How to tackle the challenges of returns and royalties
Challenges with returns and royalties
The festive season is a peak time for book sales, but what happens when the holiday cheer is over? For publishers, duplicate book gifts under the Christmas tree and unsold books returning from retailers can result in a surge of returns. This not only complicates royalty calculations but disrupts operational efficiency.
Challenges of returns and royalties
- Mismatch in sales and returns: The end-of-year rush to sell books during the holiday season inflates sales figures in the royalty period (typically January – December). But the real picture reveals itself in January, February, and March when unsold books start flooding back from retailers.
- Delayed return data: By the time the royalty period closes, many of the books distributed to retailers for the holiday season haven’t been returned yet. This creates a false impression of higher sales, as the actual returns are still unaccounted for.
- Impact on authors: Without a clear mechanism to account for anticipated returns, publishers risk overpaying royalties. Yet, asking authors to reimburse the excess royalties is practically impossible and damaging to relationships.
- Operational strain: The influx of returns in the first quarter creates logistical and financial pressure on publishers. Returns must be processed and sales data rebalanced to reflect the actual numbers, further delaying royalty payments.
However, these challenges don’t have to disrupt your publishing operations if you use the right technology and have implemented effective methods that suit your royalty formats, agreements, and sales channels.
Turn the challenges of returns and royalties into opportunities with the right approach
Managing book returns is a critical aspect of ensuring accurate royalty calculations and maintaining strong author relationships. There are three essential approaches or methods – based on either period, unit, or amount – each offering unique advantages and challenges. The right choice depends on your publishing house’s operational set-up, sales channels, and author expectations.
Understanding the pros and cons of each method helps you balance transparency, accuracy, and efficiency while minimising disputes. Careful consideration of these methods ensures smoother royalty processes and strengthens your authors’ trust.
Method 1: Return until (period-based)
Accounts for actual returns within a defined period after the royalty settlement period. The number of returned items registered (credit notes) after the settlement period is deducted from the sales in the royalty calculation.
Method name in in Schilling’s royalty management solution: Return until
Method 2: Retention (unit-based)
Withholds a percentage of the number of units sold. Configured at terms level (for example per sales channel or per royalty price group).
Method name in Schilling’s royalty management solution: Return code
Method 3: Retention (amount-based)
Withholds a fixed percentage of the royalty amount specified in the agreement to manage potential returns. This straightforward method ensures that a percentage of the royalty base (amount) is withheld.
Method name in Schilling’s royalty management solution: Retention code
Method 1: Return until (period-based)
The ‘return until’ method handles returns by deducting credit notes for returned books within a defined period after the royalty settlement period. This approach ensures that royalties are calculated based on actual net sales rather than inflated figures that include unsold or returned copies.
- Return timing: Returns are processed only after the royalty calculation period has closed.
- Withhold credit notes: Credit notes for returned books are withheld and applied retroactively to adjust royalties.
- Net royalty calculation: Royalties are calculated from the adjusted sales figures after returns are accounted for.
This method avoids overpayment by reconciling return data before finalising royalties. This ensures accuracy and reduces the risk of having to reclaim royalties from authors later on.
Pros
- Accurate royalty payouts: Ensures that royalties are paid based on actual net sales rather than on inflated sales figures.
- Clearer sales data: Provides a more precise picture of true sales after the return period is complete.
- Risk mitigation: Ensures that royalties are calculated accurately from the start, avoiding overpayments and potential financial discrepancies.
Cons
- Operational complexity: Requires robust tracking systems for credit notes and returns, especially if returns are spread over an extended period.
This method works well when accurate return data is available shortly after the royalty period ends. It is especially suited to publishers with strong tracking systems for returns and credit notes that allow them to process adjustments efficiently. However, the reliance on delayed reconciliation means that it’s crucial to communicate clearly with authors about the reasons for any adjustments.
While this approach ensures accuracy and protects against overpayments, publishers need to weigh the operational complexity against the benefits of improved royalty precision.
Method 2: Retention (unit-based)
The unit-based retention method handles book returns not by tracking physical returns but through a calculation-based approach. It allows publishers to reserve a predefined percentage of sales for potential future returns, ensuring that royalties are calculated more conservatively. The withheld amount is adjusted in subsequent periods based on actual returns.
- Configured per royalty agreement with specific unit-based return codes.
- Defines a percentage of sales (for example 10%) or unit cap (for example 2,500 units) in a particular distribution channel or price group to be withheld.
