Development of journal publishing business models and finances
This chapter provides an overview of journal publishing business models highlighting revenue generation, cost management and aspects of financial performance including the profit and loss statement. It also provides an overview of financial management for a portfolio of journals.
The opportunities and challenges facing today’s journal publishers are both exciting and daunting. A financial perspective is essential not only for large commercial publishers managing many titles but also for learned societies publishing a single journal that helps support other society programs. A successful scholarly journal program requires the creation and development of a high-level business strategy as well as the ability to implement cost-effective programs for authors, readers, editors, referees, librarians and other customers. The essential component of a successful business strategy involves a sustainable business model in which revenues are in balance with costs and overheads so as to meet financial objectives in an ongoing way.
This chapter sets out to review journal business models and finances and outline how new developments have impacted on the business of running a successful journal program. This is relevant today, as journal publishing is undergoing a significant transformation that may be as disruptive as the changes taking place in other content industries such as newspapers, magazines and music.
The first journal devoted wholly to science was Philosophical Transactions, created by Henry Oldenburg in 1665. Oldenburg published the journal at his own expense under an arrangement with The Royal Society that would have allowed him to retain any profits. It seems that the journal was not a financial success during Oldenburg’s lifetime. Fast forward 350 years to the present day and if Oldenburg were still around he would have been surprised to see the business models playing out in the world of scholarly publishing.
In the last decades of the 20th century journal publishing tended to be an industry of slow change. In terms of business model there was little innovation with the traditional subscription model in ascendance. In contrast, the last 10–15 years have seen publishers enter a more active period of new business model development, with new players, innovation and entrepreneurship. A number of factors are driving these changes, such as:
The framework for this chapter revolves around a number of themes. The first relates to business models and revenue generation. The second theme covers cost management, for example how outsourcing and technology play a role. The next provides an overview of financial strategy, profitability and pricing, highlighting the importance of the three financial statements, particularly the profit and loss statement. The final theme before the conclusion is about journals as a portfolio.
The term business model simply relates to how revenue is generated. Scholarly journal publishing is similar to other content industries in respect of the business models available. Whether it be newspapers (advertisers and readers), music (CD sales, iTunes downloads), television/ radio (subscriptions, personal pledges, advertisers), there are essentially four revenue-generating business models:
This section reviews each of these four business models. In terms of revenue generation, publishers can apply a single business model or models in combination. As for any business, the challenge is to have a sustainable model that meets customer needs in a competitive market, where revenue growth is likely to be a relevant financial objective.
The reader pays model involves a subscriber paying a fee for an agreed period of time, usually one calendar year, to access content. In the past, the fee was usually paid in advance with the publisher delivering the printed issue at a determined frequency throughout the year. Nowadays, content is typically delivered incrementally online as each article is published with print as an optional extra, sometimes for an additional fee. The subscriber may be an individual but is typically an institutional library. In terms of cash flow, this model is beneficial to the publisher because subscription fees are paid in advance of the subscription period before many costs are incurred by the publisher.
Before the internet era, institutional libraries (for example, academic, government, corporate libraries) would typically subscribe to individual titles selected by an acquisitions or collection development librarian in consultation with a library committee composed of faculty. The primary mode of delivery was print. Since the development of online journals and with the emergence of a small number of very large publishers, content has been bundled into so-called ‘Big Deals’. The Big Deal was created partly in response to the so-called ‘serials crisis’. This can be described as a ratchet effect in the following way: there is a growing number of researchers in the world. These researchers conduct more research and publish more research articles. This has resulted in journals getting larger and more new journals being launched. Consequently, journal subscription rates rose faster than the cost of living and faster than library budgets. Consequently, libraries cancelled subscriptions to journals, limiting access to content. Annual subscription prices were ratcheted up another notch to take account of subscription attrition.
For some journals as well as there being an institutional subscription market, there is also a market for personal subscriptions to individuals. The best examples are Science and Nature which include magazine-style content blended with broad scientific coverage. Other examples are titles for a professional audience such as engineering and medicine. Learned societies often make their journals available to members as part of the membership package or at a low personal rate.
The individual market can be an important segment for some journals to widen readership, increase visibility and generate revenue. The dynamics between these two segments of the market needs to be fully understood to make effective pricing decisions. Publishers are tending to see individual subscriptions decline. This is partly as journals get larger and require more shelf space in the office, and also because institutional libraries and publishers have been successful in licensing content and making it easily and conveniently available online, removing the need for researchers to wait for the printed issue to arrive.
