What is a Publishing Ponzi Scheme? And, How Can YOU Avoid Becoming a Victim?

What is a Publishing Ponzi Scheme? And, How Can YOU Avoid Becoming a Victim?

“The basic premise of a Ponzi scheme is ‘to rob Peter to pay Paul’.” – Wikipedia

In recent years, more authors have become victims of what we call Publishing Ponzi Schemes.

HERE’S HOW IT WORKS

Like with more notorious Ponzi schemes, the originators may have honest intentions in the beginning.

They:

1. Open a company and start to attract clients (authors)

2. Charge publishing fees, which can include cover design, formatting, file conversions (ebook), distribution, etc.

3. Publish the authors’ books.

4. Process orders for those books (received from the public, authors, distributors, and retailers).

5. Collect payments for book sales from book-buying customers, distributors, and retailers.

6. Pay royalties to their authors.

However, sometimes they don’t budget their money wisely and they spend, spend, and then spend some more, often making the mistake of committing to high-cost, long-term items (like cushy offices with high rent, too many employees, expensive rented office equipment, etc.). It’s not unusual for a new company to take out a loan to open their doors. Some smaller business owners simply max out their credit cards in the process.

But, what happens if the number of new authors coming in starts to slow down? The publisher has budgeted his monthly expenses on historical revenue numbers. Now, things are starting to dive. Uh oh. He’s in trouble!

On a side note, most print on demand / publishing service firms charge WAY TOO MUCH MONEY up-front to authors. That’s their primary source of revenue (and a very unfair business model, in my opinion). Since they’ve already sucked as much money out of each author as they can, they may not care if their authors’ books sell or not. So, they must continue to bring in at least as many new authors each month as they have in the past in order to meet their fixed-cost commitments.

NOTE: BookLocker.com does it the opposite way. We break even on setup fees, and earn our profits on book sales later. Thus, we and the author have a vested interest in the success of each and every book. ALL print on demand/publishing service firms should do business that way! And, in the 20 years it’s been in operation, BookLocker has NEVER made a late royalty payment. 

So, let’s assume Publisher Pete (no relation to Peter in the quote at the beginning of this article) was bringing in 50 new authors per month, and charging those authors $2,000+ per month, which is waaaaay to much, by the way, but not uncommon in the industry. That’s $100,000 per month in revenue. Publisher Pete was able to meet his rent, utilities, Internet, website maintenance, equipment rent, salaries, taxes, and many other obligations with that money.

But, a few months ago, Publisher Pete’s business started to slow down because, you know, he was charging authors way too much money and word was starting to get around online that authors could get the same services for a LOT less. Suddenly, Publisher Pete is only signing up 40 new authors per month, and then 30, and then 25… Publisher Pete is, by this time, popping antacids and losing LOTS of sleep. Nobody will give him a loan (because he hasn’t been paying back his existing ones) and he’s maxed out all of his credit cards.

He can’t move his office because he signed a five year lease. That also means his utilities are going to stay high, too. He’s paying a fixed rate for his corporate Internet account. He can’t quickly get rid of his leased equipment, either. He can lay off employees…but that would be embarrassing. (Yes, some really dumb corporate types are so full of themselves that they will do anything to save face, even if that bad decision will ultimately destroy the company.)

So, Publisher Pete is now desperate for cash. And, he DOES have access to cash! From where, you ask?

  • His distributor and the book retailers! Every month, he’s getting a big, fat payment from his distributor for retail sales of his authors’ books (i.e. Amazon).
  • People buying books from his website (that Publisher Pete may no longer be able to provide because he hasn’t paid the printer any money in the past few weeks).
  • Authors buying copies of their own books (ditto).
  • Authors pre-paying for post-publication services, like marketing (that Publisher Pete is no longer performing because he has other priorities…like trying to stay in business).
  • A few thousand from a handful of new authors signing up (who obviously didn’t research Publisher Peter, and who will never see their books published).

Now, Publisher Pete is DESPERATE! He swears he’ll pay it all back later. But, for now, rather than sending his authors their royalties, he uses the money coming in to pay his rent, his utilities, etc., etc. And, since Publisher Pete has a HUGE mortgage (that he obtained when he was getting 50 authors per month to sign up) and a large monthly bill for his kids’ private school, he continues to pay himself, too.

