Milton Friedman, Nobel Prize Winner and Guru of Conservative Economists

P = TR – TC

The economist’s traditional way of putting this equation is:

pi = TR – TC

What is this? It’s the equation for profit, which is what runs your life if you’re in the book business, and most others. (Economists use the Greek letter pi to indicate profit.)

Profit = Total Revenue – Total Cost.

I’m posting this article before putting up the words of my guest bloggers because my guests are are old hands in the publishing world. They jump in running with their comments. What they say might be a bit confusing if you’re not familiar with the background. I’m setting out a few basic economic formulas to establish a framework for thought.

Total revenue is all the money coming in to your publishing endeavor as a result of your books, eBooks and whatever else you sell. That might include revenue from speaking or seminars, whatever. How you define your business for tax purposes is up to you, your CPA, and your tax attorney. Whatever: TR includes all remuneration from your endeavors however broadly you define them.

From TR, we subtract Total Cost. This means the cost of everything from editing and proofing to stamps on the promotional postcards. Costs of all consultants, printing. Rent, electricity. Everything.

Profit is what’s left over after you subtract total costs from total revenue. That’s “the bottom line.” If the number is negative, you’ve made a loss.

In traditional publishing, where the publisher buys your manuscript and publishes it at his expense, this equation runs the show for a simple reason: In a capitalist society, businesses go bankrupt if they don’t make a profit pretty regularly.

If you’re a self-publisher or run an independent press (an Indie), the bottom line also matters, even if profit isn’t your total focus. How many of us can afford the time and expense to write and see our work in print decently (i.e., edited and properly typeset), when Mom is the only person who buys it? The profit equation applies to all of us.

John Maynard Keynes, Father of Modern Economics

Another equation that applies to the publishing world:

Y = C + I + G

This is the equation for national income––the big picture.

Y, used by economists to mean national income, usually called Gross Domestic Product or Gross National Product. GDP means the value of goods and services produced within the United States (in our case) during the year.

C stands for Consumption: everything we clever little shoppers buy from dinners at fancy restaurants to vintage wine to a whole lot more necessary things like brain surgery and clothes for our kids.

I means Investment, spending on goods and services intended in increase the size or efficiency of our productive capacity over time. So, spending on factories and new ways of making widgets.

G is Government Spending, which operates independently of consumer spending. Many of he functions of government (mosquito eradication, the military, our highway system) are functions benefiting society as a whole and need to be paid for by society as a whole. These are independent of private consumption, as is the cost of paying for our governmental system. (Congress, the Executive Branch, the court system … all that.)

National income equals the total of everything we spend, everything we invest, and all government spending.

What does this have to do with selling books and the Great Recession?

The definition of a recession (or depression) is that National Income is lower than it was. Economists have means of measuring these variables and comparing economic performance over time. (The most recent measurements of economic variables say we’re OUT OF THE RECESSION! Ain’t that great? Don’t you feel it?)

Since, by definition, Income is lower in a recession, that means that at least some of the other variables, C + I + G, are down, too. In the current case, off the top of my head, I’d say Investment is stalled and Consumption is depressed. Government spending is strong, which is the whole idea behind the Stimulus Package.

Lord John Maynard Keynes, the father of modern economics, was the first to notice that the government can counteract what’s going on in the private sector. If C and I are faltering, G (government expenditures) can invigorate a sluggish economy.

Thorstein Veblen, Author of The Theory of the Leisure Class (1899). Coined the phrase "conspicuous consumption", which probably explains what fueled the Great Recession. That and crime in high places.

WHAT DOES THIS MEAN FOR BOOK SELLERS?

It means that overall consumer demand is off. (Duh.) Folks have less discretionary income––money they can spend as they want. That means that every friggin’ thing that they buy with that income competes with everything else for limited dollars.

Though we book producers worship books and consider them hallowed, other folks consider them just another form of entertainment. In a recession, books compete with all other forms of amusement––movies, sports events, music, everything.

Consumers rationing scarce dollars will think twice before plunking down $20 for a book (especially from an unknown author) when they could go to the movies or hit Starbucks.

