This article is based on a presentation made by Pete Masterson at the 2011 BAIPA Institute held in Oakland, CA on March 12, 2011.
NOTICE: In the time since this article was posted, the competitive situation between CreateSpace (CS) and Lightning Source, Inc. (LSI) has changed. Also, measures by Amazon to discourage the short discount pricing (inherent in this "New Digital Print Business Model" has rendered the strategy presented here to be impractical. Finally, CS has modified their pricing, making them far more competitive with LSI, in spite of their not offering quantity discounts. Thus, many of the figures comparing the two (as digital book printers) are no longer accurate. While I plan to do a thorough re-write of this article, that can not occur for several weeks (from the time this notice is posted).font>
For the past 70 or 80 years, publishers have been following a business model that grew out of certain financial considerations and situations related to the Great Depression. We won't be examining the history of this business model nor any prior variations. What I call The Traditional Business Model is based on the technology, as it has evolved, that was in existence in the early 20th Century.
Briefly, the publisher prepares a manuscript for publishing by processing it through editing, proofreading, typesetting, more proofreading, etc. until it is finally ready for printing. At this point, among other publishing tasks, an estimate of a reasonable press run is determined based on a projection of sales. Bids are obtained from printers. The printer is selected and the books are printed and shipped to the publisher's storage location.
The publisher then ships copies to distributors or wholesalers (as previously arranged) for sale to booksellers and the public. A simplified flowchart of this process might look like this:
The flow of money to the publisher would look like the following. (For the example, we'll assume a 200 page book that sells for $15.95.):
The print cost at a press run of approximately 2000 copies would cost about $2.00 per copy, delivered to the publishers storage location. For the sake of our discussion, we'll ignore the publisher's overhead, editorial and design costs, since for any particular project, those are unaffected by the business model used. So, in this case we will make the following calculation:
Since the total printing bill for 2000 copies was about $4,000.00, we can see that our break even point (the point at which we have paid the costs of acquiring inventory) is about 957 copies.
We can summarize as follows:
At this point we've assumed that the publisher has sold out the complete press run. While that is an ideal situation, it is not usually the case, so any unsold books will lower the amount the publisher receives -- and unsold books will continue to generate storage costs (at least, the inconvenience of having cartons of books filling a spare bedroom, garage, etc.).
The advantage of the traditional business model is that the publisher can (usually) manage to get the most extended exposure of a book to the public by selling through multiple wholesalers (and/or possibly through a distributor (that adds to the distribution channel costs)). This wide exposure is the ideal that publishers generally seek so that the book will maximize sales by being available in as many locations as possible. (Good marketing is to make it easy for customers to buy your product.)
The reality of the traditional business model is that independent publishers can rarely get titles into broad distribution in retail bookstores. Wholesalers do little or nothing to encourage booksellers to order books -- possibly requiring use of more expensive distributors to get bookstores to stock the title. Unsold books are returned, usually in a somewhat beat up condition, making it hard to resell them at full price. And the biggest problem is that publishers can never make an accurate estimate of the book sales, thus the first press run is often too large or a secondary press run is soon required, losing efficiency in the unit price of the book.
Starting in about 1985, the confluence of desk top publishing software, laser printers, began a digital revolution in publishing production technology. While, at first, the new systems simply appeared to be the substitution of personal computer software for previously manual or analog systems. However, as the technology evolved, new ways of looking at the publishing business developed. We can substitute some digital processes for the analog systems used in the traditional business model. We stick with the same supply chain and wholesale discounts. I call this the hybrid business model. (It includes elements of the digital system with the traditional thinking for distribution.)
The flow of a manuscript to book now has an alternate approach:
Suddenly, we no longer need to print (and pay for) a large inventory. Using a one-order=one-book print on demand system, no expense is incurred until a book is sold. However, each book costs considerably more than they did when inventory was produced with the highly efficient offset printing in relatively large quantities. Thus, the book that cost $2.00 each (in a press run of 2000) will cost $3.50 per copy. But, this book does not require storage and shipping (paid by the publisher) so the additional $1.00 per copy added to the printed inventory to cover that expense is not incurred.