- Calculates withheld units before royalties are calculated so that only adjusted sales figures are visible (for example, out of 1,000 sold, only 900 are shown after applying a 10% retention).
- Adjustments can be applied in the next period or further down the line (for example year 1 or year 2).
- Balances withheld percentages with actual returns in future periods.
Pros
- Can be customised per sales channel: Works well for physical sales channels where returns are more common.
- Easy to implement: No need to track physical returns directly, reducing administrative complexity.
- Future flexibility: Enables deferred reconciliation of returns, allowing time to gather more accurate data.
- Differentiation by sales channel: Focuses retention on specific sales channels or price groups, providing tailored accuracy.
Cons
- Deferred challenges: Pushing return adjustments to future periods may complicate later calculations.
- Increased complexity over time: As price structures and returns accumulate, the method can become harder to manage.
- Potential for over- or underestimation: If returns deviate significantly from withheld percentages, discrepancies may arise.
- Limited to predefined percentages: Relies on static percentages and may not adapt well to fluctuating market dynamics.
This method is most effective for physical distribution channels where the likelihood of returns is higher and provides a manageable approach for publishers, balancing returns and royalties. However, careful monitoring is necessary to avoid compounding issues in future periods.
Method 3: Retention (amount-based)
The amount-based retention method offers a straightforward approach to handling returns by withholding a predefined percentage of royalties directly within each royalty agreement. This method is designed to be easy for authors to understand and reduces operational complexity for publishers.
- Set-up per agreement: The amount-based retention method is applied to individual royalty agreements, specifying a fixed percentage (for example 10% or 15%) of royalties to be withheld.
- Configuration on agreement/ISBN: Amount-based retention codes are configured to apply to a specific agreement or ISBN.
- Visible retention: The withheld amount is explicitly shown on the author's royalty statement. Authors can see both the withheld amount and when it will be reimbursed in future settlements.
- Reimbursement in future periods: Withheld royalties are released on subsequent settlements [HS1] [LP2] once the return period has passed, ensuring transparency and avoiding disputes.
- Flexible retention periods: Publishers can decide whether retention should apply only in the first royalty year or across multiple periods.
Pros
- Simplicity: Easy to set up, understand, and manage compared to more complex methods.
- Author transparency: The withheld amounts are clearly visible on royalty statements, reducing confusion and building trust with authors.
- Low operational impact: No need to adjust transactions retrospectively, minimising administrative efforts.
Cons
- Limited precision: Retention percentages are predefined and static, which may not fully reflect actual return rates.
- Reimbursement delays: Although transparent, delayed payouts may still cause frustration for some authors.
- Inflexibility over time: Applying retention across all agreements might not account for fluctuations in sales or returns across different sales channels or periods.
The amount-based method is well-suited for publishers seeking a straightforward way to manage returns while maintaining clear communication with authors. Its visibility and easy implementation make it particularly effective for fostering trust and minimising disputes. However, the static nature of retention percentages requires careful consideration to ensure fairness and accuracy over time.
By prioritising simplicity and transparency, the amount-based method offers a practical solution for managing returns without overcomplicating processes or introducing unnecessary friction into author relationships.
Achieving seamless returns and royalty management
Handling returns and managing royalties effectively is crucial for you in your aim to balance operational efficiency, transparency, and author satisfaction.
By adopting the right strategies and technology and using an advanced and automated royalty engine, you will have a more efficient returns management process that ensures accurate royalty payments, reduces operational complexities, and enhances author relationships. Proactively managing these aspects is not just a logistical improvement – it’s an opportunity to strengthen trust and long-term collaboration in the publishing industry.
Schilling’s advanced royalty engine does the job
With Schilling’s royalty management software , you can simplify a complex and time-consuming process:
- Reduce costs associated with return handling through automation and real-time tracking.
- Ensure fair and transparent royalty payments by eliminating manual errors and delays.
- Strengthen author relationships through improved communication and regular data sharing.
Our royalty management solution is more than just a tool. Powered by an advanced royalty engine, the solution is the foundation for addressing all the challenges, regardless of your business size and which method you choose for managing royalties and returns.
Don’t let managing royalties become an uphill battle
At Res Publica, ensuring accurate and timely royalty settlements is essential for maintaining good relationships with their authors. But as a growing publisher, this important task simply became too difficult and cumbersome to carry out in a homemade spreadsheet.
Read about Res Publicas transformation from spreadsheets to a professional automated solution.
It has been a game changer for our business and has reduced the time we spend on managing royalties. Today we are far more efficient and able to refocus on our core tasks.
