Understanding Wholesale Discounts

One choice authors need to consider when publishing a book through Orange Hat is the wholesale discount they want to offer resellers (like bookstores). The wholesale discount is the sale price to resellers, the percent off the retail price and thus the profit earned by the store when someone buys the book. For example, offering a wholesale discount of 40% means the retailer pays 60% of the retail price for the book, ensuring them a 40% profit.

In book sales, a 40% discount is considered standard (otherwise known as the “regular” discount). That means a $20 book sells to a store at $12. But wholesale discount is more complicated than that for a couple reasons. First, publishers may offer a higher discount for favorable placement of a book. For example, a publisher could offer a store a wholesale discount of 50% if the store agrees to feature the book in their front window. (What a quaint arrangement! In reality, this would be negotiation with a much bigger operation where all kinds of things are being negotiated.) Second, the amount of wholesale discount offered affects the amount of publisher’s compensation received, and thus also the amount of income available to pay out to the author as a royalty.

Publishers need to pay attention to these factors too. Changes to print cost and wholesale discount through distributors can sink small publishers, especially when they’ve promised to pay a set amount per book sold. An increase in book print cost combined with needing to put in a higher wholesale discount amount (to ensure that resellers receive the 40% they want) can mean a publisher makes no money from the sale of the book or, even worse, would lose money without raising the price.

In short, these factors are key, and in this post I want to explore a little about how wholesale discounts look on the publisher end, on the reseller end, and ultimately, on the author end! One note: I’m writing this post about what Orange Hat sees through our platform with our main distributor and printer, Ingram. We use Ingram Lightning Source, and this service makes it possible for us to be in business! Other distributors, other services, other options—All of those will have their own associated math. This is just how the math works for us.

For Publishers: There are three levels of wholesale discount that we enter, 30%, 40%, or 55%. They have dramatic impacts on the compensation we receive from the sale of a book. To understand this, let’s look at print cost for a softcover novel, 5.5×8.5″, and 250 pages. The print cost for this book is $5.71 when we use Ingram. (And again, this is for us. Other publishers of different sizes, etc., will have different costs.)

If we sell the book at $16.99, here’s how the wholesale discount affects the return from the book.

$16.99 * .7 (30% wholesale discount) = $11.89 (what the reseller pays) – $5.71 (print cost) = $6.18 – Ingram fee (seems like it is around $0.165) = $6.01 in publisher’s compensation (the amount we receive when the book sells). That’s pretty great!

$16.99 * .6 (40% wholesale discount) = $10.18 – $5.71 = $4.47 – Ingram fee = $4.31 in compensation. Still pretty good!

$16.99 * .45 (55% wholesale discount) = $7.65 – $5.71 = $1.94 – Ingram fee = $1.77.

Now imagine that the publisher has said they will pay the author 12.5% of the retail price for every book sold. $16.99 * .125 = $2.12. That won’t work with a 55% wholesale discount! Even 10% leaves almost nothing for the publisher. If the publisher was counting on book sales as significant revenue, they don’t have many great options. A low royalty rate for the author could work. A low wholesale discount would be okay financially (but see next how things look for resellers, and we’ll see this really doesn’t work). Or a much higher retail price, with associated downsides for book buyers.

For Resellers: So what does a reseller see with those three wholesale discount levels?

With 30% entered, the reseller sees the wholesale discount as only 5%. With 40% entered, the resellers sees 20%. And with 55% entered, the reseller sees “REG,” meaning their expected discount of 40%.

For our book at $16.99, this makes a huge difference! If we entered a 30% wholesale discount on the publisher end, the reseller has to pay $16.99 * .95 = $16.14 for the book. Even if they sold 1,000 copies, their profit from those sales would only be 1,000 * ($16.99 – $16.14) = $850. And that profit has to pay for their store space, the opportunity cost of having that book in stock instead of another one, the people working in the store, etc. It’s a terrible deal.

20% off is a little better. The reseller pays $16.99 * .8 = $13.59, earning $3,400 in profit from the sale of 1,000 books. And 40% is best, $16.99 * .6 = $10.19, with $6,800 in profit from those 1,000 copies sold.

You can see why resellers want to make sure they get the “regular” discount (40%). It probably doesn’t make sense to carry the book under any other circumstances.

And where does the rest of the money go? When the publisher offers the book at 55% discount and the bookstore gets 40% off, there’s 15% of the retail price unaccounted for. That amount goes to Ingram, and it’s part of what allows them to offer their services to publishers without charging us a monthly fee. Instead, they make their money when we make money. Even if we sell no books one month (meaning Ingram doesn’t make any money from us), we still get to keep our account and don’t have to worry about paying a big bill at the end of the month just for having our books up for sale.

For Authors: Ultimately, how does this affect authors? The biggest question is how likely it is that a bookstore will use Ingram to stock an author’s book. If the author expects that many bookstores will be doing that, then we need to make sure those resellers get the regular discount. But if the bookstores that will stock the book are willing to order through us, the publisher, or if the reseller doesn’t have an Ingram account (for example, a children’s clothing boutique might stock a children’s book but probably doesn’t have an account with Ingram), then a lower wholesale discount may work better. We don’t have to worry about freezing out potential resellers.

Of course, this all depends on how the publisher structures royalties. For Orange Hat, most of our contracts pay authors based on the compensation we receive, rather than a fixed amount. For example, for sales through Ingram, Orange Hat keeps $0.50 of each book sold and the rest goes to the author. The bigger the remainder, the more the author makes, while our cut stays the same. From the example above, with a 30% wholesale discount, that means the $6.01 in compensation returns $0.50 to Orange Hat and $5.51 to the author. Expressed as a percentage of the retail price, the author will make $5.51 / $16.99 = .32, 32% of retail! But that all depends on the factors discussed above.

I hope every publisher is willing to talk frankly with their authors about revenue. Too many small publishers go under each year because they’ve made financial arrangements that worked at the time but end up costing too much. There are a lot of reasons why this happens, and wholesale discounts are one of them. (I look forward to exploring other causes in future posts.)

Do you feel you have a good handle on wholesale discounts? What other questions do you have? Share them in the comments! I look forward to responding.