So, looking at a single book sale, we see this calculation:
Not bad, but the traditional model delivers $4.18 to the publisher under the same sales terms. And there's the issue of returns. Unfortunately, if we're using Lightning Source/Ingram (LSI) for our wholesale system, returns go back to LSI, and then we have the choice of having the (probably damaged) book shipped to us or destroyed. Since the books are rarely in condition to allow easy resale at full price, the best choice seems to have returns destroyed upon receipt by LSI's warehouse.
On the plus side, we do not have to store or handle inventory (except for a small quantity for personal appearance sales and to have on hand for friends and neighbors, etc.) The reality remains that bookstores are not likely to order our books for speculative sales -- indeed, many booksellers are loath to order "POD" books at all due to the non-returnable terms offered when the digital production system was first put in place by Lightning Source/Ingram. But this reality gives us another alternative.
The "out of the box" thinking that truly makes the print on demand (one-order=one-book) method a real profit possibility is that you do not have to give the full 55% standard trade discount when selling books via Lightning Source/Ingram. You are allowed to choose any wholesale discount between 20% and 55%. Let's look at what happens when we choose a 20% wholesale discount:
This changes the whole character of the traditional vs. digital comparison! Instead of digital resulting in higher unit costs (but avoiding the "inventory risk" if inventory is not completely sold out), it becomes a means to a much higher revenue per book for the publisher. Indeed, you can make more money even if you sell fewer books.
When we looked at the traditional publishing model, when we calculated the revenues to the publisher after printing and inventory cost, sales of 2000 copies of the book resulted in receipt of $8,355. But using the short discount business model, we can generate the same amount after only selling 988 books -- less than half the quantity sold required by the traditional model.
What are some of the ramifications of this short discount method? First, no bookseller with a physical bookstore will order copies of the book. However, we already know that booksellers are unlikely to order independent publisher books even if offered through the traditional distribution model. So we are not seriously hurt by the choice of the 20% short discount (non returnable) terms.
The electronic booksellers (Amazon.com and the many other large and small online booksellers) will list all books offered through Ingram (Lightning Source) regardless of the discount offered. The electronic sellers have minimal overhead and do not hold inventory of Lightning Source printed books (therefore they have no risk of unsold inventory). The marginal cost of adding another book to their offerings is minimal (almost unmeasurable) and they use highly automated systems that do not require any human effort to "pick up" the new listings from Lightning Source/Ingram.
Indeed, few of the electronic booksellers actually ever take physical custody of any of the books printed by Lightning Source. When the bookseller receives an order, they (electronically) pass the order on to LSI, LSI prints the book then packs and ships it to the consumer, and then the vendor (of record) "settles up" with LSI, receiving their share of the revenue. Indeed, sales of LSI titles through Amazon are so well managed, that LSI even uses Amazon-labeled boxes when they ship the books. To the consumer, the book appears to have been shipped directly from Amazon, but the book never physically left Lightning Source's facility until it was picked up by the USPS for delivery to the consumer.
While we may question how the electronic vendors benefit from these arrangements, we can only observe that these sales have been continuing for sometime and that Amazon has not yet tried to convert independent publishers into some other arrangement. We note that Amazon did "go after" several subsidy publishers to convert them from using LSI to their using CreateSpace (formerly Booksurge) as the print-on-demand printer for their titles. However, due to the large number of titles handled by these subsidy publishers, it makes economic sense for Amazon to make such arrangements. It is rather less justified for Amazon to work with thousands of individual single-book publishers, so they have not made any move to do so.
Note: Aaron Shepherd has written two books on this general topic, Aiming At Amazon (2007) and POD for Profit (2010). My thanks to Aaron for giving me the inspiration to examine this approach more closely. If you are thinking of following this approach, you might consider getting either of Aaron's books to help you with your planning. The titles are linked to Amazon for your convenience.