Unfortunately, the following month, Publisher Pete only gets 20 authors to sign up. He keeps track of the money he’s spending (money that’s not his), and he once again uses his authors’ royalties for his own expenses. The next month, he gets excited because 30 authors sign up! He quickly posts the (very late) royalties to his authors’ accounts, and sends some of them partial payments. But, the following month, only 15 authors sign up. So, Publisher Pete sticks his hand in the cookie jar again. Worse, some authors have ordered copies of their own books and Pete has spent that money, too, vowing to have the printer print and ship those books in a couple of weeks…or maybe next month – as soon as he’s able to pay the printer’s past-due invoices. All the while, authors who are still signing up for Pete’s services aren’t hearing anything back from him after their credit card is charged.

This process continues for a year. All of his authors have noticed that he isn’t crediting their accounts, nor making royalty payments on a monthly basis like he used to. First, there was a two-month delay. Now, it’s been four months, six months, or more. An increasing number of authors haven’t received copies of books they’ve ordered…but their credit cards were charged. They’re starting to post complaints online and this results in even fewer authors signing up with Publisher Pete. He does continue to make partial payments of royalties to the really squeaky wheels – those authors who are threatening to sue him.

What about the other authors? The ones that are gently inquiring, while praying he’s not ripping them off? They are nice because they either can’t believe someone would actually rip them off, or they think, if they make him mad, they’ll never get another dime from Pete. I mean, what could he possibly say? He certainly can’t admit he’s been stealing their royalties. (Pete is still telling himself it’s “borrowing.”) It’s easier to just ignore their messages. They’ll all eventually get paid, right?

Except…they don’t. Publisher Pete is living in La La Land and now he’s committing one felony after another.

Of course, we all know how this story ends because it’s happened so many times in the publishing industry. Publisher Pete wakes up one day, and realizes the gig is up. He calls all of his employees, and tells them they no longer have jobs. He abandons his office and business equipment (he hasn’t paid the rent in months anyway), he changes his phone number, his house gets foreclosed on, and he moves away without filing a mail forwarding request with the post office.

The absolute worst Publishing Ponzi Scheme crooks are the ones that start the exact same business all over again under a different name, in a different city or state. By this time, they know how to get easy, free money. And, by this time, they think they won’t ever be prosecuted. (And, if enough authors don’t complain to the attorney general in Publisher Pete’s state, he WILL continue to get away with it!)

If your publisher is doing the following, you are very likely the victim of a Publishing Ponzi Scheme:

1. Delaying crediting your author account for royalties on sales you KNOW occurred months ago.
2. Not paying royalties on a schedule he is contractually obligated to adhere to.
3. Telling you lies (i.e. “We moved, and don’t have new letterhead yet;” “We ran out of stamps; “We DID mail your check! You didn’t get it?!”).
4. Not shipping books and performing services that YOU paid for.
5. Ignoring your correspondence.

To AVOID becoming a victim of a Publishing Ponzi Scheme, research any publisher thoroughly. If you find these types of complaints, avoid that firm at all costs:

1. Failure to credit their authors’ accounts for sales.
2. Failure to pay royalties per their contracted schedule.
3. Giving authors lame, unbelievable excuses.
4. Not shipping books or performing services that were ordered, and paid for, by authors.
5. Ignoring authors’ complaints.

Protect yourself! Only do business with a veteran publisher that has a stellar reputation.

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3 Responses to "What is a Publishing Ponzi Scheme? And, How Can YOU Avoid Becoming a Victim?"

  1. Pingback: What Our Readers Said About: Angela’s Shark, Advertising on Facebook (not how in the way you think), and Publishing Ponzi Schemes | WritersWeekly.com

  2. Pamela Allegretto  August 4, 2019 at 2:13 pm

    Wow! So, so glad to be a part of the BookLocker family!

    Reply
  3. Tatiana Claudy  August 3, 2019 at 5:45 pm

    Thank you for this informative and useful article!

    Reply

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