The dynamics between print and online editions, and institutional and individual sales, can be further complicated where journals have a significant revenue from classified or display advertising in the print edition. Media rates for selling online ads are much lower than selling ads in a printed issue and publishers are finding ‘yields’ from online advertising are much lower than for print. This situation is not likely to change in the near future, making publishers with significant print advertising revenue reluctant to cease the hard copy, with its associated costs.
In the print world, an institution often subscribed to multiple copies of the same journal (main library, department reading rooms, etc.). In the online world, these multiple subscriptions are being replaced gradually by a single campus-wide licence providing access to the online version, sometimes as part of multi-year deals. Part of this trend has also seen libraries discontinuing print subscriptions all together. The transition from print to online has been continuing since the mid 1990s and for some publishers the proportion of subscribers taking online only can be as high as 70 per cent. For the publisher, this requires decisions and policies on how to price legacy print subscriptions, terms and conditions for site-wide licenses and when to stop producing print issues all together.
As in any market, supply and demand are important economic factors. In scholarly journals, the demand curve continues to climb as more researchers fuel the growth of existing journals and spawn the development of new titles, for example in new or interdisciplinary research fields. Mabe (2003) has estimated that the number of journals has grown steadily over the last 200 years at around 3.5 per cent per year. On the supply side, the academic library (the primary paying customer for academic journals) is under continued financial pressure as a result of library budgets not keeping pace with inflation or even declining in absolute terms. The long recession starting in 2008 has seen renewed economic pressure in the three large mature markets of the USA, Western Europe and Japan. It seems likely that these financial constraints will continue and have a serious impact on all stakeholders in the journals enterprise. Consequently, publishers are eagerly establishing new markets, for example, in the so-called BRIC (Brazil, Russia, India and China) countries, and looking for innovative ways to add value, for example the use of semantic technology to enrich and tag content.
The last 20 years has seen the emergence of a small number of very large STM publishers. Currently, the four largest STM publishers (Elsevier, Wiley-Blackwell, Taylor & Francis and Springer) account for a combined total of approximately 6000–7000 journals. Each of these large publishers has created multi-journal packages bundling journals into online collections. These bundles are offered to librarians at a price that reflects a discount from the ‘catalogue’ price. Discounts vary but are typically in the 15–20 per cent range. This approach has become known as the ‘Big Deal’ and is sometimes referred to as the ‘all you can eat’ model.
Smaller and medium-sized publishers and society publishers have also followed suit. The Royal Society of Chemistry offers RSC Gold and American Institute of Physics has AIP Complete. For society publishers with only a single title or small list, then the option to bundle is restricted unless they co-operate with other organisations. The ALPSP Learned Journals Collection (in partnership with Swets) is an initiative whereby smaller ALPSP member publishers work together, through Swets (a subscription agent), to sell a combined package of their journals to consortia and other large customers. This cross-publisher package is an effective way for librarians to acquire content from multiple smaller publishers (http://aljc.swets.com/).
In response to the increasing pressure on library budgets and the challenge librarians face to stretch acquisition funds ever further, libraries have grouped together into cooperatives or purchasing consortia. The development of consortia started in the late 1980s, OhioLINK being one of the first examples. This has grown to be a consortium of 88 Ohio college and university libraries, and the State Library of Ohio, that work together to provide Ohio students, faculty and researchers with the information they need for teaching and research (http://www.ohiolink.edu/). Consortia operate along the following broad lines:
Consortia have provided a mutual benefit for both publisher and librarian. Consortia members have access to more content for a relatively low additional cost, whilst the publisher benefits from additional revenue and increasing the visibility of their content at a larger number of institutions. The International Coalition of Library Consortia has over 200 active members around the world and their website provides useful background (http://www.library.yale.edu/consortia/). The Consortium Directory Online (www.consortiumdirectory.com) is a comprehensive directory of the library consortium market and a useful resource for publishers. With the impact of the long recession of 2008 still being felt in
For useful background on licensing models and public domain templates for standard license agreements, a useful site can be found at http://www.licensingmodels.org/.
