When you start thinking about products, you need to think about the process, from creating a product, to selling it, to providing after-sales service. Most products will follow a process that has the following steps (see Figure 5.2). For now, I want to briefly introduce these main steps—I will then go on and discuss them in greater detail.

Figure 5.2. The product, from creation, through development, to market, and beyond.

Now that we have agreed on what we are calling a product, what product are you going to sell to your fan base? This is where product development comes in.

You probably looked at the products I listed in the previous section and thought that you wanted to do all of them. (This is not unreasonable; most musicians do want to produce downloads, CDs, DVDs, T-shirts, posters, and live performances.) You probably also got lots of other ideas for products you would like to create.

Let’s look at some of the factors that should influence your choice of which products to develop.

One of the biggest problems will be deciding when a product is ready to be released to the public.

For an artist signed to a major record label, the decision to release an album is usually fairly simple. If the producer says it’s ready, and the label thinks it’s ready, then it is ready, and the album (or whatever) will be released.

If you’re trying to release a product (any product, not just a CD) without having someone with that level of financial involvement, then you need to be really certain that you aren’t releasing your product too soon. When you think that you may be close to release, make sure you distance yourself from the product (as far as you can) in order to stay as objective as possible.

Also, again to the extent possible, consider other people’s opinions. In particular, if you have paid someone to be involved with a product (for instance, a producer), and her reputation is on the line too, then make sure she believes you are ready to release.

Products get renewed: In other words, production of old products ceases, and a new product comes in its place.

Outside of the music industry, product renewal comes in two forms:

This sort of product renewal can be difficult in the music industry, so let’s look at the example of how the video-game industry renews some of its products:

The key difference between these two approaches is that with the first option you are getting more sales from the original product, so you are widening your user base. With the second approach, the existing user base is being asked to replace a product that has become obsolete (and all of the games for the obsolete product can be regarded as obsolete, too)—in other words, people are being asked to buy the product for a second (or third or fourth) time.

These sorts of practices do happen in the music industry. Here are a few examples:

The complete renewal of a product (such as the new video-game console) is a harder task to achieve. The music industry last did this very effectively when it made vinyl obsolete with the introduction of CDs. However, since then it has not managed to renew its products so well. That is not to say it hasn’t renewed—for instance, MP3s, remastered albums, and attempts at higher-quality audio (such as 5.1 mixes) have had some effect.

For your early products, just focus on getting a successful product launched and ensuring that you make a profit. Remember the possibilities of renewal, and don’t make any decisions that would make it harder for you to renew your products.

When you have a portfolio of products, then you can consider whether it is feasible to produce a version two or a version three of any products. Before you renew your products, consider two issues:

Only you know how your fan base will react, and only you can decide upon the right course for your business.

You need to take development time into account to organize your life. Historically, most artists follow a structure in which they record an album, release the album, and then tour to promote the album. The tour is usually booked before the album is finished, so a few months’ gap is left for overruns. If you don’t plan well enough, you could be touring before you have finished and released the album you are meant to be promoting.

Without wanting to belabor the point too much, remember that planning also takes time, so you should include an allowance for planning. (I know it sounds like planning how to plan, but it’s better to remember it than to get it all badly wrong.)

When you are planning a project, there are some activities that can happen only after something else has happened. For instance, you cannot mix a track until it has been recorded, and you can’t press a CD until the songs have been written.

Equally, there are plenty of activities that are not dependent on other activities. For instance, you don’t need to have completed the mix of an album to commission the artwork.

The key to successful planning is ensuring that you have a timescale for each part of the project and then recognizing which parts are dependent on a previous task having been completed and which tasks can be completed independently. Clearly, the tasks that are dependent on a previous task are the hardest to plan, particularly when you are trying to schedule several people together (such as a producer, a mixing engineer, and a mastering engineer).

Turning to focus on the logistics of product development, as a musician you know that there are no shortcuts when you create music. You cannot half-write a song and hope that you are inspired to write the remaining part when you get up on stage and start playing the song. If you’ve only half-written a song, you will find it is impossible to teach the rest of the band the song.

If you are a songwriter, you know that songs get written in many different ways. Sometimes inspiration comes to you, and the song writes itself in as long as it takes you to play it. Other times, you need to keep returning to a song over a long period of time, perhaps agonizing over one word or one note for several weeks. Maybe you write with a partner, or you and the whole band all get in the room and play. Everyone throws in lines and melodies, and together you create perfection that could not be created by any of you individually.

You also know there is no right or wrong way to write a song, although it often feels as if you are using only the wrong ways. This is the nature of the creative process, and how you create is up to you.

However, although I do not wish to put any constraints on your creativity, I would like to make a few suggestions:

How many times have you heard that phrase and wanted to scream? Unfortunately, it is true.

There are things you can do as an artist that will generate money (for instance, writing a hit song), and there are things that do not generate money (sleeping, for example).

