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).