Pay-per-view (PPV) is another form of ‘reader pays’ model. Most PPV schemes operate on the basis of charging a fee (ranging from a few dollars up to the $20–30) to a reader who would not normally have access to a title because they are not based at a subscribing institution. PPV revenues generally make up a small percentage of total revenue for any journal, in comparison with subscription revenue and license fees. For new journals, where the library has not yet decided to subscribe, then PPV converting into a subscription once a pre-set threshold of PPV purchases has been recorded is one method that some publishers are adopting to launch new titles.
The concept of article rental is also under development, with a growing number of publishers experimenting with this model. One example is a service from DeepDyve (http://deepdyve.com). The service allows readers to rent an article for an agreed period of time (24 h, 7 days, etc.) for a small fee (typically 99 cents a la iTunes) and providing a full-text version of the article with limited functionality compared with online HTML or PDF versions. For example, the renter often cannot save, store or print the article. It is early days yet to say how or whether this model will be popular with users and whether publishers can make sense of it financially – for example without cannibalising other sales. This low price model does have a lot going for it in terms of providing a meaningful response to ‘disenfranchised’ individuals who are not at well-resourced institutions, and possibly provides a low-price way forward in relation to public access.
In recent years publishers have created online archives containing digital files that go back to the first issue of the journal. For publishers with long histories these projects can require significant upfront investment in digitisation costs.
Publishers are making this archival content available in two main ways. The first method involves a lease or rental scheme. Here, the subscriber maintains access to the archive by paying the publisher an annual license fee. The fee may be part of the annual subscription or an additional payment may be required. The second way is via a one-off outright purchase. In this case, the back file can be regarded as a separate product. Access to the back file product continues regardless of whether the subscriber maintains the current subscription.
For back files, the publisher needs to decide when the current ‘content wall’ starts and back file content wall ends and what fee to charge for the additional back file content as a rental and as a one-off purchase.
Back file projects continue to prove popular with libraries who can now provide researchers with seamless online access to current volumes and the complete back file. This also means they can convert precious physical space in the library to serve other purposes. For publishers, back file projects have added to the journal’s asset value and up-front costs are recouped in a relatively short period of time – typically 12–18 months.
For smaller and medium-sized publishers, there are cooperative efforts providing effective solutions; for example, JSTOR (http://www.jstor.org/) collaborates with hundreds of publishers and content providers to preserve and broaden access to their scholarly content.
In the case of online-only products such as a digital archive, the question arises of what access is provided to the customer at the end of the license period. In the print world it is clear that the subscriber retains the print copy for future use. In the online world the publisher has several options and can decide to provide ongoing access after cancellation of a license, and this may include the need for the customer to pay an annual maintenance fee to the publisher to maintain the customer’s access to previously licensed content.
In summary, the reader pays model, typically via a subscription or license, retains a strong position as a sustainable business model for journals. However, it also faces perhaps the biggest challenge and potential for disruption. Partly as a result of this, the author pays model has attracted growing interest in recent years.
Partly in response to the growing pressures on academic library budgets, there are an increasing number of publishers and journals that are adopting an ‘author pays’ model. This is known as Open Access (OA) publishing where authors publishing in the journal are required to pay a fee (often termed an ‘Article Processing Charge’, APC) and in return, articles are made freely available online to all at no charge. APCs range from a few hundred dollars to several thousand dollars with the average somewhere in the range $1500–2500 per article. The author pays model has also been termed the ‘gold route’ to OA. As far as cash flow is concerned, this model is less advantageous to the publisher than the subscription model as revenue flows (author payments) are more in phase with outgoing expenses.
It is relevant to note that charging authors is not new and goes back to publishers levying ‘page charges’ on authors. These charges were based on the understanding that authors benefit from publishing in a journal and should be asked to support part of the costs. Typically, such charges would cover so-called ‘pre-press’ or ‘first copy’ costs, i.e. the costs of preparing an article for publication which would typically include:
So called ‘run-on’ costs would be covered by the reader through subscription charges. Run-on costs would include manufacturing costs (printing, paper) and distribution. This page charge/subscription fee model is an example of a hybrid business model.
Some journals employ a tiered page charge scheme where charges are triggered once a page limit is exceeded. Page charges are sometimes voluntary and waiver schemes are also available for authors who are not in a position to pay. These variations are also used by some OA publishers.