Every minute that you are alive has a certain cost. You have to buy food, you have to put a roof over your head, you have to put gas in your car if you want to drive anywhere, and so on. Although you may not be spending money at any one particular moment, over the course of time you do have to spend money.

Therefore, your time as an artist is valuable. If you spend an hour on one project and a year on another project, you will have incurred different costs. Hopefully, the longer project will generate more income. If it doesn’t, then I suggest you complete more of the single-hour projects—they are far more lucrative for you.

When I talk about the cost of time, this is the principle that I am discussing.

When you sell a product, you will receive income—in other words, money. This is great; money is really useful for buying stuff like food. However, you can’t spend all the money you receive, because you will have incurred costs in getting your product to your fans; even if your product is digital (such as a download), there will be costs. In really crude terms, the difference between the wholesale selling price for the product (in other words, the price you are paid for it) and the cost of producing the product is the profit.

The profit is money that you can spend (or money that you can invest to develop more products). If the cost of producing the product exceeds the price you get for selling a product, then you have incurred a loss (which is a bad thing—if you do it too often, you become bankrupt). I make no excuses for spelling out in detail many of the costs you may encounter. If you don’t recognize and factor in these costs, you run the risk of incurring a loss.

There are many costs in developing a product; these fall into the broad categories of development, manufacturing, distribution, marketing, and after-sales service (which I discussed at the start of this chapter). Let’s look at how these may apply to you in a real-life situation. Please bear in mind that many of these areas overlap and may be difficult to separate if you are working on a project, so some of the distinctions I have made may seem slightly artificial.

There are two factors determining the number of products you can sell:

It may sound simple, but the more people you can sell to, the higher your income will be (provided you are selling your product at a profit). Although you may have an excellent product, if your market is limited (for example, taking the illustration I used earlier, if you are a classical guitarist), then there will be a ceiling on the number of people who are likely to buy your product. Therefore, to generate more interest, you need more products (so your income per fan rises).

Only you will know your particular situation and your fan base. In light of this knowledge, you will need to decide whether you should spend more time marketing or more time developing a wider product range if you want to positively influence your income stream.

As a side note, do remember that the rule that selling more products leads to more income is true only if you are making a profit. If you have priced your product at a level that creates a loss, then higher sales equates to greater losses.

At the individual product level, one control you have over the income that flows from each product is your profit margin. Irrespective of the cost of production, many products will have a maximum price above which no one (or only a few people) will buy them. For instance, if you are selling a CD, most people might expect to pay in the range of $8 to $15, and you will find only a few who would be prepared to pay more than $20.

Usually you can’t break the ceiling price for a product. However, at other times you can. For instance, if you are playing a gig, then there is probably a ceiling on the maximum price you can charge for tickets. The solution to generating more income in this situation is to sell more tickets, which you can do by using a bigger venue. Obviously, a bigger venue will lead to higher costs, but you should be able to factor these in to ensure that you make greater profits. Also, somewhat ironically, as you move up to bigger venues, your gigs will become more of an event, which will allow you to price the tickets at a higher level.

In broad terms, the profit you will make from any product is the income from sales (which, if you’re selling through a vendor, will be the wholesale cost, not the sticker price), less the costs.

Some of your costs will be fixed; for instance, once you have recorded an album, any studio costs that need to be recouped through the project will be fixed. As we have also seen, other costs can be managed on an ongoing basis—for instance, you can control the cost of CD duplication by limiting the CD run.

The difficulty with costs is that they tend to be big numbers—they’re usually followed by three zeros, denoting amounts in the thousands. By contrast, income tends to come in small amounts—typically, you’re selling single-digit products (if not less, in the case of downloads). This disparity means that it can take a long time to recoup your investment in a project. If you don’t have any money to fund yourself until you are making a profit, you run the risk of bankruptcy.

I will look at some of the ways you can finance your career and your products while you are waiting for your income to start flowing in the next part, as well as consider the wider issue of income and profitability.

At this point I want to illustrate the costs and potential income from a product with the example of a CD project. For this example, I have invented numbers to illustrate my point. You should not assume these numbers are anything close to realistic. More realistic numbers will be discussed in the next chapter. Also, to make this example easier, I have assumed that you are earning all of the income from the CD (in other words, you are selling it directly and are not giving a cut to a retailer). My final main assumption is that you have a source of income to fund your project. To make the illustration more straightforward, I’m ignoring other sources of income that might flow from the recording (for instance, download sales).

For this project, I am assuming we have an established band of four members, who each draw living expenses from band funds of $2,500 per month (in other words, $10,000 per month for the whole band or $30,000 per year per band member—no one is going to buy a Rolls-Royce on that salary).

I will assume that the time spent during the development phase and the recording phase (up to the point that the CD can be released) is 12 months. In other words, the band’s living expenses will have reached $120,000 over that period.

