Although this was in a comment thread, I wanted to separate it out; it's a question asked by janni.
I don't actually know how true this is now, but I do know that I, like Janni, heard this a lot in the early '90s. There was some sense that if the advance, which is entirely separate from something like a P&L statement, earned out then you, the author, had been paid too little.
In the '90s, advances seemed to have no upper bounds. Money was being spent to acquire properties in a way that seemed -- from my admittedly new eye -- to imply that publishers had endlessly deep pockets. I remember doing the math, making certain assumptions (probably somewhat incorrect) based on general contract knowledge, and wondering how on earth a publisher was going to see money from these books in any realistic way. Not, of course, that I would have sneered at these advances myself < wry g>.
I'm not at all certain that that's true, though. From a publisher's point of view, all risk, all monies ventured, are ventured by the publisher. From an editor's point of view, things are different -- have I mentioned just how much fun I think it would be to be an editor? Because if I haven't, picture this: You're told by your publisher to keep money and costs Way Way Down, and your salary and job relies on your ability to a) do this until you can b) find a Robert Jordan to your own credit in which case you c) will be golden and have more leeway. You're told by your authors that they're starving (in some cases literally), and that they need to be paid more. Oh, and that they're not being treated as well as Robert Jordan (whose books may very well have nothing at all to do with their own in style or substance). Does this sound like fun to you?
Okay, there's probably a lot more to it than that -- but it doesn't sound like fun to me :/. I truly admire the editorial ability to withstand heat from either side of the divide. It seems -- from my perspective -- to be not unlike walking on lava. That was tonight's digression.
In general boilerplate terms, you'll be offered some sort of advance against royalties. It will be something along these lines: For a hardcover, 10% of the first 5,000 copies, 12.5% of the next 5,000 copies, and 15% of every book thereafter, based on the retail price of the hardcover. For a paperback, 6% of the retail cover price for the first 150,000 and 8% thereafter, although some houses will offer 8% and 10% instead, if negotiated up. Given 150,000 these days, that's 6% <wry g>. Trade paperbacks are often at 7% of retail.
Ummm, okay. I said I was going to ignore books in which the author made money and the publisher didn't. Let me now sort of go back on that. In the case where the initial orders are high enough, the publisher can print a lot of hardcovers, ship them, and wait. If the returns are high, or much higher than expected, the publisher can take a bath, but the author can still earn enough on royalties to pay out their advance.
Let's say, for the sake of illustration, that you're offered 50,000 for your first novel (in these days, that's very high). Assume that some buzz is achieved, and cautious buyers throw that caution to the wind, and order lots for a first novel. Also assume, for the sake of this example, that the publisher is confident enough to put that book out in hardcover and the sales force, to push it as they can. The publisher can admittedly feel a bit stressed about the fact that the financial risk, in all senses, resides with them -- because if the buyers do screw up, they just ship back what they didn't sell, and they get a credit against future debt.
[I forgot that part. If a book is 10.00, the bookstore will pay 5.70 for every book. When I strip and return the covers of that 10.00 book, the bookstore will receive a credit for 5.70 for each cover returned. Although hardcovers are sent back full book, rather than stripped -- and I'd like to see someone try to strip a hardcover, but I digress -- the bookstore will get a credit for the net amount I was invoiced as well. This is why buying books without cover is particularly bitter for both authors and publishers -- the bookstore received a credit for the cover, so neither the publisher nor the author are getting any money out of the sale of the book body, and it can easily be argued that that takes money out of both pockets.]
Before I sound like I'm schilling for publishers, let me make one thing clear: I do believe that without the right author, they wouldn't be in business. But discovering which is the right author is a costly and difficult proposition.
Yes, the author worked on this book for no pay. Yes, the effort should be monetarily rewarded in a perfect world. But in order to put the book on shelves, the money comes from the publisher; to get it out otherwise in a similar fashion would cost so much more than an author could afford that I would severely Not Suggest It. (Vanity presses are bad. In fact, this whole long set of ramblings began because of a discussion about Vanity Presses).
If a book's initial orders justify a print-run of 50K books, the author can earn out their advance if the book sells 15,850 copies and the rest are returned. At 25.00 a book, the first 5,000 will earn the author 12,500; the second 5,000, 15,625, and the third 18,750, or 46,875 in royalties. If we sell another 850 of those 50K shipped books, we've now earned out our advance. But the sell through? 32 per cent. This is not going to make money for the publisher. Truly. It's an abysmal sell-through. The author can then continue to earn, free and clear, any royalty money made from paperback sales -- but the security of their next book, in my mind, would be in severe question.
This is not the question that janni asked. Arg. Part 2 coming, because I'm running out of words.