In the late 20th century pages charges declined or charges were made voluntary rather than mandatory. This trend was driven largely by commercial publishers who in the 1960s and 1970s developed journals that were free to the author and relied exclusively on subscription charges.
Where society journals still have page charges then a possible way forward to a full OA model would be to increase author fees and reduce subscription prices, eventually removing subscription charges altogether.
Another option for author side payments is to charge authors a ‘submission fee’, whereby the author is charged a fee whether or not the article is published. This spreads the financial costs beyond solely published authors. Thus far, it appears that few journals are willing to adopt this variant as possibly they fear it might deter submissions.
The number of OA journals continues to grow and the take-up of OA can also be measured in terms of the growing number of OA publishers, ranging from not-for-profits – like the Public Library of Science – to commercial OA publishers – such as BioMedCentral (acquired by Springer in 2008), Hindawi (based in Egypt) and InTech (based in Croatia). The OA model clearly works for some publishers in some subject areas and it is now more of a question of how quickly the model will develop and move into other disciplines. Authors in some fields (predominantly biomedical) have been early adopters, chemistry has been less embracing, and it is likely that in other fields (e.g. mathematics) researchers with limited or no access to funds will be less attracted to the author pays model. The same applies to authors in developing countries where funds to pay OA fees would represent a significant cost, putting these researchers at a disadvantage (unless they were subsidised in some other way).
The trend to launch new journals under an OA model is partly driven by financial considerations. Starting up new subscription-based journals takes more upfront investment of money (with payback over 5–7 years), whereas OA journals are more ‘pay-as-you-go’. The new OA publishers have been able to ramp up a lot of journals very quickly.
How the OA business model impacts financially on institutions depends on a number of factors such as: total expenditure on OA articles against expenditure on subscription products and the rate of transition from one model to the other. A Research Information Network (http://www.rin.ac.uk/) study (‘Heading for the open road: costs and benefits of transitions in scholarly communications’) identifies five different routes for achieving a sustainable transition, and compares and evaluates the benefits as well as the costs and risks for the UK.
For any scheme requiring author payment, it is important that publishers adopt clear policies to ensure that an author’s ability to pay is separate from editorial acceptance, creating a ‘firewall’ between the editorial office and finances.
So-called hybrid OA is where a journal offers authors an option to pay to make their article OA. Articles from authors who don’t pay such a fee are only available to subscribers. An example of this hybrid model is ‘Oxford Open’ (http://www.oxfordjournals.org/oxfordopen/) offered by Oxford University Press. Many publishers now have a hybrid scheme in place although there is varied take-up from authors. Fees are similar to those for gold OA titles. Publishers offering hybrid OA are adopting a policy to reduce subscription prices in proportion to the revenue generated by author fees so as to avoid any claim of ‘double dipping’ from author fees and subscription charges.
In relation to OA, there is also the so-called ‘green’ route. The green route requires the author to deposit a version of their article in a subject-based or institutional repository. The version may be a pre-print or post-print version of the article and may not be the same as the final ‘Version-of-Record’ article published in the journal depending on copyright policies of the publisher.1
The best examples of subject-based repositories are those in physics, maths and computer science (arXiv) and Research Papers in Economics (RePEc). For most of its almost 20 years of existence, arXiv has relied on funding agency support alongside support from its host institution (currently Cornell University). More recently it has launched a ‘Sustainability Initiative’ which is a collaborative business model. Rather than being supported by a single organization, arXiv is now supported by more than 100 other institutions who have a collective interest in the longer term sustainable development of the system.
Subsidies can take different forms from real financial resource through to resource in kind, donations of time and non-financial resource such as space, computer equipment and expertise. Many small publishing ventures and start-ups are funded in this way until they develop a sustainable financial model for the longer term. It can be a somewhat precarious existence to be a beneficiary of someone’s largesse.
Perhaps the best recent example of subsidy funding a start-up is that of the Public Library of Science (PLoS). PLoS was founded in 2000, and received a grant of $9 million from the Gordon and Betty Moore Foundation to help support the creation and launch of a high-profile OA journal – PLoS Biology. Since then, PLoS has gone on to launch other high-profile journals, community-style journals and PLoSOne, all of them based on the OA model. PLoS is now financially self-sustaining and the rapid growth and success of PLoSOne has been one of the contributing factors.
