SigninG a Publishing Contract

It is extremely important that your contract is clear about how your royalties are to be calculated — and that you understand what it says. We have seen several different methods, and some are more trustworthy than others. This section compares three methodologies: MSRP, Gross Revenue, and Net Profits.

1. Most transparent: Royalty based on MSRP 

In book publishing, authors are regularly paid based on the Manufacturer’s Suggested Retail Price (MSRP) rather than the publisher’s revenue. This is less common in games publishing, but does sometimes happen. This methodology is easy to track and fairly transparent, because the MSRP is a single, consistent amount for all copies sold within a certain time period. Designers can negotiate their royalty percentage with a good understanding of the base amount that the percentage is applied to — it is uncommon to know what the exact MSRP will be at the time you sign your contract, but you’ll have an idea of what similar games sell for.

2. Most common: Royalty based on gross revenue 

The most common type of royalty provision is one based on a publisher’s gross revenue or net selling price for copies of your game. If the publisher sells a copy for full price, their revenue for that copy is equal to MSRP. But when they sell at wholesale rates, the revenue can be much less — usually about 40% of MSRP. 

Under the gross revenue methodology, typical royalties are 5%-8%, according to Cardboard Edison. If the game is based on a major licensed IP (Marvel or Star Wars, for example), royalties are typically half as much to cover licensing fees.

The gross in gross revenue means we're talking about all income received by the publisher for your game — no expenses should be deducted. However, publishers often include language clarifying some things that don’t count as revenue. These might legitimately include:

• Crowdfunding fees: In a Kickstarter campaign for a $100 game, the publisher never gets the full $100 as revenue. Kickstarter takes their cut first.
• Shipping and taxes: These are usually pass-through costs, not actual income from the game.
• Returns: The revenue the publisher originally received (and then refunded) doesn’t count.
• Bad debt: If a publisher sends games to a distributor, but that distributor does not pay for the games, this is bad debt. The publisher hasn’t actually received any revenue. 

SAZ recently released a white paper noting that some German publishers have begun trying to deduct additional costs from the “net selling price” calculation, such as the cost of an insurance policy that protects against bad debt (del credere insurance). This is a business expense, and not an appropriate deduction from gross revenue.

3. Red flag: Royalty based on net profits ⚠️

Be extremely wary of a contract offering royalties based on net profits. Profits are revenue minus costs, and costs can be quite broadly defined. It would be easy for the publisher to manipulate the ways that they allocate costs to a game. For example, if they exhibit at a convention, how much of the cost of the booth is a marketing cost allocated to your game? If the owner receives a salary, how much of that operating cost is allocated to your game? There are egregious examples of Hollywood blockbusters that managed to deduct expenses until they had no profits on their books — avoiding paying some actors any royalties at all.

4. Example of the 3 methods

Consider a game with an MSRP of $100. This is a rough example of how the three different methods described above might play out. If you want to do this math for yourself on an offer, it is a fair question to ask a publisher for a ballpark estimate of what they might expect for the MSRP — understanding that many things might affect the final amount before it’s done.