What Are Author Royalties? What Licensees Need to Know

Author royalties are pivotal to publishing. They’re a simple, tried-and-trusted concept that has satisfied both licensees and creators for decades. But while the royalties model is simple in theory, it can soon become complex and laborious for the people who manage calculations and payments. Here’s our guide to how royalties work, what licensees can do to manage them efficiently, and how MetaComet® can help.

Royalties: What they are and how they work

Royalties are a core component of payments to authors and other creators. They are a split of the money that publishers and other types of license holders receive whenever a book or other content is sold. These rates are negotiated and laid down in agreements between licensee and author. 

Here’s a simple example. If a contract stipulates a 10% royalty rate on a $10 book, the creator receives $1 for every sale. It’s the licensee’s responsibility to calculate royalties and pay them on an agreed schedule—typically once, twice or four times a year. Normally, royalty rates apply for the book’s entire lifecycle.

Royalties are not the only means by which creators can be paid. Some licensees prefer to pay a fixed-rate fee that removes royalties. Some might also incorporate an up-front ‘advance’ to support an author to create content. But there are good reasons why the royalty system has endured.

The value of author royalties

For authors and other creators, royalties deliver fair reward for work. All stakeholders in a book deserve a share of its sales—from publisher to printer to distributor to retailer and, of course, the originator of the content. By stipulating the royalty rate, authors can be assured of earnings.

Royalties also motivate authors and illustrators to produce the best content they can. Taking that example of a $10 book on a 10% rate, the author stands to earn $1m if a million copies are sold, but just $5,000 if 5,000 units are shifted. That’s a very good incentive to deliver compelling content and then vigorously promote it. Selling books becomes a win-win model, in which all parties share in both success and risk.

Author royalties, rates and reports

There are no set rules for royalty agreements, but some standards have emerged over the years. That 10% rate is reasonable in paperbacks and many areas of publishing, but it can be lower if creators have a smaller role to play, or larger if they take on a greater share of the publishing process. Standards differ by sector, like scholarly or trade publishing. In some hybrid publishing models, where the costs of publication are shared, authors may receive more than 50% of sales. Under the purely self-publishing model, authors both bear all costs and keep all profits after deductions from retailers.

Rates also depend on which of two metrics are used. ‘Retail’ or ‘list’ royalties are calculated on the cover price of a book, while ‘net royalties’ are based on the licensee’s revenue after deductions for retailers and distributors. These royalties may be reduced further if sales to retailers are heavily discounted. In these cases, a $1 ‘list’ royalty may drop to a matter of cents on a ‘net’ calculation. Read more about key royalty terms like net and list.

This is just the start of many variables that must feed into royalty reports. If a book has more than one author, royalties need to be divided. ‘Escalators’ or bonuses may be applied, by which higher rates are paid when volumes reach a certain threshold. Royalties also need to offset any advance that has been paid, and must allow for returns, when books are dispatched to retailers but are later returned unsold. 

On top of this, different formats attract different royalty rates. Authors expect a greater share for sales of ebooks or audiobooks, where publishers’ costs are typically lower. Other forms of licensing, like to TV or film companies, merchandising specialists or foreign markets, will also have different rates. Read more about different types of royalties.

Getting agreements right

These and other factors can make it hard for licensees to track and calculate author royalties. Part of the solution is to create clear agreements that incorporate all variables and set out transparent terms for all sides. Industry-standard templates may be used, but as with all contracts, it may be advisable to seek legal advice. 

No agreement can be completely future-proofed, and they have adapted over the years to factor in new formats like ebooks and, more recently, the AI-related use of content. But a robust and binding contract will always work best for both licensee and creator. Read more about the elements of a high-quality royalty agreement.

Payments and processes

Establishing agreements is just the start of licensees’ obligations. Once a book or other content starts to sell, the task of calculating and paying author royalties begins. For a licensee with a small number of books and simple sources of sales, these processes can be straightforward and managed on spreadsheets. 

However, as soon as a licensee sells different types of content or finds different channels, calculations get complex. Multiple sales files need to be managed, and that simple $1 royalty can morph into many different rates. Preparing statements takes longer and payment timescales may slip. Complexities increase the risk of error, and of payments being delayed. That brings reputational risk and, at worst, legal complications. Read more about some of the complexities of royalty accounting.

The power of automation

The fix for these and other royalty headaches is automation. Tools like MetaComet®’s Royalty Tracker® can dramatically simplify calculations and reduce the heavy burden of manual administration. They integrate multiple sales sources and varying rates to automate statements, ensuring payments are accurate and on time.

As well as supporting licensees, specialist software makes life easier for royalty recipients. MetaComet’s secure portal provides access to real-time statements, delivering the transparency that is so important to creators. As publishing evolves, author royalties are becoming ever much more complex—but automation returns them to the simple principles on which they were created. 

Need more help to manage your royalties? To discuss your needs and learn more about MetaComet’s solutions, contact the team.