Buyers may be more aware of opportunity cost, the economist’s jargon for, “Every time you make a choice, you lose.” If you’ve spent your $20 on diapers for the baby, that coffee table book fades into the sunset.

The book is the opportunity cost of the diapers. But which do you need more???

HOW TO MANAGE THIS?

Recall the formula for profit: Profit = Total Revenue – Total Cost.

To handle today’s world, the smart book producer and seller can mess with both TR and TC. He or she can work to up Revenue and decrease Costs, or both.

This is what my guest speakers address in their comments, which begin with the next posting.

John Kenneth Galbraith, Keynesian Economist, Presidential Adviser, Prolific Author

A NOTE: I haven’t mentioned CREDIT and CREDIT CARDS in the discussion above, treating disposable income and the other variables as though they were fixed amounts.

In reality, consumers have plastic. For years, we financed our lives using deficit spending, just like the government. We use credit cards instead of printing money.

This is fine, until the credit card’s limit becomes binding or the monthly payments of multiple cards take us such a large portion of our income that we can’t pay the rent. Or something happens. Like the loss of a job or a company going under.

The natural tendency to defer payment to some (much) later time by borrowing on future income does have a limit. Many of us have experienced that limit. Personal bankruptcies have soared along with corporate disasters.

So the equations above do apply, but they’re elastic. A consumer can go a long time before the crunch happens.

Next up are some of our book marketing all stars!

Sandy Nathan Back in the Day When I Was an Economist!

All the best,

Sandy Nathan
award winning author of Numenon &
Stepping Off the Edge

“I didn’t know you were an economist,” one of my friends said when she heard about this series.

Yep. I hold a BA and MA in economics. I was on my way to a PhD at the Graduate School of Business at Stanford when I had an “Ahah!” moment and realized that I couldn’t do the math. I slunk back to doing what I knew how to do––being an economist.

I was the Economic Analyst for Santa Clara County (the heart of Silicon Valley), among other positions. My first publications were in economics, including some written in a joint study of the Santa Clara County Planning Department and the RAND Corporation.

Even though I’m an author and proprietor of a small press today, the current situation keeps shoving concepts from economics in my face. I felt compelled to write down a few insights, throwing in ideas from business theory and psychology. (I also have an MA in Marriage, Family, and Child Counseling. I’m not bragging as I mention the alphabet soup behind my name: I’m from Silicon Valley, where multiple degrees are as common as downsizing and excess is barely enough.)

What do I see for booksellers and everyone else?

1. WE’RE IN THE GREAT RECESSION. IT DOESN’T SEEM TO BE GETTING ANY BETTER.

Well, duh. A real economic analysis would back up this assertion with studies and statistics. But we don’t really need that. We all know that we’re in a bad way. If we don’t feel it in our personal lives, we can go to out local mall and look at all the empty retail space.

Is that space ever going to be filled? Beats me. In the old days, economists thought that unemployment and under-utilization of productive capacity were short-term phenomena. Everything would be cool in the long run.

John Maynard Keynes

John Maynard Keynes, the father of modern economics, exploded this myth by observing, “In the long run, gentlemen, we are all dead.”

Lord Keynes explained that the economy was like an elevator. Previous generations of theorists thought the economy would automatically rise to the top floor and stay there, at a natural equilibrium and full employment.

Keynes said, “Not so; the economy can get be stuck below the top and at less than full employment for a long time–-forever, maybe.” He also came up with the idea of government stimulus: direct government expenditures to get the economy going again.

2. MONEY, PROFITS, AND SMALL PRESSES

How does this affect book sales? The way you’d expect. This series of articles was motivated by a friend lamenting his recent lousy book sales and by other friends asking, “How are you doing? What are you doing? Help!”

In the discussion below, I focus on the financial aspect of publication: Books and book sales as moneymakers. The situation has changed greatly over the years. I recall a publisher friend remarking, “Back in the 70s, you could make money publishing books.” Now the book market has thousands of small presses with more being formed every day. Hundreds of thousands of new books are released every year. Major publishers are cutting back. Except for the mega best sellers, making a profit as a publisher or author is hard.

