During this SELF PUBLISHING SELF-HELP WEEK we are examining a number of topics. In the last post we examined the 3 Paths to Publishing and determined that the hardest choice was deciding between Path 2 (independent self publishing) and Path 3 (full service self publishing).
This follow-up posting may be able to help, since the business models for Path 2 and Path 3 are different. By exploring the business models for both Path 2 and Path 3, you may be able to determine which business model makes the most sense for your project and that, in turn, will help you determine which publishing path is best for you.
INVENTORY-DRIVEN BUSINESS MODEL
The business model followed by Path 2 (independent self publishing) is the same business model followed by the traditional/conventional publishers. This business model can be summarized into two words: Inventory-Driven. In other words, all the pricing, profitability, ROI, and investment (everything that defines a financial business model) is based upon the inventory levels for the book. The higher the inventory levels, the higher the up-front investment and the lower the per-unit cost.
In order to make this model work, inventory levels have to be estimated up-front, based upon subjective ideals. The more accurate that estimate is, the more successful the financial business model is. Of course, on the flip side, the more inaccurate that estimate is, the more disastrous the business model becomes.
Let’s follow the arrows on the schematic above. Once demand is estimated, an initial investment of cash is made to produce and print that quantity of books. Another investment of cash is made to store those books in a warehouse (either a wholesaler like Ingram, or an independent storage/fulfillment company where additional fees for storage, pallets, and handling are incurred). From there, books are then sold to retailers and retailers purchase these books (either from the wholesaler/publisher directly, or from a distributor, who would then extract a percentage also).
Since the distributors, wholesalers, or retailers are not the final customer for your book (readers are), book retailers in this business model are nothing more than another consignment storage facility for your book, particularly since they all have the freedom to return unsold books back to the publisher for a full refund. You see, the inventory-driven business model has nothing to do with the demand for the book and has everything to do with how many copies are printed.
Once the book is being represented by the distributor, available through the wholesaler, and carried by the retailer, one of two things can happen. Your book is either bought (that’s good) or it’s not (that’s bad). If there is demand for your book, the book is bought, and money changes hands in your favor. From there, the customer pays for the book and it is officially sold and you earn a payment for that sale. On the other hand, if there is no customer demand for your book, the book is returned back to the wholesalers for a full refund that comes out of the publisher’s pocket. In the case of independent self publishing, that publisher is you. No wonder returns are the bane of the publishing business.
Eventually, customer demand is what determines customer orders, and customer orders are what determines publisher profit. So if the inventory levels you estimated at the start of the chart are lower than the customer demand, you then re-print more books. This is called a second printing. If, on the other hand, your inventory levels are higher than customer demand, you have excess books that cannot be sold. This is called remaindering, where you try to unload the books for pennies on the dollar to recoup some amount of the initial investment. This is also called “taking a bath.”
You might ask yourself what sense does an inventory-driven business model make? Well, if the book is extremely successful, the profitability and ROI is so great that the success of a runaway bestseller can offset the losses on other books where the inventory estimates were wrong. But, statistically speaking, inventory-driven business models make very little sense for single books because you don’t have other books to offset your losses should your single book inventory estimate be inaccurate.
DEMAND-DRIVEN BUSINESS MODEL
What would happen if the customer demand was determined before the printing investment was made? Rather than estimating an inventory level based upon hopeful and subjective ideals, the inventory levels are tied specifically to the customer demand. This is known as a Demand-Driven Publishing Model and is the model used by the majority of self-publishing companies utilizing print-on-demand printing technology.
Let’s follow the arrows on the schematic above. The customer demands the book by ordering it. That payment immediately triggers a royalty payment for the author and also triggers the printing of that customer’s book. That copy of the book is then provided to the bookstore or retailer who now acts as the fulfillment center, connecting the customer with the product.
For an unproven author or unproven book, there is little question that this is the preferred business model to follow from a strictly business sense. Once a book or author is proven (by excessive demand), there comes a point when the Inventory-Driven Business Model may make more sense. But until that tipping point occurs, the Demand-Driven Business Model is typically the most economically responsible choice.
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