% sell-through on a 50,000 copy print-run:
　
Costs:
Printing cost @ .85 42,500
Typeset/design 5,000
Overhead 3,500
Total cost 51,000

Revenue @ 50% sold:

25,000 @ 55% net (2.75) 68,750
Less royalty @ 6% 7,500
Less total cost 51,000
PUBLISHER'S PROFIT 10,250
　
The important thing to consider in this scenario is that only 25,000 books were sold, leaving another 25,000 in a warehouse somewhere. However, these unsold books are fully paid for, because the cost for all 50,000 has been deducted from the revenue on sales on only 25,000. The publisher can sell these leftover 25,000 copies at $1.00 each to some discount broker -- like Book Margins, Inc., if BMI were legitimate -- and make another $25,000 profit. Because most authors' contracts allow the publisher to renege on royalties if the books are sold below "cost," the publisher can produce figures showing that the books cost $.95 to produce (based on the figures in the first example) and the author gets NOTHING while the publisher pockets a cool $25,000.
Clever bastards, ain't they?
　
The bottom line (and as you yourself have said, it is always the bottom line) is that the publishers are not entering into this home subscription venture without assurances of a profit. We don't need to accept
their excuses.

If you have any questions, please don't hesitate to call -- anytime. I'm usually awake by seven in the morning and rarely get to bed before midnight. I know timing is tight between now and next week with the conference, but I have no real schedule, so you won't be interrupting anything except general chaos!

Feel free!

I am eagerly awaiting this conference. I think it is going to be one we will remember for a long time to come. In fact, I have a feeling RWA may emerge much changed as a result. I'm glad I'll be there.
　
Sincerely,
　
Linda,