Authors frequently confuse LIST and NET and, in this way, end up with contracts that pay lower royalties when they believe that they are getting a good deal. Often, they cannot negotiate in ways that benefit themselves because they do not understand this difference and its significance.
Let's break this down. List refers to the retail price of the book. Payment on list means a percentage of the retail price of the book. If royalties are 8% of list (5-8% is typical), then on a $10 book, royalties would be 80 cents; if they are 10%, royalties are $1, on every book sold. Easy to calculate, easy to predict income, and always standardized, no surprises or overestimations.
Net refers to what is leftover after expenses. Gross revenue gets adjusted by a number of expenses: printing costs, printer set-up fees, shipping costs, handling fees, distributor percentage of sales (typically, 40%-55% per book), distributors' initial and continuing catalogue listing costs (without which online sellers and brick-and-mortar bookstores do not learn about the book and/or cannot obtain the book). These are direct costs, and on a $10 book can add up to a considerable amount. Royalties based on net are not transparent because costs can vary (e.g. printing costs often go up with increase in paper expense to the printer), shipping costs will depend upon how many books are purchased at a time (shipping 1-2 books is very expensive and can wipe up close to most of any profit). Catalogue listing and printer set-up fees are a standard, not variable, fee, whether one book is sold or 1000. So, the more books that are sold, the healthier net will be. With a poor selling book, net can result in just pennies. On a $10 book with a typical print cost of $4 and a 55% of sales going to the middlemen, only 50 cents is left as net income if no shipping is required and the set-up fee and catalogue fees are spread over, say, 200 books. So, 50% net (often net is lower) means the author gets 25 cents. And it could be less or near zero if those other expenses come into play or if fewer books are sold so that the set fees are spread across fewer books.
There are some misleading sites (not intentionally misleading) that give figures as royalties on sales; generally, these refer to net. Authors who assume that they refer to list can be making a big mistake without being aware of it. On more than one occasion, I have unsuccessfully tried to show an author where these figures are misleading, but they go ahead and sign these contracts because they like the big numbers (e.g, 25% of sales [net] vs. 10% of list -- 10% of list always beats 25% of net).
Traditional publishers do not typically pay 10%-25% on list, so if those levels of royalties are being discussed, then look carefully, they are likely payment on net. Paying on list would not be possible in most cases, given printing and distribution costs alone.
Assumptions in any endeavor are dangerous. In the book business, assuming that sales = list will result in much lower royalties, and the author may never be aware that his or her $200 check for net could easily have been $1K with list.
Who pays on list? Almost no one. Mainly the big 5 publishing houses. Small publishers, academic publishers, and hybrid publishers almost all pay on net, though there are some exceptions. MSI Press pays on list for the most part although we do have some net contracts. So, if you get a contract from any press other than the big five and list or net is not specified, chances are it is net. This is a very important item to clarify before signing a contract. Negotiate for list if you can. While 5-8% is the norm, so publishers will go higher by a bit. We offer 10%. That is pretty much top tier, but it is a healthy return.
Bottom line: Understanding the difference between the terms list, net, and sales has strong financial implications. Get some help if the differences are unclear.
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