As an aside, the PLoSOne model is different from most journals in a number of ways. As mentioned above it depends on a gold OA business model and employs a Creative Commons licensing scheme where authors retain copyright. The journal adopts the principle of peer review, but has implemented peer review in a different way from most journals. Rather than being asked to judge scientific quality or significance of an article – the scheme used by most traditional journals – referees are asked to judge on technical correctness, validity of the experimental method, whether conclusions flow from results, etc. Scientific quality and significance are then judged post-publication by readers using article-based metrics such as downloads and post-publication commentary.
The dramatic success of PLoSOne (it rapidly became the world’s largest scientific journal in terms of articles published) has led to the model being copied by a number of other publishers who have created their own versions of PLoSOne. These now have their own term: ‘mega-journals’.
Other countries also support scholarly journals through subsidy. For example, in Japan, many learned society journals are partially supported by a subsidy system called ‘kakenhi’. This is a system of grants-in-aid that provide financial support or subsidy for many Japanese learned society journals. The dependence on government agencies to support a national scholarly publishing system may remove some market pressures, until of course government decides that there are other national priorities and journals have to fund their own way.
Another example of subsidy is SciELO – Scientific Electronic Library Online. This is a model for cooperative electronic publishing of scientific journals on the Internet designed to meet the scientific communication needs of developing countries, particularly Latin American and Caribbean countries. SciELO is product of a partnership among regional, national and international institutions. In a similar way, BioOne is a collaborative venture of learned societies in the biological sciences where each founding organisation continues to make financial and/or in-kind contributions to BioOne’s development. BioOne provides a means for smaller societies to gain market impact and presence online and a means to provide libraries with a high-quality collection. ProjectMuse has similar objectives for learned society journals in the humanities and social sciences.
There are a very small number of high-profile journals that generate significant revenue from advertising, both classified – i.e. principally career sections and advertisements for jobs – and display ads – i.e. for products and services. These are publications such as Nature and Science which are as much magazines as they are journals and have a much broader reach in terms of subject coverage. They also have very large readerships and circulations – institutional and individuals – which mean that advertisers can reach a large audience for their products and services. Advertising in most scholarly journals has generally a much more limited potential because of the smaller readership. There are exceptions of course, and these are typically in fields where the readership has a professional base such as medicine or engineering. The transition from print to online for these journals has been another challenge as advertising rates for online publications are typically a fraction of advertising rates in printed journals.
Sponsored sales of single issues can be a significant income stream for some journals. This involves a sponsor (often a corporate organisation) purchasing a particular journal issue in bulk because the contents of the issue are relevant to their business. Journals in the medical field (e.g. New England Journal of Medicine, The Lancet) can generate significant revenue from sponsorship of this kind where a pharmaceutical company might purchase 100 000 copies of a report on a successful clinical trial. For smaller clinical journals such sales can represent an important secondary income.
Sponsored sales whilst being a positive boost for sales and providing additional visibility for the journal brand, can be unpredictable from year to year. There are also possible ethical issues to steer clear of when selling content in this way and making sure there is a clear ‘firewall’ between editorial control and the sponsors’ interests. In the last couple of years such revenues have been declining, partly because of the current economic situation and perhaps partly because the pharmaceutical companies are looking at other ways of promoting their products.
Publishers can also earn additional revenue from their digital content, often in the form of royalties or license fees, by making their content available through other channels such as third-party aggregators. These aggregator databases are intended to access segments of the market that are difficult or costly for the publisher to access. To avoid the possibility of cannibalising revenue from current subscriptions, publishers have the option to embargo content in these databases so that access is only to prior years and not to current content.
As well as revenue generation and growth, publishing is also focused on cost management. Today’s digital publishing landscape is very different from the world of printed journals, yet most journals still have printed editions that are manufactured and distributed. The end result is that there are more cost categories to plan, budget and control.
There are a number of activities that incur costs surrounding the editorial process. The journal needs an effective system to support the process of managing submission of articles, peer review and manuscript tracking. Almost all journals now use a software system to manage these processes either developed in house or leased under a license from a specialist service provider. Consequently, the publisher is faced with a ‘make or buy’ decision, where factors to take into account include:
The degree of control required over the development path. For example, does your particular journal or community need a customised interface or specific features and functionality? Or will a more generic solution meet your needs?
Licensing software from a supplier of course means there are external costs and license fees rather than internal salaries and consultants fees involved. Peer review software companies charge on the basis of a fee for each manuscript submission that goes through the system.
