Monday, June 13, 2016

Business Side of Books

The economics of authoring is not always great the first year of publication, but improves over time. Three measures of business success are shown below with book examples.

1. Return on Investment
A profitability measure of a business that evaluates the performance by dividing net profit by cost. ROI, is the most common profitability ratio.
Revenue - Cost / Cost = ROI

For example, lets look at a paperback book over two years that cost $1200 to produce:
Revenue for year 1 $115 - $1200 / 1200 = -90% ROI
                        Negative 90% return looks like a terrible ROI
Revenue for year 1 & 2 $6217 – 1200 / 1200 = 418% ROI
                        Positive 418% is a great ROI

2. Breakeven point
The breakeven point is the sales volume at which a book earns exactly no money. The formula is: Revenue - cost  = 0; and you find it by dividing your costs by the profit per sale.

This can be useful to determine the time needed to recover your initial investment. For example, let’s say an ebook costs $700 in editing fees, $75 for the cover, $75 for formatting. If the book’s sales price is $3.99 and you earn a 70% profit, you will get $2.793 for every book that sells. To figure the breakeven point we would add up the costs, $850 and divide by the royalties. In this example it is at 304 books being sold.

3. Opportunity Cost
The “opportunity cost” of producing a book, means the value that the author will give up of the next-highest-valued alternative to what is being chosen to do. 

This one is hard to quantify for authors. It takes us months/years to write a story. We may give up going to movies, spending time with family members, and other worthwhile pursuits.

Opportunity cost asks the business owner to examine what they are giving up to get profit and ask, is it worth it? This is the part of author economics that asks you to prioritize your values. It’s different for everyone and may change for any one person at any time.

For us, we knew we needed a 5-year business plan before we would see a solid return on our investment of time. So we chose the time we wrote carefully to allow us to spend time on things we wouldn't be able to recover, like family time and work. So our writing time was when the kids were in bed or at school. 

Now, we receive profit without much expended time or expense. Opportunity cost greatly decreases as the longevity of the sales extends.

No comments: