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To generate sales, publishers must spend money on producing books, distributing their products, and promoting or marketing newly launched titles.

Production

To produce books, publishing houses have expenditures such as overhead (including salaries for the employees who edit and design books) and paper, printing, and binding. Also, as part of their contracts, authors sometimes require that publishers pay them advance money, an up-front payment that’s subtracted from royalties later earned from book sales (see Table 2.2). Typically, an author’s royalty is 5 to 15 percent of the net price of the book. New authors may receive little or no advance from a publisher, but commercially successful authors can receive millions. For example, Interview with a Vampire author Anne Rice hauled in a $17 million advance from Knopf in a contract for writing three more vampire novels.

Distribution

Distribution costs include maintaining inventory of books to be sold and fulfilling orders (shipping books to commercial outlets or college bookstores). Publishers monitor their warehouse inventories to ensure that enough copies of a book will be available to meet demand. Anticipating demand, though, is a tricky business. No publisher wants to be caught short if a book proves more popular than originally predicted. Nor does it want to get stuck with books it can’t sell, as the company must then absorb the cost of returned books. As one way to avoid both of these costly scenarios, distributors, publishers, and bookstores have begun taking advantage of digital technology to print books on demand rather than stockpiling them in warehouses. Through this technology, they can revive books that would otherwise have gone out of print because of limited demand—and avoid the expense of carrying unsold books (see “Converging Media Case Study: Self-Publishing Gets Redefined”).

Source: Arianne Cohen, “A Publishing Company: Random House,” New York, http://nymag.com/news/features/2007/profit/32906/.

Marketing

Publishers spend a significant amount of money on marketing, which includes advertising and generating favorable reviews. For trade books and some scholarly books, publishing houses may send advance copies of a book to appropriate magazines and newspapers with the hope of receiving positive reviews that can be used in promotional materials such as brochures. A house may also send well-known authors on book-signing tours and arrange radio and TV talk-show interviews to promote their books. College textbook firms “seed adoptions” by paying instructors an honorarium to review a book that’s in development, by sending free examination copies to potential adopters, and by promoting new titles through direct-mail brochures.

To help create a best-seller, trade publishing houses often give large illustrated cardboard bins, called dumps, to bookstores to display a particular book in bulk quantities. Large trade houses buy shelf space from major chains to ensure prominent locations in bookstores. Publishers also buy ad space in newspapers and magazines and on buses, billboards, television, radio, and the Web—all to pump up interest in a new book.