In addition to software, managing a journal office includes costs for peer review management, manuscript checking, author support and administration. These costs can be as salaries for in-house staff or payments and stipends to support external editorial offices housed at the editor’s research institution. All of these costs usually scale as the size of the journal grows. A useful business ratio to keep track of here is cost per submitted manuscript and how this scales with volume of articles. Another useful metric is revenue per article – particularly if your journal is considering moving from a subscription to an author pays model.
Production includes typesetting (usually in the form of XML composition), copy editing and page make up – the so-called ‘pre-press’ activities. Many of these activities, particularly pre-press, were done in local markets by small to medium-size vendors close to home. Nowadays, much of this production activity is outsourced to large companies based off shore in places like India. Cost-effective management of production vendors has become an essential skill as well as the ability to negotiate service levels and prices and manage expectations. Travel budgets for production staff have risen accordingly. With this off-shoring and outsourcing has also come economies of scale that have driven down prices significantly. In such an environment it is unlikely that production departments will find it beneficial to enter multi-year agreements with vendors – better to have the ability to renegotiate with existing suppliers and/or negotiate with potential new suppliers as competition, technology changes and economies of scale drive prices down further. Finance Directors will be looking to see price per page metrics trending downwards.
As the transition continues away from print then other potential costs savings are available; for example, print-on-demand technology provides publishers with a cost-efficient method to manage print runs and warehousing costs. In an innovative move, some publishers have adopted a ‘rotate and condense’ print format that accommodates two pages on a single page with significant cost reductions.
now needs to build an online delivery platform or rent space with a journal hosting provider (another ‘make or buy’ decision). Technology costs scale in a marked contrast with how editorial or production costs scale. Technology costs typically have a large fixed cost component and small variable costs (as content is added to the platform) whereas production costs tend to scale proportionately according to the size of the journal. One can list many different requirements needed for successful online journal platforms, such as:
This list will only continue to evolve and grow with new developments in the market and emerging opportunities for the management of scientific data. The challenge is to assess how each of these activities and processes adds value compared with its impact on your cost base and ability to generate a return on investment.
With the move away from annual journal subscriptions based on simple price lists published in a catalog, to online information products bundled via a license negotiated with the customer, there are a great many new costs associated with these different practices: for example, legal costs of creating and managing licenses, and sales staff costs associated with face-to-face discussions with library customers to negotiate mutually beneficial deals, new requirements to mine customer data and drive sales success. There is also a need for software and systems to manage these data and the associated business transactions, such as:
With more and more marketing being managed via sophisticated software, the world of marketing (whether it is author marketing, usage marketing or content marketing) is becoming evidence based and analytically driven. Many of these systems are web based and provide valuable tools to staff in the office and on the road. New systems mean additional costs and the challenge is to show a positive return on investment. In addition to these new activities, there remain costs of other activities, such as exhibiting at conferences. Editors and societies demand it, but it is hard to determine whether it is cost effective.
Understanding financial performance is critical to success in any business and this applies equally to journal publishing. Unfortunately, some publishing managers and staff acquire financial understanding in rather a ‘hit and miss’ fashion; others are fortunate enough to benefit from rounded management training and a close relationship with their finance department and management accountant.
An important first step in any assessment of publishing finances is clarity on the organisation’s financial strategy and how this fits within its overall mission. A profit motive is clear in any commercial organisation whilst for a not-for-profit then financial aspects are just as important even if the goal is to break even financially as well as serve the mission.
Pricing of journals and information services is more an art than a science. Pricing partly depends on the objectives of the owner and the strategic and business goals the organisation sets out to achieve. Pricing is also about value and understanding the value your customers place on your product in a competitive market. An effective pricing strategy should also be part of the marketing mix and although costs are important to keep in mind when making pricing decisions, cost-based pricing is more likely to be appropriate for commodity-style products rather than a journal publishing a unique collection of content.
Value, of course, tends to be in the eye of the beholder and understanding the value proposition of your journal means having a deep understanding of your customers and the competitive market. A highly cited quarterly review journal is likely to represent a different value proposition from a large rapid communication journal, for example. Being closer to the customer is much easier in the online world particularly as usage defines a value metric and usage is now well calibrated through the COUNTER system (http://www.projectcounter.org). Ratios such as ‘cost per download’ (CPD) are now terms commonly in the vocabulary of publishers and librarians where librarians set CPD thresholds and if a journal exceeds a particular CPD value then this triggers a closer review or even cancellation of the title in question. For OA journals, setting appropriate article processing charges for authors requires a similar philosophy concerning value, the competitive market and financial objectives.
