Publishers traditionally have based royalties on the retail price of the book – the list or cover price – or more rarely, the invoice (wholesale) price of the book.
Another approach, however, always has existed: a net revenue formula. This formula is based on the publisher’s actual receipts after all discounts and costs of sale, rather than the retail price. This type of royalty calculation formerly was used only in certain types of publishing – typically niche markets – or by small presses. Because of the growth of deep discounts for booksellers such as Amazon, however, more and more publishers – including major independents such as Sourcebooks – have gone to the Dark Side, paying royalties on net revenue exclusively.
A royalty based on net revenue has many advantages for the publisher. Rather than paying the author on the book’s price, the publisher pays the royalty only on the actual amount of money that ends up in the publisher’s bank account after the book is sold. A typical clause:
The Publisher shall pay to the Author on each copy of the Work sold by the Publisher, less returns, ____ % of Net Revenues from the sale of any and all net copies sold. “Net Revenues,” as used in this Agreement, refers to money actually received by Publisher from the sale of copies of the Work, net of returns, after deduction of shipping, customs, insurance, fees and commissions, currency exchange discounts, and costs of collection.
Thus the publisher avoids paying royalties on the increasingly theoretical figure of the “retail” price – rarely paid by anyone except patrons of independent book stores. It also is preferable to using the invoice or wholesale price, based on the various bookseller’s discounts. But the net effect, of course, can often mean substantially lower income for the author if the same royalty percentage is used as with the retail price formula. Under such a formula, you will receive less royalties – often half as much — as a “cover price” author would receive from the same amount of sales. When dealing with net sales clauses, I believe that royalty percentages should be substantially higher (18-25%), however there is little chance that your publisher will agree.
What you can do is make sure that the definition of Net Revenue is appropriate. The definition cited above, for example, leaves far too much room for creative accounting by the publisher. If you have a net revenue formula in your publishing agreement, I recommend that “Net Revenue” (or “Net Sales” or “Net Receipts”) be defined as “actual cash receipts from all sales of the Work in any media or format less shipping costs, returns, and sales or value-added taxes remitted to Publisher by the purchaser.” And be sure you have an audit clause in your agreement, allowing you to examine the publisher’s calculation of net revenue for your book.