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…

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Dr Boyce Watkins says “Don’t try to make money rapping, start a business instead”

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Dr Boyce Watkins from Your Black World speaks with a young artist Jay Ortiz  about the importance of approaching the music industry with a business mindset. The focus of artists building stages instead of them looking to just jump on to a stage, was the main focus of discussion which was what Jay Ortiz managed to do.

When we started Lavatory Records, it was not just about starting a label, rather more about setting up artists as business people.

Watch this discussion on YouTube or  SoundCloud.

 

The elevator to the top: what is the selling price of fame? 

 

In this era of the music economy many artists are looking for sponsorship and endorsement deals, to compensate or supplement for the lack of revenue meant to be generated from album sales and royalties. We’ve already discussed many of the quantitative aspects pertaining to an artist’s branding concepts in previous article published in 2016. So, in this article we’ll be giving a qualitative perspective on how an artist can monetise from fame. This is to add further understanding for artists to be able to integrate the information from the music economy series and convert it into a business model which works best for them.

We’ve seen instances where some artists seek attention through all sorts of strange manners, just to “stay relevant” and become the talk of the town. As a basis of income levels, terms such as ‘mass markets’ and ‘niche markets’ are thrown around. These are two broad types of economic markets, which enterprises try to target in order to generate revenue and grow their businesses. According to the Chron, “the term mass market refers to a large, undifferentiated market of consumers with widely varied backgrounds. Products and services needed by almost every member of society are suited for the mass market.” This mainly means that, this would be inclusive of a market of people of all income levels, which does not exclude anyone. For artists, this offers them a chance to sell to as many individuals as possible – for as long as the merchandise price point does not exclude consumers from lower income groups. In musical terms, this could be assumed as catering to the mainstream audience who make up the majority.

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Music Royalties in the “free” digital age

An interesting debate has since sparked, following the revenue creation through music royalties article that we published on the in June 2016. It’s a known fact that traditional radio and TV stations usually make money through advertising revenue and subscription fees. In all forms of media (print included), the assumption has always been that media communications,  as a service, were paid for by the consumer.

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However, the Internet era has presented independent artists with a variety of platforms to ply their trade on, with some being free. This is one of the reasons why social media as a free service, has become the most popular method for musicians to market their music and content.

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Your bargaining power as an artist is in your ability to walk away!

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The term bargaining power is a concept that was widely discussed by economist Michael Porter, when he conceptualised the “Five Forces Theory”. This framework as developed by Porter is a business industry analysis tool to measure a business’s performance in terms of profitability and strategic sustainability. Porter listed these five elements: Threats of New Entrants, Threats of Substitutes, Degree of Rivalry, Supplier Power and Buyer Power. The real reason any business would do an industry analysis is to gain a competitive advantage over other rival firms. Quick MBA gives an extended explanation of Porter’s five forces theory.

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Value Chain: The kind of relationships you form will make or break you

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While growing up you may have heard sayings like “birds of a feather flock together”, “you are who you surround yourself with” etc. These sayings, pertaining to the company one chooses to keep, may be cliched but never get tired. The fundamental principle is that those who value the same things and share the same interests will find each other; and therefore naturally add value to one another. The concept of value adding is very important in trade and commerce and can be applied in music too.

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According to Investopedia: “Value added is the enhancement a company gives its product or service before offering the product to customers”. In the context of the artist operating within the music industry, this would entail the artist having to take the role of being a producer in the economic sense. Your music composition would be adversely affected by your band mates, featured artists, music producer/ beatmaker, your post production audio engineer, and the publishing house that manufacture your CDs – all these people would be established as adding value to your final song as a product. These inputs ultimately affect the final outcome of the song you compose, to which you (as a composer) would find hard to quantify. This means, for as long as you as the composer/producer and your fans are happy with the final product, how much you spent into creating that piece of art is of little importance. Bearing in mind that the entire process of the creation of your work does not leave you in a pool of debt and you are staying within your means.

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Opportunity Cost – The cost of taking that free gig!

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For many artists who are just starting out in their career there is always the possibility of finding themselves in a situation where gigs or bookings will be rewarded by “do it for the exposure” phrase as much more polite way of saying “you will not get paid”. Many will usually rant and rave and start talking about exploitation and being taken advantage of. However, there are a few things one must consider before writing off an opportunity. This again is a principle of economics in regards to Opportunity Cost, starting from analysis of one’s economic situation at individual level. By mastering the principles of being able to stay within and below your means, you would then be able to maximise off opportunities through developing an investment.

What we are saying at Lavatory Records: STOP COMPLAINING! No one can do to you what you don’t allow. Think carefully before deeming situations as “exploitative”. Taking a free gig can be beneficial to one’s career if done under the right circumstances.

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Music Economics: Stay within and below your means!

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Continuing in the series of establishing a music economy, we want to stress to all readers that you must remain economical and grow incrementally by staying within and below your means. The universally agreed way of making money in the music industry, is through live shows. Live shows on their own are a great way to explain the applicability of economics. The concepts of understanding the equilibrium and developing good habits in this regard, will ensure you stay within your means.

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Being a music producer entails building your music economy

As often mentioned here on Lavatory Records, the music industry is in a state of a “breakdown” – in order to rebuild. We regularly get approached by young musicians who ask how they can build their careers and make a living from their passion. It is a rather difficult question as there’s no actual blue print laid out for everyone to follow

Being a musician or working within the performing arts is a profession that has its own sets of challenges. Compared to other ‘formal’ professions like being an accountant, music has no clearly defined path of advancement, where you would know for sure that in about 7 years you’d be worth and making a certain amount of income marking your set value. 

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