Cost-Volume -Profit Analysis 103ideas such as the Baskets of Nantucketbest-seller, and edited my work word-
by-word and frame-by-frame. They worked hard for me and earned every
penny they made on me. I was not the easiest artist to put up with.”
Stephen was interested. “Go on.”
“ Well, now I barely talk with them. I am at the point where loyal readers
suggest many of my projects. I design them myself, edit them myself, and even
help my publisher prepare the promotion materials. They don’t work so hard
anymore. I think I have paid my dues. I want a bigger piece of the pie.”
“That could be a problem, Abbey. I just finished a case study on that in-
dustry, and it is very competitive. There are many parts to the industry value
system that ultimately ends with someone buying a book (see Exhibit 3.1). It
starts with people like you who have the intellectual capital. The next piece of
the system is the publisher, who manages the creativity process, supplies the
editing, prints the book, and markets it. Wholesalers like Ingram add value to
this system by buying books in large quantity from publishers, warehousing
them, and selling in smaller quantities to bookstores. Of course, the last piece
is the bookstore, where in-store promotion and the final sales process takes
place. On, say, a $50 book, the bookstore buys it from the wholesaler for about
$35, netting about $15 to cover its costs such as rent and salespeople. The
wholesaler buys the book from the publisher in large lot sizes for about $30 a
book, giving the wholesaler about $5 to cover its logistics costs. Of the $30 the
publisher sells it for, 15% of the retail price, or $7.50 ($50×15%) is your roy-
alty, and the rest covers printing, client development, returned books, adminis-
trative expenses, and a profit. The publisher really can’t give you too much
more since its margin is already very slim. Sorry to disappoint you but that’s
how it is.”
Abbey was disappointed. “Stephen, for all that money your parents are
paying, doesn’t that business school teach creativity? You have to look at the
world and think of what it could be, not what it is today.”
Unembarrassed by Abbey’s chastisement, Stephen, reacted positively.
“How much risk do you want to take on this new project, Abbey?”
EXHIBIT 3.1 Publishing industry value system.
Author CustomerCompetency: Intellectual
PrintingLogistics Promotion
Capital Editing Warehousing SalesDevelopmentRevenue: $7.50 $30.00 $35.00 $50.00
Purchase cost: 30.00 35.00
Gross margin: $ 5.00 $15.00
Publisher Wholesaler Bookstore