Royalty contracts often have a reserve for returns clause. This clause withholds a percentage of royalties earned to account for future returns that the licensee (publisher) expects to receive from current period sales. The reserve may be flat amount or it can change over time.
A typical clause says:
- “The publisher may withhold a reasonable reserve against returns for one royalty period.”
- “Each royalty period the publisher may withhold a reasonable reserve; not to exceed 15% of royalties earned, for one royalty period.”
Our royalty software is very flexible when it comes to handling reserves.
1. The reserve for returns can be based on format. You can have a zero percent reserve on digital products; which are not returned, and a 20% reserve on physical products.
2. You can have reserves based on sales type. You may withhold a 40% reserve on sales to wholesalers, a 20% reserve on sales to retail stores and no reserves on direct sales to consumers.
3. Reserves can change over time. You may withhold a 30% reserve during the first royalty period, a 20% reserve during the second royalty period and a 10% reserve thereafter.
If the general ledger account for unearned royalties has a balance you have paid royalties on sales that were later returned. The royalty software’s sales analysis report can help determine the appropriate reserve rate. You can view returns by backlist/frontlist, title, format, currency, sales channel, sales type and territory.
Most publishers have a flat reserve rate for print sales; hardcover and paperback. No reserves are withheld on eBook sales because they are rarely returned.
Publishers of pulp novels such as romances books will frequently have a reserve rate that declines over time.
Some publishers withhold no reserve on sales to Amazon. Why? Amazon orders books on consignment. Ownership does not change until the sale occurs. Returns from Amazon’s customers are minimal.
Publishers that pay royalties semi-annually or annually tend to withhold reserves for only one royalty period. Those that pay royalties quarterly will withhold the reserve for 2 or 4 royalty periods. Publishing companies that pay royalties monthly will withhold reserves for 6 to 12 royalty periods.