Advanced Label Economics

I’ve taught this many times (at Loyola University, University of New Orleans, Ben Franklin High School, SXSW, Cutting Edge Music Business Conference, and more), but decided that tonight I would put it down on “paper”.

Our “typical” CD Production Costs:
$15,000.00 Musician Fees (does not include our artist)
$10,000.00 Studio/Engineering/Mastering
$ 4,000.00 Producer
$ 1,500.00 Photography
$ 1,000.00 Graphic Design
$ 500.00 Liner Notes

Profit Advance to Artist
$ $$,$$$.00 In addition, we pay a profit advance to the artist on our label. If a project makes a profit we split the profits with the artist, but the artist keeps the profit advance regardless.

PR and Advertising Costs
$ 7,500.00 Press, TV, & Web Publicist
$ 3,000.00 Radio Publicist
$10,000.00 Advertising (print, web, radio)
$ 7,000.00 Buying shelf space at retailers (both brick and mortar & online)
$ 6,000.00 Mailing promotional copies of CDs to press, tv, web and radio

So, before we sell the first CD we “typically” have committed to spend $65,500.00, plus we have advanced the artist profit that we may or may not make.

Here is the breakdown of a $15.98 CD at retail:
$15.98 Consumer pays store
$10.30 Store pays distributor (Store covers its overhead with about $5.68/ CD margin)
$ 8.00 Distributor pays us (Distributor covers its overhead with about $2.30/ CD margin)

Of the $8.00 per CD that we receive we spend approximately:
$1.25 for manufacturing
$1.00 for mechanical licenses (payments to songwriters & publishers)
$0.30 shipping

That leaves us with approximately $5.45 per CD of what is called gross margin. We generally receive this money 90-120 days after the CD is sold.

That means that our break even is $65,500 in costs divided by $5.45 per CD gross margin = 12,018 CDs.

That’s where you come in.

4 thoughts on “Advanced Label Economics

  • Great post, Mark! It is cool to see it all outlined in writing, and it certainly makes me appreciate why I spend so much on music every month.

    How has the digital distribution of music changed the economics? Do you see it changing them more as we move further away from physical disks?

  • I am going to expand my post in a day or two to cover the digital media, but here is a brief answer to Gumbo Show Joe:

    For a typical $9.99 album download we receive $5.95 and we pay about $1.00 to the songwriter/publisher. The digital store pays our digital distributor about $7.00 and our digital distributor keeps about $1.05. The digital distributor makes sure that 100's of platforms have our music, and provides us with a single payment and most important a single accounting by track of all payments each month.

    Therefore, our gross margin is about $4.95, nearly the same as a CD. Advantages are that we don't have to carry excess inventory in our warehouse to be ready for demand, place extra inventory in stores in order to ensure enough visibility, or wait for returns. We also don't have to worry about whether the product is in stock.

    The downside is that there is no packaging which might include information about our website, our other artists, or biographical material about our artist to help the consumer become more familiar with the artist. Downloading also means that consumers can pick and choose tracks. For our artists, who work on creating an album, this is contrary to their artistic vision.

    Since we are dealing with a digital media, the digital transfer is certainly most efficient.

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