Profit Margins in the music business: How much should an artist give away and retain in this present music economy?

Lavatory RecordsIn the current paradigm music artists find themselves in the position of being wholly independent, which leads to many of them thinking they would be entitled to keep all of their earnings! Unfortunately, it doesn’t quite work like that, as “independent” doesn’t necessarily mean that an artist did everything by themselves – it’s actually quite the opposite! The more successful artists are the ones who actually know who to keep in their circle that make valuable contributions towards their careers.  Through various forms of revenue such as royalties, commercial deals, album sales etc, an artist would somewhere down the line have to pay people who are imperative to their success. This ties in with subject we have covered in our value-chain analysis article. The music economics series this time around discusses how special people are compensated for their efforts.

The splitting of the revenue comes in the form of management fees, agent commission, distributors duty & fees etc. All these forms of revenue split vary and depend on how the artist’s bargaining power is determined. The final fee or cut (in percentage form) from the point of view of the product or service (music album or stage performance)  an artist has to sell, goes a number of ways to cover expenses and then to determine how the profits are split. The moment the conversation comes to profit splitting, there are a number of dated principles that are still presently applied that need to be understood first before deciding to part with 10%, 20% or 30% and so on…

Circumstances that would ensue a ten percent split entails that the artist would keep ninety percent of the takings, implies the covering of administration costs (to management for support functions that are document intensive) or are considered as gratuity for services. The concept originally stems from the church system where one pays over tithes (ten percent) of their earnings. In earlier times churches were central to how a society functioned and are considered the earliest form of government, as this is also how the taxation system came about. The ten percent split is commonly used in business as incentives for commision to a sales person, who closes a deal on behalf of a business or even towards a person who refers a significant amount of business to a company, firm or an individual. This ten percent also encompasses the concept of goodwill in accounting terms where “goodwill could refer to some value that has been developed within a company as a result of delivering amazing customer service, unique management, teamwork, etc”, which is all about reputation enhancement of a brand or an organisation!

Lavatory Records

In the case where an artist decides to give away 20%, that stems from the Pareto Principle. According to Investopedia the Pareto Principle is named after economist Vilfredo Pareto, and specifies that 80 percent of consequences come from 20 percent of the causes, or an unequal relationship between inputs and outputs. This principle serves as a general reminder that the relationship between inputs and outputs is not balanced. The Pareto Principle is also known as the Pareto Rule or the 80/20 Rule. In the context of music, it could mean that the 80% of operations should be accounted for and settled, before an artist pays over twenty percent to agents or other beneficiaries/intermediaries. The other way to apply it is where an artist remembers to pay themselves first by keeping twenty percent of takings as profit, before then making sure the remaining 80 percent is there for variable costs, priority splits, fixed expenditure etc. The Pareto principle is very flexible and adaptable, which is why it is a highly popular concept to apply especially for commercial growth.

Where the revenue splits are deemed more than twenty percent (thirty percent for example) – it would be a fusion of the Pareto Principle and the tithing system working in tandem. When the split of takings go up to fifty-fifty, this is where the principle of equal partnership then kicks in just like in marriages. When the splitting of revenue goes beyond the fifty percent threshold, it means that an artist’s network of stakeholders has more bargaining power than the artist. Hence in business terms a fifty one percent (51%) means a controlling stake in all affairs, at that point it might be good for an artist to start reviewing the ownership aspect of the products/services. The other review would be to do an audit of their money flows against the contracts they have with all partners down the value chain.

The important thing for artists to remember is to always remain cognisant of their worth and bear in mind that nobody makes it to the top on their own. Money is energy and the energy that goes into building an artist’s career, needs to flow back into the influencers who contribute to the cause.

 

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