Monday, January 27, 2014

Return on Investment - Part 2

Last Friday, I talked about how to calculate your return on investment. Just a quick reminder:

Return on Investment = (Gain of Investment - Cost of Investment) / Cost of Investment



If your ROI is not a positive number, you're losing money on your investment.

If you're an indie writer who has all your rights, the next question you need to ask yourself is how patient are you. Last Friday, I used the first year's worth of data to demonstrate a negative ROI for Seasons of Magick Spring. Assuming I do absolutely nothing with the story, I will eventually break even because I OWN AND CONTROL ALL THE RIGHTS to the story.

I can fix the cover. I can raise the price. I can even bundle the four separate stories into one volume and sell it as a collection.

Here's the next step you need to consider - Opportunity Cost.
This means taking into account what you would lose by picking a certain alternative.

Opportunity costs apply NO MATTER WHICH ROUTE YOU GO--indie, assisted or traditional. It's up to you to calculate the costs.

Example 1 - Indie Only
As I said in the previous post, my typing speed was 500 words per hour in 2011-2012. Through practice, my typing speed is up to 750 words per hour. Before I do anything now, I have to consider the loss of pages by doing an alternative activity.

It will take me approximately two hours to search for a new cover for Seasons of Magick: Spring. Then there's the tweaking in, which is another hour. Redoing e-book files with the new cover = 1 hour. Uploading to retailers and distributors = 1 hour. I'd spend five hours for re-doing one little book instead of writing 3750 new words (roughly 14 pages).

Also, remember my cost of investment for this particular story is already $435. Total units sold as of December 2013 is 148 with a income of $0.35 per copy.

($51.80 - $435) / $435 = - $0.88

I'm adding the new photo ($8) and five more hours of my time ($50). Therefore my new COI is

$435 + $8 + $34 = $493

which drags my ROI down to

($51.80 - $493) / $493 = - $0.89

I going to have to sell 22 more copies at $0.99 each to make up for the time and money spent. Definitely not worth it at $0.35 a copy.

However, if I create an anthology of the Seasons of Magick series, it's still going to take me the same amount of time and the same costs, but I can reasonably justify a higher price point of $5.99 (which actually gives the customer a discount off buying each story separately).

The photo and five hours would actually be pro-rated between the four stories, so the new COI would be

$435 + $2 + $12.50 = $449.50

And the new ROI for Spring alone would be

($51.80 - $449.50) / $449.50 = - $0.885

With the new price, my income would be roughly $4.19 per copy or $1.05 per story. Therefore, I would only have to sell three copies of the anthology to surpass my original ROI for Spring only!

Edit to add: Yes, my ROI is still negative, but the odds of a reader picking up the longer work. (See Mark Coker's analysis at the blog.) When I do put out the anthology later this summer, I'll keep you folks updated.

Example 2A
The problem with most assisted publishing packages is that you, the writer, will have to pay the overhead (cover, editing, etc.) as well as 15% of your gross income to your packager.

I'm going to stick with Seasons of Magick: Spring so you can see the difference.

My gross income is $51.80. My packager gets 15% percent or $7.77, which lowers my GOI to $44.03. That same $7.77 get shifted over to COI. Therefore,

($44.02 - $442.77) / $442.77 = - $0.90

Here's the problem: packagers always take their percentage off the top. Your COI will NEVER go down. It will increase with each transaction.

Example 2B
What would have happened with a book I've made money on like Friday's example of Sluts in the City #1?

Remember the original factors for the first year were GOI was $2962, COI was $433 and ROI was $5.84. 15% of $2962 is $444.30.

($2517.70 - $877.30) / $877.30 = $1.87

Major difference going from $5.84 all the way down to $1.87. Your opportunity cost is a loss of $3.97 ROI by choosing to go with assisted publishing. This is why folks like J.A. Konrath, Dean Wesley Smith and Kris Rusch constantly preach about sticking to fixed, one-time costs when publishing your books.