So that this discussion doesn’t become a downer, I’m going to share a few thoughts, and then open up the series to the red-hot marketers in the next installment. We’ll hear from people who are selling books, making money, and attaining their personal goals in this recession.

3. WHAT BUSINESS ARE YOU IN? KNOWING WHAT YOU’RE REALLY SELLING IS A FUNDAMENTAL OF BUSINESS THEORY.

“I’ve never made money with any of my books,” said my most illustrious boss, an internationally known business consultant and professor who has taught at Harvard and Oxford. He’s written classic books about business theory, which were published by the top publishers in the world.

“My books never made any money, but they got me consulting jobs that did.”

This bit of information is probably more valuable than any in this article. As a life success guide, it’s as valuable as the statistic that 90% of small businesses fail within the first five years. Of the 10% that make it, 90% fail in the next five.

People should imbibe my boss’s words before releasing books and memorize the failure rates of small business before starting small presses.

What business are you in? Selling books, or something else? What business should you be in, given your skills and what you write about?

4. ARE YOU IN THE RIGHT PLACE?

An adage in applied psychology is: “If you want something, go to where it is.”

If you want money, you should be where it is. Here I’ll call upon that venerable enlightenment organization, the Bureau of Labor Statistics, to help us. Where does the money live?

The BLS table May 2008 National Occupational Employment and Wage, a distribution of income by occupation, tells us. The table presents “estimates … calculated with data collected from employers in all industry sectors in metropolitan and nonmetropolitan areas in every State and the District of Columbia.” The numbers are based on a sample, but a very good sample. The table links to another table giving percentile rankings and the employment percent relative standard error.

The data shows the high income jobs are exactly where you’d expect them: at the CEO level of management, high level technical and scientific professions, and in the medical field. MDs in various specialties received the highest income, with surgeons showing the greatest mean income of any profession, $206,700.

What about writers and authors? According to the Bureau of Labor Statistics estimates, the writers and authors occupation (a sample of 44,170, about the same number as surgeons) showed a mean annual income of $64,560. (Anybody make that much with their books? This obviously includes all the people writing articles and doing seminars about making money with writing.)

What does this mean? The data show that some writers make a living from their craft. On the other hand, millions of better paying jobs in other fields exist.

If making money is your primary motivation, it will probably be easier to become a brain surgeon or CEO than a financially successful writer in the current market.

5. DO WHAT YOU DO DIFFERENTLY, OR DO SOMETHING ELSE

All of this is to establish that maybe writing for money isn’t the best use of your time. I was going to add an appendix of articles about writing for money, because many people would say the exact opposite. Tons of “make money writing” sites and courses and books exist. Google the topic, you’ll see. You may want to work with those ideas, in addition to what I’m saying. (However, none of the writers heralding the possibility of fortune through scribbling can get around the Bureau of Labor Statistics data presented above.)

Meanwhile, have you considered your writing a springboard to another career, as it was for my professor friend? You might augment your income by adding speaking gigs, leading workshops, consulting, teaching writing skills, self-expression, and the gamut of things related to writing that may prove lucrative. Stretch your creativity beyond “I’m an author.” Or just keep your day job.

This writing/publishing world is a rough place to survive, even without a recession. Consumers are jaded: What used to work doesn’t any more. Emailed offers get ignored, book signings aren’t attended, and contests and reduced prices don’t increase sales. (If I get one more notice of a contest or special event from another excessively smiley person selling books, I’ll scream. And get off their mailing list immediately.)

We need to do things differently.

IN CLOSING

In future articles, I’ll discuss thrilling and very relevant concepts like price elasticity, opportunity cost, and use of influence. I’m turning the next article over to the guest bloggers.

Our first guest blogger is Dennis Batchelder. A computer security expert, Dennis has been writing for ten years. He has sold 16,000 copies of his first novel since April, and 1,200 copies of its sequel since it’s release in September ’09. How has he done it? He’ll explain.

Sandy Nathan

Sandy Nathan is the award winning author of Numenon and Stepping Off the Edge. Her two books have won twelve national awards, including the 2009 Silver Nautilus Award, which recognizes books promoting conscious living.