The easy answer is that publishers estimate the number of copies the book will sell the first year. They take into account the author's experience, the subject matter, and the likely audience. They compare the acquisition to other books of that type and also the timing. A book, for example on physical fitness may be well written and carefully researched but others have written on the topic in recent years. They'll probably know about the book's competition and compare it with what other publishers have done. They'll either know or guess what other publishers paid for similar projects and how their sales went.
Publishing houses already have a pro-forma analysis program that calculates
• the costs involved in the editorial work. What level of editing does the book need? Some books have excellent content but need a virtual rewrite. Others need someone to add more substance.
• the costs of producing the book, which includes the format, trim size, paper costs, number of copies they'll do for their first print run. This includes the royalty scale.
The amount of advance royalty is a good indicator
of the publisher's expectation for your book.