IMPORTANT POINT #1! I won't be able to do anything else with this story without going through the assisted publisher. If I want to do the anthology for Seasons of Magick, I may not be able to depending on what the contract says.

IMPORTANT POINT #2! The other factor is how long an assisted publisher can collect from you after you've terminated the relationship. Many times, their contracts are worded so that they can collect 15% for the life of the copyright, which means the rest of your life plus 70 years!

WARNING: I used my fixed costs for the example. Assisted publishers generally charge you much, MUCH more for these services!

Example 3A
What about a traditional publisher? First of all, they usually won't accept a novella all by its lonesome. There are exceptions, but for simplicity's sake, let's pretend Sluts in the City #1 is a novel. To make it a little more realistic, let's assume it took me 200 hours to write the novel (200 X $10 per hour = $2000).

Let's assume instead of publishing the book myself, I sold the license to Kensington. Based on a lot of conversations lately, I could expect a $2500 advance for a first-time novelist, 6% royalties of gross for print, and 25% of net for e-books. Kensington sets both the MMPB and the e-book price at $7.99. The wholesale price is $4.00. Let's also assume I have a print run of 10,000, I still sell 1481 copies, and my print and e-book sales are split 50/50.

For the first year:

Advance against Royalties = $2500

Royalties = (741 MMPB X (.06 X $7.99)) + (740 e-books X (.25 X $4.00)) = $1,085.24

Hey, Kensington gave me more money than I would have gotten through royalties! Therefore, my ROI is

(2500 - 2000) / 2000 = 0.25

That's a positive number, I cheer.

But wait, I forgot about my agent! She gets $375 of my advance. And what about the 100 hours my editor insisted I spend promoting my book online? The bookmarks I handed out when I spoke at the local writer's group ($25.00)?

(2125 - 3400) / 3400 = - $0.38

It gets worse. Because 1481 is considered a pathetic performance, no other publisher will touch me. There's no second year because all the copies are returned and/or pulped. And depending on the terms of my contract, I probably won't be able to get my rights back.

Oh, and my agent will dump me.

In other words, I can't do a damned thing to change that negative ROI.

Example 3B
Let's change the scenario that my entire print run is sold the first month it's out.

Royalties = ((5000 MMP X (.06 X $7.99)) + (5000 e-books X (.25 X $4.00)) = $8397

Agent fee = $1259.55

So my ROI looks better right?

($7137.45 - $4284.55) / $4284.55 = $0.67

The problems start if Kensington decides my book is not worth another print run. This is ALL the money I will EVER make from the paperback version Sluts in the City #1 until I get my rights back (if I ever do). What happens if Kensington sublicenses my e-book to a subsidiary which reduces my royalties (which is a stunt Harlequin pulled)? I have no control of what happens to my book.

But more important, what are the lost opportunity costs of not publishing myself? Let's assume I sell the e-book for $4.99 and $14.99, which would give me revenue of approximately $3.45 and $2.00 per copy for the same 10,000 copies.

Lets assume my costs are $2000 for writing the book, $100 for a professional cover, $500 for editing, $150 for e-book formatting, and $500 for print formatting. Just like signing with Kensington, I'm not doing any other work myself except for the writing. I'm also not pimping myself online and not having bookmarks made.

(Please note: I'm not pulling these numbers out of my ass. I've been getting estimates for publishing A Question of Balance (formerly Sword of Justice), my NaNoWriMo project)

GOI = (5000 X $3.45) + (5000 X $2.00)
= $17,250 + $10,000
= $27,250

COI = $2000 + $100 + $500 + $150 + $500
= $3250

Therefore, my ROI jumps to

($27,500 - $3250) / $3250 = $7.46

Even better my rights aren't tied up for the life of the copyright. I can lower or raise the price as necessary. I can join with other erotica writers to create a sampler. The possibilities are endless.

I hope this information helps you in your writing journey! Q'pla!

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