This article is from the misc.writing Writing FAQ, by Wendy Chatley Green email@example.com with numerous contributions by others.
You pay a vanity publisher to turn your manuscript
into a book. There is nothing wrong with this, per se--as
long as you realize that *you* are responsible for all the
costs of printing and binding. The vanity publisher will
not market your book, store the copies, ship the copies
(other than to your address) or do anything else that a
royalty publisher will do after they buy your book.
(What's a royalty publisher? One who buys your book,
markets it, sells lots of copies, and sends you the
royalties. You do not pay them--they pay you. This is the
goal for which most writers aim. Royalty publishers also
place books in bookstores, get them reviewed in newspapers
and magazines, send authors on book tours--things that
vanity publishers never do.)
Subsidy publishers fall between these two types. A
subsidy publisher asks that you pay something towards the
cost of printing and/or marketing your book; i.e., you
subsidize some or most of the publishing costs. Subsidy
publishers sometimes will market your book and perform other
services, often for an additional fee.
Note that many retail booksellers pay no attention
to the order lists from subsidy publishers. Reviewers
ignore the books sent them by subsidy publishers. Because
of this, even a good faith attempt to market your book by a
subsidy publisher may fail to earn any money.