As I mentioned in the first post on self publishing, one of the first things I did when I started planning out this venture was to build a Google spreadsheet. That spreadsheet is a break-even business plan for the venture. It makes a huge number of assumptions, as it must because there are a huge number of things that I don't know. So I don't expect this plan to be an accurate picture of what is to some, but I do need it to provide me with a way to model that dynamics of how things could go. With this post, I'll explain how I made a business plan for this project and how you could go about making a plan for a similar project.
My overall goal with this plan is to determine what needs to happen, given certain parameters, for us to make back our money on this project. When we think about making back the money invested in a project, it's important to keep in mind that there are two types of expenses I need to cover.
I have fixed expenses: the cost of getting the cover designed, the audiobook recorded, etc. These expenses will be the same whether I sell 100 books or 10,000 books. When I talk about making back those expenses, I mean that I need to make enough profit on selling the books that it will cover these fixed expenses. So if I invested $2,500 in fixed expenses and I sold 2,500 books, I would need $1 in profit per book to cover my fixed expenses.
However, in addition to my fixed expenses, I also have variable expenses. My main variable expense in selling self-published books is the expense of making people aware that the book is out there and they may want to buy it. Some of this will be accomplished via word of mouth. People I know read the book, enjoy it, tell other people they like the book, some of those people buy it and read it, they tell other people, etc. It's like trying to get nuclear fission to occur, where readers are radioactive atoms and their enthusiasm about the book are the particles that those atoms emit which can go on to strike other atoms and cause them to break down. If I have enough readers with enough enthusiasm, the book will eventually "sell itself".
As with nuclear fission, there are two variables. With fission, those variables are how quickly the atoms are decaying and how many atoms there are. If the atoms decay and emit neutrons frequently, and there is a critical mass of other atoms around for those emitted neutrons to hit and breakdown, you get a chain reaction. If the element is not radioactive enough, or there isn't enough of it together to reach critical mass, you don't get a chain reaction.
So too with readers and enthusiasm. The more readers enjoy the book, the more likely they are to recommend it, leave positive reviews, buy it for friends, etc. So the quality of the book and the enthusiasm it inspires in readers is one clear factor. But the other factor necessary to start a chain reaction is to the number of readers. If you don't have enough atoms, you can't get a chain reaction. If you don't have enough readers, even if those who do read are enthusiastic their enthusiasm will not get a chain reaction going.
I like this analogy because it makes it clear that quality matters. If people really, really love your book, it can "go viral" as they say these days with relatively few initial readers. If the book is moderately enjoyable, you'll need more readers to get things rolling. If it's a dog, your readers will be like inert atoms and won't create any chain reaction at all.
And how do you reach that critical mass of readers? Well, one clear method is advertising. There are lots of different ways to advertise a book, and I'll get into that in more detail in future posts, but for now we're talking about advertising as our main variable expense. Let's say that on average I need to spend $2 in advertising for each copy of a book that I sell. If that ratio holds, if I spend $200 I'll sell 100 books, and if I spend $2,000 I'll sell 1,000 books. This variation is why it's called a "variable expense" it changes as the scale of my business changes.
So think again about our two types of expenses: fixed and variable. Let's work with that $2 in advertising per copy ratio that I suggested above, and let's assume that I had $1000 in fixed expenses. To cover my fixed expenses, I need to make $1000 in profit after paying for the advertising that it takes to move my books. If I sell a book for $5 and my profit is $3 on that book, then $2 goes to cover the advertising and there's $1 left in order to go to my fixed expenses. At that rate, I need to sell 1,000 books to cover my fixed expenses, which means that I need to plan on spending $2,000 in advertising.
Of course, I could increase my price. If I sold for $6 instead of $5 my profit per book would be higher and I could pay off my fixed expenses faster. But here's where the multi-factor model gets tricky: if I increase my price from $5 to $6, my book probably will become somewhat less attractive to customers. This is called price elasticity: the rate at which people become less eager to buy something as the price goes up. When I worked in pricing fast food, we used to joke that we'd only need to sell one hamburger a day if it sold for $10,000. The only challenge is: How do you sell a $10,000 hamburger?
How indeed.
Of course, the price elasticity of a novel in this particular category is yet another thing that I do not yet know. So in order to have a working model, I've assumed that I need to price this novel in line with the prices that I've seen for other holiday novels and novellas. If it's basically credible in terms of price, then my remaining problem is to have a large enough advertising budget to make the whole thing work, and enough of a profit margin to pay off the fixed expenses.
What does that look like?
Right now it looks like this:
There's a fair amount of detail in there, and as I say the numbers are fluid because it's full of assumptions. The overall model is:
Across all formats I'm budgeting to sell 3,400 copies over the course of 60 days. This is a very aggressive number, it it includes a couple of discount windows including a week of $0.99 for the ebook which will be heavily marketed through discount newsletters. The total advertising budget is $6,200. Revenue from royalties is $8,713. So take the advertising cost out of that revenue, and then the fixed expenses and the total profit is: -$37
All of that work is to break even. If we're able to do better, we may some money. If we can at least learn enough that we're covering fixed expenses and paying off a certain amount of our fixed expenses, I'll consider it a fairly successful experiment because next year we'll still have that book in print and we can add another one. The new novel will have new fixed expenses, but the published novel will have now new fixed expenses and so if we can push both novels next year (and get people who buy like one novel to click through to buy the next) we'll become more efficient as we go along.
So there's a rough overview of business plan thinking. More information on the self publishing project to come.
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