The key thing that leads to misunderstanding is wording – the
difference between how royalties are calculated. In our case, you do
not receive 20% of the PROFITS, you receive 20% of the COVER PRICE.
Some places may claim to pay 100% royalties, or 100% royalties from
the profits, for example, but those are strictly what money is left
over after all the expenses, including cost to print, shipping,
taxes, anything the publisher takes out for
themselves, retailer discount, etc. This makes it very
hard to pin down exactly what you, the author, would be making. In
addition, it doesn’t say what has to be taken out before you get
yours – which also allows them to claim that the 20 cents they pay
you per copy is everything counted as profit (because they can
technically include paying themselves before counting profit).
So, as mentioned, profit is how much money is left after all other
costs: retailer (i.e. Amazon, Walmart, etc) cut (often 50% of the cover
price!), print cost, shipping, taxes. What is left from all that is
profit. So, on a $10 book, $5 will go to whoever sold it (Amazon, for
example), $2.25 may go to the printer for the actual cost of printing
it, then $0.70 for taxes, shipping, etc. That leaves about $2 of profit
on the sale of the book. We try to price the book so that you will get
20% of the cover price. If this were your book, you would get that $2
profit (that last spare nickle is what we use to pay for the maintenance
on the account: handling your royalties, ensuring that the book
continues to be available without issues, etc). This means that while
you are receiving 20% of the cover price in royalties, you are – at the
same time – typically receiving about 90% of the profit in royalties. We
do it based on cover price to avoid having to recalculate for minor cost
fluctuations. For example, printing costs recently went up by about 6%.
Fortunately, those were absorbed by us. We did not have to reduce
royalties to the authors on all the books we print because even though
the actual total profit on the book was reduced, we were able (in almost
all cases) to keep the cover price the same, which means they still got
the same amount (whereas if it was calculated based on the profits,
their royalties would have also dropped a little bit).