5.2 Selling Books in the Great Recession: The Only Equation Book Sellers Need to Know

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.

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, disaster relief) 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 before. 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?) [This was written in 2009. Nuthin’s changed.}

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. [Except that we called it off.]

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. [Only thing different in 2011 is whole countries are going broke now.]

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
Winner of seventeen national awards

Sandy’s  books are: (Click link for more information. All links below go to Kindle editions.)
The Angel & the Brown-eyed Boy
Numenon: A Tale of Mysticism & Money
Tecolote: The Little Horse That Could
Stepping Off the Edge: Learning & Living Spiritual Practice

Two sequels to The Angel & the Brown-eyed Boy are in production with an early 2012 release date planned. If you liked  The Angel you’ll love Lady Grace and Sam & Emily.