Reserve on Returns
by Daniel Steven

          Q. I’m puzzled by my royalty statement.  Why has the publisher deducted some of my royalties as a “reserve?”  

          A. Standard publishing agreements usually contain a clause giving your publisher the right to retain a “reserve against returns” or similar language. Why? Because the book publishing world works on consignment.  Nearly all commercial publishers offer books to bookstores on a returnable basis. (This is part of what separates commercial publishing from print-on-demand publishing).  Unless you are an established best seller, or your publisher’s sales force makes a big push for your book, the typical bookstore chain may order as few as 3-5 copies of your book.  The store has the right to return your unsold books to the distributor or publisher for full credit.

How long the retailer keeps your unsold books on the shelf or rack depends both on the format of the book and the type of retailer.  Unsold trade hardcovers or full-size (“quality”) paperbacks may stay on a chain bookstore shelf for up to a year; mass-market paperbacks only a month or two.  And for those paperbacks distributed through drugstores, airports, and supermarkets – a few weeks!

Only trade hardcovers or paperbacks are actually returned to the publisher (or, in some cases, chain bookstores may instead be allowed to sell unsold books at a steep discount); retailers of mass market paperback just have to strip off the book covers and return the covers for credit; the bookstore then is supposed to dispose of the books through the trash or recycling bin. (Often these missing-cover books illegally turn up for sale at garage sales and book fairs.) 

You earn a royalty when a bookstore orders your book, not when the book is actually sold to a customer—but that royalty is forfeited when the book gets returned.  Thus the need for the reserve against returns clause, where the publisher can hold back some of your royalties in anticipation of copies being returned.  Based on the type of book and the sales record of the author, publishers generally have a fair idea of the percentage of books that will be returned, and in what time period; the publisher reserves that percentage from semi-annual royalties, as reflected on your royalty statement. 

The problem comes when the contract allows the publisher a “reasonable” reserve against returns—an intentionally vague provision. Try to get a cap on the reserve of between 15 and 25 percent, the lower the better; also try to limit the time that the publisher can hold the reserve to no more than one six-month accounting period.  Here’s a suggested clause: “The Publisher may maintain a reasonable reserve against returns from distributors, retailers, and customers, in any accounting period, not to exceed fifteen percent (15%) of the amount due to Author, and Publisher shall indicate such reserve, if any, on the Author’s statement of accounting. Such reserve shall be maintained for no more than one accounting period.

© 2009, Daniel N. Steven