In my experience, I've sold about 80% of my book through Amazon or other online book vendors. The remaining 20% of sales have been trough physical booksellers. (I'm not counting any direct personal sales for this example.)
Assume that I sold 2000 books (as shown above). I would have received, net after all printing and inventory expenses (not counting overhead and editorial production costs) about $8,355 when the inventory was sold out.
Selling with the short discount, lets assume that I sell zero books through the non-electronic booksellers. Since my experience was 80% electronic bookstore sales, that suggests that I might sell only 1600 copies instead of the 2000 copies sold under the traditional approach. However, I make more on each copy sold, so 1600 x $8.46 =$13,536. So, after selling 400 fewer books, I actually make an additional $5,000 by using the short-discount, all electronic sales business model. Plus I don't have the risk of having left over unsold books (that I paid for) and I don't have to worry about selling some set number of books before I make a profit.
Setting up an account with Lightning Source costs about $110 for upload fees and for a proof copy. Using the example figures, that means my break even occurs after selling about 13 copies.
Indeed, this approach is so attractive, that when I do a second edition of my book, I plan on making it suitable for digital production and will use the short-discount business model for myself. No inventory risk. Costs covered after relatively few sales. More revenue for me. Such a deal.
There is no "one size fits all..." and it's helpful to recall that my this solution may not be your best solution to whatever situation you're considering. (There is a tendency for some folks to be quite adamant that "their" choices are somehow the "best" choice for everybody.)
CS is a subsidy publisher -- one that is among the least toxic, but a subsidy publisher nonetheless. Since Amazon combined Booksurge and CreateSpace that distinction is more apparent. See my article on using Subsidy Publishers. For this point, let me be clear that I do not recommend using a subsidy publisher for any book that has significant sales potential. I do suggest using CreateSpace in its mode as a printer.
CreateSpace has two modes: (1) as a printer who will print (and let you sell) your books or (2) as a subsidy publisher who will provide various levels of design and typesetting services. We are not considering CreateSpace in its role as a subsidy publisher, but rather focusing on its utility as a digital on-demand printer.
Lightning Source, Inc. is only a printer. It deals with publishers, not authors. The unique service it offers is distribution through Ingram Book Services -- something that no other digital printer offers. The many subsidy publishers that offer distribution through Ingram do it by printing with Lightning Source and marking up the printing to charge the author a higher fee than what you'd pay LSI directly.
I note that I've heard that Baker & Taylor (the next largest book wholesaler after Ingram) now offers a print on demand, one-order=one-book service much like Lightning Source. I have not heard any feedback on that arrangement, so I have no comments about it here.
CS, as a subsidy publisher owned by Amazon sets a 40% discount for sales via Amazon. You can sell through the CreateSpace "estore" with a 20% discount -- this allows you to use a web page on your own web site to the estore to maximize your revenues. This allows you to offer your book for sale from your web site but remain "hands off" so you do not have to process credit card payments, pack and ship books, etc. The 20% that CreateSpace charges for this does not seem unreasonable. If I were to be using the digital print business model, this would be a simple way to have books for sale from my web site. (Currently, I am an Amazon Associate, so that links from my web site to Amazon generate very small commissions on any resulting sales.)
CreateSpace also offers "extended" distribution. Essentially, they, like all the other subsidy publishers, will put your book up for sale through Lightning Source/Ingram to give you "world wide" distribution. CS requires that you use a CS-assigned ISBN and they charge you 60% of the list price for this service. There is absolutely no justification to pay CS 60% of your list price when you can go directly to LSI and only give up 20% of list price.
LSI, in connection with Ingram allows you to set a variety of terms for the sale of your books. You may set a wholesale discount between 20% and 55%. You may make books returnable or nonreturnable. This allows you to have books at the usual 55% discount fully returnable terms that booksellers are accustomed to working with. (A portion of your discount goes to Ingram and a portion goes to the retailer -- that split is between the bookseller and Ingram.) These terms will allow the book that truly has physical bookseller interest to operate in a hybrid digital inventory but "normal" distribution through booksellers. There are a few books where this results in significantly higher sales. However, such books appear to becoming fewer and fewer. (Most such books are from large publishers who have rather different business models anyway.)