Revenue comes in many flavours, as indicated in the business models section above. For each business model, there needs to be an appropriate pricing scheme. As well as multiple journal bundles, pricing discounts and consortia licenses, some publishers have been successful with tiered pricing schemes. This is where each customer is assigned to a tier according to a metric or set of metrics that relate to the value a customer places on having access to the content. For example, a small two-year college might place a lower value on having access to research content than a large research intensive university and prices should vary accordingly. Other pricing schemes use full-time equivalent number of faculty or researchers as a measure, and the Carnegie Classification (http://classifications.carnegiefoundation.org/) has been used by publishers as a means to set prices according to the value a customer is likely to place on having access to content. Product tiering is another common pricing strategy, where the customer pays a premium for value-added features; this strategy is less common in journals publishing.
Given that most publishers are in business to maximise access and distribute their content widely, pricing models that are more restrictive and meter usage are less likely to support objectives and goals for the publisher and tend to be unpopular with librarians as well. A key message is to keep pricing schemes transparent and simple to communicate to all concerned.
Three financial statements are required to manage any business: the profit and loss statement, balance sheet and cash flow statement. There are many useful books available on finance for non-financial managers; for example, Financial Intelligence: A manager’s guide to knowing what the numbers really mean is a practical guide with informative sections on each of the three financial statements (Berman and Knight, 2006).
The P&L statement is usually the one that most managers and publishing staff will to be familiar with. The purpose of the P&L statement (sometimes called the ‘income statement’ or ‘statement of earnings’) is to attempt to measure whether the products or services that a company provides are profitable when everything is added up. The P&L statement represents the best attempt to show the sales a company generated in a given period of time (e.g. a month, a quarter, 12 months), the costs incurred in making those sales over the same period and the profit or surplus, if any, that remains.
The P&L statement may be for the entire company, a division, or a single product or service. Publishing staff as they reach higher into the organisation will take on what is termed ‘P&L responsibility’ for their journal or portfolio. Each journal should have its own P&L statement and often for publishers with larger journal portfolios, each publishing manager will have an aggregate P&L statement for the journals they have P&L responsibility for.
The P&L statement is presented in a common structure with three main categories of headings. Sales or revenue is at the top and this is what people commonly mean when they refer to ‘top-line growth’. Costs and expenses are the middle section of the P&L statement, and profit or surplus is at the bottom, hence – the ‘bottom line’.
A brief, simplified example of what a Journal P&L looks like is given in Table 6.1.
The P&L statement is an important document for managers in order for them to run the business and to understand how decisions (e.g. on pricing and discounts) have an impact on revenue, and how other decisions on costs (e.g. hiring new staff, purchasing new equipment or paying vendors) impact the bottom line. The format of most budgets will usually follow the same format as the P&L statement.
The big proviso in how to interpret a P&L statement, inherent in any P&L, is that they reflect estimates and assumptions made by the finance department. For example, when should a publisher recognise revenue from a subscriber if the subscriber pays a full year in advance of the subscription period? Should it recognise revenue on the P&L when the invoice is sent to the customer, when the customer sends payment or when the publisher starts dispatching issues of the journal? In fact it is typical for publishers to use the so-called ‘matching principle’ to match revenues against costs. For example, this would mean that for a monthly journal one-twelfth of the revenue received would be apportioned to the P&L each month. Similarly, consortia access fees might be added on a pro-rata basis according to online usage metrics.
Another proviso is that the P&L tells us about what has happened, rather than providing information we need to predict or forecast what will happen in the future. So as well as using the P&L statement as a management tool, it us important to develop other metrics that are more forward looking, for example the number of new customers added, market spend per new customer or sales from new products against sales from old products.
As we have seen above, there are different methods available for a journal to generate the funds it needs to be a viable and sustainable operation. The other side of the financial equation for any successful business involves balancing revenues against expenses, costs and overheads in order to break even or generate a profit or surplus.
