With some deals reported on PW or Publisher's Marketplace, you can't help but think, A million dollars for a two-book deal! Success at last for some lucky new author!!
I don't mean to burst anyone's bubble, but deals like that are a huge gamble for everyone involved. As an ex-editorial assistant, big advances make me nervous - for both the author and the house.
(I'm gonna start with the cons, because I like to end on a happy note.)
(I'm gonna start with the cons, because I like to end on a happy note.)
With a high advance, the author may not earn out. To explain what this means, we're going to have to do a little math. Gasp! On a Friday morning too. So cruel....But I've made it easy. The explanation is smaller and thus easier to skip if you aren't in the mood.
An advance is actually an advance on the royalties of an author earns. The standard royalties are 10% of the list price for hardcovers and 6% of the list price for paperbacks. Basically, that means that when a reader purchases a hardcover for $20, $2 of that go to the author. (Okay, actually to the author and the author's agent, but explaining that makes this twice as complicated and will need be saved for another day.)
That means that at the time that you sign your contract and receive your on-signing check, you are receiving money that you technically have not earned...yet.
So, hypothetical scenario time (ie. I'm making this up): Let's say that author Sammy Smith receives a $10,000 advance for his book CURSE OF THE RED M&M'S with standard royalties. The hardcover goes on sale for $20. In its first week, CURSE OF THE RED M&M'S sells 1,000 copies. The $2,000 that the author has earned with these 1,000 copies goes toward "earning out" the $10,000 advance. Since Sammy Smith has only paid off 20% of the advance for CURSE OF THE RED M&M'S, he hasn't actually earned more than what he received as an advance. Thus, he isn't owed any more than that.
However, let's say CURSE OF THE RED M&M'S sells 5,050 copies in its first month. Sammy Smith has earned $10,100, thereby "earning out" his advance of $10,000. Now, he will receive royalties in addition to the advance that has already been paid - $100 in this case, and another $2 for every new CURSE OF THE RED M&M'S hardcover purchased.
Thus, "earning out" is selling enough copies of the book for the author to start receiving more royalties.
With a $10,000 advance for a $20 hardcover, only 5,000 copies need to be sold to earn out - and really, even in this economy/climate of industry upheaval, 5,000 copies isn't too tough.
Or maybe Sammy Smith's advance is $250,000 for one book, still priced at $20. 125,000 copies of the hardcover would need to be purchased if this book would earn out in hardcover. That's bit harder. (When I worked in editorial, selling 40,000 hardcover copies of a debut novel was considered more than respectable. Of course, this was in children's publishing. As I understand it, the sales for an adult title were usually expected to be much higher)
Or let's say you're Audrey Niffenegger of the Time Traveler's Wife fame and you sell your second novel at auction for $5,000,000. To earn out in hardcover, priced at $26.99, with standard royalties (ie. 10%), Her Fearful Symmetry must be purchased nearly two million times. Honestly, even though I'm a big fan of Audrey Niffenegger, I'm pretty sure that selling two million copies in hardcover only happens to peeps like Dan Brown, J.K. Rowling, and Stephanie Meyer.
(Please note: I'm simplifying for the sake of my argument. I haven't discussed paperback earnings, media rights such as film rights, or foreign rights, but they're out there.)
If the author does not earn out, then the publishing house takes a hit for the difference. Now, why is this bad for the author? The publishing houses keep track of these things, and they talk amongst themselves. So, if Sammy Smith received a $750,000 advance for CURSE OF THE RED M&M'S and it only sold 20 copies (ie. earning only $40 in actual royalties), it's going to be almost impossible for him to get another book published.
If a high advance is paid, the pressure is on like whoa. Pressure on the author to write well and revise even better. Pressure on the editor to make it so awesome that readers can't help reading about it and talking about it and buying a copy for all their friends. Pressure on the cover designer to make it look irresistible. And to a certain extent, that pressure is justified.
Strange things happen with a high advance. The book gets a lot of attention. Within the publishing house, a lot more fingers go into the pot than are probably helpful. Post publication, people in the know are judging it by the advance amount. (Would reviewers have been so harsh with Her Fearful Symmetry if the high advance wasn't common knowledge?)
Most books get a standard marketing plan, but if a high advance is involved, then the marketing department gets the go-ahead to spend more money, which means more marketing for the book. (More marketing can't necessarily make a book, but it certainly doesn't hurt.)
Also, if you're an author with a high advance, that means you have more than you need to live on. That means you can buy an awesome website. You can start your own merchandising and organize your own touring (since you'll be able to quite your day job). Authors with big advances can do a lot more self promotion than might have been otherwise possible.
A big advance gets people talking, and it gets them talking early. Even if the new author doesn't have a website or a blog yet, a new name can get a significant amount of internet buzz with an attention-grabbing auction or deal.
Honestly, I know several series that I am eagerly anticipating, which I have only heard about since so much was written about the initial auction or deal. I am already plotting years in advance to pull strings and snag galleys. (insert evil laugh here.) :-p
REALITY FOR THOSE OF US WHO AREN'T ROWLINGS, MEYERS, OR BROWNS
What happens more often than a high first advance (from auction or whatever) is a gradual increase in advances with each new contract of a certain rising author.
For instance, let's say Sammy Smith did sell his first novel, CURSE OF THE RED M&M'S, for $10,000. Once it was published, it earned out very quickly - in the first two months, which is pretty good for an unknown author, and it continued to sell steadily.
Now that Sammy has earned his stripes, the house signed Sammy Smith for a two-book contract, each for $30,000, which makes the author feel financially comfortable enough to start working part-time in order to pursue his writing more rigorously. His second novel, HORRORS OF MILK DUD MELTAGE, sells even better than his first, and his third novel, WHEN THE CANDY SPEAKS, actually hits the NY Times bestseller list.
Now this publishing house - pleased to have nurtured a NY Times bestseller - offers Sammy Smith $125,000 for books four, five, and six. Mainly because the house knows that if it doesn't, another house will offer Sammy Smith that much (or more) and lure their new NY Times bestselling author away... (*sob* But it actually happens a lot.)
Just some food for thought....
(Can you tell that I was a little hungry for chocolate while I was writing this post? :-P)