Amazon and other online booksellers "automatically" list your book for sale once it's in the Ingram catalog. All booksellers can obtain books from Ingram.
Both LSI and CS have comparable print cost, although slight differences in rates may affect certain trims and page counts to give a slight edge to one or the other in particular circumstances. Both CS and LSI allow you to order books for inventory and will ship to you at your expense. LSI offers discounts for large quantity orders. You can also order books directly shipped to a buyer from LSI (where you have received direct payment). (CS only offers this in connection with their "web store.")
Ease of use. CS, in general, offers a simple and accessible method of signing up and submission of materials. LSI is a little more difficult and LSI specifically does not want to work with "authors" -- they have specific questions in their application process to "weed out" authors -- but if you learn the basics of being a publisher, LSI is happy to work with small publishers.
Initial costs. LSI is somewhat more expensive to set up than CS if you order a proof copy, etc. In the long run, the cost difference isn't particularly significant. LSI costs $70 to upload your cover and interior files, and charges $40 to overnight a proof copy to you. CreateSpace has no set up charge. This is a significant advantage is you wish to print preliminary copies to share with friends and family (to get editorial and proofing comments). LSI charges $37.50 for each file you upload (cover and interior are separate files). LSI will charge if you upload corrected materal. CS has no charge for uploading corrected files.
There are situations where CS could be beneficial in addition to LSI -- if, for example, you wanted to offer a 55% discount to obtain interest from physical store booksellers, then you could use LSI for that market and use CS to sell to Amazon and only give up 40% on those sales (cutting out the 15% that goes to Ingram on Amazon sales). (Amazon prefers CS to LSI when it places orders.)
CS can be used to (relatively) inexpensively test market a title (perhaps using a free CS-provided ISBN), and if the test proves actual market interest, re-issuing the book with your own ISBN and using CS and LSI together may be the best overall method to fully exploit the market opportunities.
The point is to analyze your costs and returns via all distribution methods and use those that are most beneficial to you in serving your market segments. It's less a matter that CS or LSI is "better" than the other -- it's that you should be using the tools available to maximize your return on your marketing efforts.
In the end, it's just a matter of your perception and the advantage of one over the other depends on the specifics of your business plan.
CreateSpace has a lower unit cost per book. Lightning Source offers discounts on quantity orders. So, if you are using both CS and LSI, it can pay to calculate the relative cost of books via both printers. In general, any quantity under 250 copies are likely to be less expensive when printed by CreateSpace. Over 250 copies, and due to the quantity discounts then LSI becomes the more economical choice.
The following table adds in the set up cost, then calculates the unit cost per book at various quantities for a 200 page book:
With the set up cost counted in, the first copy is quite expensive, but as you pro-rate the set up cost over the number of copies ordered, it drops rather quickly. The basic cost of a 200 page book with LSI is $3.40 per copy. The same book costs $3.25 per copy at CreateSpace. (CS offers no quantity discounts.) However, LSI discounts quantity orders as follows:
So, once you order 250 copies at one time, then Lightning Source becomes the most economical choice. If you prefer to keep a much smaller inventory (say 50 copies or so), then CreateSpace is the more economical choice. Shipping is extra, but to most destinations, the difference in shipping cost is not significant (LSI prints in Tennessee, CS in Pennsylvania). Note that if you have multiple titles, LSI will count all titles ordered at the same time toward the quantity discount. So, if, for example, you order 50 copies of Title A, 100 copies of Title B, and 100 copies of Title C, you qualify for a 250 "unit" order and receive the 20% printing discount. (With rates per book based on the page counts of each.)
Copyright © 2011, 2015 by Pete Masterson. All Rights Reserved
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