There is no typical journal, each one being different in terms of its size, scale and market. Larger journals may benefit from economies of scale; high circulation titles have potential for advertising, whereas journals in the social sciences and humanities are typically much smaller and therefore cost less to produce; STM journals in particular can become large operations in their own right.
Financially intelligent managers should not only understand the P&L statement but also be aware of and get acquainted with two other important financial statements. These are briefly defined here and for further background the reader is referred to one of the many books on financial management for non-financial managers.
Companies prepare a balance sheet to provide a summary of their financial position at a given point in time (so balance sheets always have a date, typically at the end of an accounting period such as a month, quarter, financial year). The balance sheet is simply a statement of what a company owns (its assets), what it owes (its liabilities) and its book value, or net worth (also called owners’ equity or shareholder’s equity).
The balance sheet is used as an important indicator of a company’s financial health. It is useful to a banker, an investor or owner of a business for assessing risk as well as inventory management. It helps answer questions such as: Is the business in a position to expand? Can the business easily handle the normal financial ebbs and flows of revenues and expenses? Should the business take immediate steps to bolster cash reserves?
Analysis of the balance sheet can identify important trends, particularly in the area of accounts receivable and payable. Is the receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectable? Has the business been slowing down payables to forestall an inevitable cash shortage?
The cash flow statement shows how a company acquired and spent its cash during a given period of time. If you’re a publisher in a large organisation, changes in your company’s cash flow will not typically have an impact on your day-to-day job. But in fact it is the most important statement. If your organisation runs out of cash you simply don’t have a business. So senior management certainly needs to understand cash flow management.
Large publishers usually divide their programs up along subject lines with portfolios managed by a group of staff charged with growing the program and building the business. Good financial management (revenues and costs) is part of this. For smaller society publishers, a key question is whether to ‘self publish’ and carry out the main publishing activities independently or to contract out the publishing function in whole or in part to a commercial publisher. For learned societies with a single journal or small group of titles it is becoming increasingly complex to go it alone and so partnerships between societies and commercial publishers continue to grow.
For commercial publishers seeking to grow the portfolio, adding society journals can be an effective method to achieve this goal. As society journals are added to the portfolio, some costs will scale with activity (e.g. production costs) but other costs, for example sales costs, will largely remain fixed. In this way, the publisher grows revenue by adding new titles, whilst spreading fixed costs over a larger number of journals. This can be part of an effective financial strategy.
The society also benefits by gaining access to economies of scale (e.g. production) and efficient access to a market via the publisher’s sales force. For small and medium-sized societies, this approach can be an effective way to manage their journal assets and manage investment and risk.
When a society publisher contracts out its publishing to a commercial publisher, the most common arrangement is one based on a royalty payment. In this case, the publisher will manage the costs of publishing the journal, collect the revenue and provide the society owner with a royalty. The royalty may be a percentage of revenue or percentage of gross or net profit.
Research continues to grow and publishers have responded to market needs by launching new journals in emerging fields and interdisciplinary topics. Launching new journals compared with managing an existing journal program requires a different mind-set, for example the approach to risk and investment. Launching new journals can be an effective way to grow the business and a number of factors need to be taken into account, such as:
A successful journal launch is always a team effort and it is strongly recommended that one of the team has a strong financial background if you don’t have a management accountant on hand. This will help create and develop the business plan before launch and help monitor risks and provide forecasts as the journal develops.
As long as the journal continues to serve valuable functions in the scholarly community then publishers will continue to have an opportunity to develop and tailor appropriate business models to suit market needs.
A successful journal has many key characteristics and this chapter has attempted to show that one of these characteristics is the need to have sustainable business models in place. This requires a good understanding of revenue generation, pricing strategy and cost management. As you move higher up any organisation, the focus changes from individual title performance to portfolio management and creating successful growth strategies.
Knowledgeable financial staff are located close by in most organisations and it is strongly recommended that you get to know the way around your journal finances by getting closely acquainted with the chief financial officer or management accountant for your journal. Working collaboratively you will be able to deliver top line growth and a stronger bottom line.
Heading for the open road: costs and benefits of transitions in scholarly communications – a study commissioned by Research Information Network (RIN), JISC, Research libraries UK (RLUK), the Publishing Research Consortium (PRC) and the Wellcome Trust. April 2011.
1An NISO/ALPSP Journal Article Version Technical Working Group has made recommendations describing the versions of scholarly journal articles that typically appear online before, during and after formal journal publication.