I am assuming that the band has a reasonable following and that there is a manager who will take 20 percent of the net income (which I am defining as the income less the recording costs, but not including the band’s living expenses). I will talk more about managers in Chapter 8, “Building the Team around You.” There may also be office staff (running the fan club, updating the website, and so on) and other miscellaneous unaccounted-for expenses, but let’s not get too detailed yet.

Anyway, for this album project, let us assume that:

In total, the recording costs come to $100,000. This figure has to be recouped before the band can see any income.

For the manufacturing costs, let’s assume that the band gets the CD pressed in batches with the following costs (including shipping from the plant to the band’s distribution center):

We’ll assume each CD is sold for $10, and I’m also assuming the fan will pay for postage and packing. Let’s assume that there is a credit card charge of 60 cents for each sale, meaning that each CD will bring in $9.40. To make things simple, I am not making any allowance for sales tax (such a VAT or any state or national equivalent).

Before a solitary CD can be sold, the recording costs have come in at $100,000, and the first batch of 10,000 CDs has cost $10,000. Added to this, there is the expense of running the band, which came in at $120,000, so the total spent before any money has been earned is $230,000 (see Table 5.3).

Assuming the first 10,000 CDs can be sold at $10 (bringing in $9.40 after credit card charges), this will generate $94,000. From this, the manager will take nothing because the recording costs have yet to be recouped. After the sale of 10,000 CDs, the project is running at a loss of $136,000.

With the pressing of the next 15,000 CDs, a further $10,000 will be spent, giving a total loss for the project of $146,000 (see Table 5.4).

When this batch of 15,000 CDs is sold, they will generate an income of $141,000. At this stage, the recording and CD pressing costs will come to $120,000 ($100,000 recording costs, plus $20,000 for pressing 25,000 CDs to date), so the manager will start taking her fee. In this instance, the manager’s fee is 20 percent of the income above recording costs (in other words, $94,000 + $141,000 – $120,000).

After deducting the manager’s fee of $23,000, the project is still running at a loss of $28,000. This means that after 25,000 CDs have been sold, each CD now equates to just over $1.00 lost. To generate more income, more CDs need to be pressed. This time 25,000 will be pressed at a cost of $16,000, leading to a total loss to date of $44,000 (see Table 5.5).

If this next batch of 25,000 CD is all sold (making total sales of 50,000), it will generate $235,000, from which the manager will take $43,800 (in other words, 20 percent of the income from the sales less the production cost).

The break-even point is when the expenses have been recouped and therefore any further income is profit (refer to Figure 5.3). At the point that the project sells 29,095 CDs, it will break even, and the band will start to make a profit (in other words, the act will start to generate some income for themselves). However, due to the nature of the product that is being sold here, there is a cost associated with each CD (for instance, the cost of manufacturing and the credit card charge). Accordingly, the break-even point is not as simple as Figure 5.3 may suggest. A more detailed explanation of the break-even point is contained later in this section.

Figure 5.3. An example break-even point. Unfortunately, break-even points are never as simple as this graph may suggest. See Figure 5.4 for a more detailed example.

Having sold 50,000, the CD has now made a profit of $147,200 for the band members—in other words, $36,800 per member (see Table 5.6).

This implies an income for each member of the band of around $66,000 (including the $30,000 living expenses) for just over a year’s work. However, let me add some caveats here.

First, there will be more expenses—for instance, accounting costs, warehousing costs for storing the CDs, and insurance, to give three examples. There could be quite large expenses, such as hotel costs and transportation for the band and their equipment (with roadies) while working at the studio. Second, the band is likely to have to tour extensively to support this album and generate this level of sales. At this level, the income from touring may be quite volatile.

Added to this, it may be two years before the next album is released, which implies the profit would need to be split over two years, giving an income (including the money used to fund living expenses) in the region of $33,000.

Perhaps the most significant caveat is that it is really hard work to sell 50,000 CDs. However, I wouldn’t wish to discourage you from your aim. In fact, why not work even harder and try to sell 100,000? Look at Table 5.7 for an illustration of the income that this sales figure could generate.

As Table 5.7 shows for this example, selling 100,000 CDs could generate a profit for each band member of $126,400, which equates to $63,200 per year if it is split over two years. However, do remember that you may not sell all of your CDs immediately once they have been pressed.

At the start of this example, I put in an allowance of $2,500 per month for band living expenses during recording. If this amount is removed to show the total profit for the project, then the total profit on the project would amount to $625,600. If this figure is split over two years for each band member, it equates to a monthly income of $6,500 (before taxes, savings, or any other deductions).

I will discuss the level of earnings you need to achieve to live on in greater detail in Chapter 7, “Your Pay Packet.” I will also discuss the comparative income you could generate under a typical contract with a record company.

Before we move on, I want to draw to your attention some of the large amounts that have been spent in this project. Some of these charges are explicit (the band has to pay them directly—an example of this would be the studio costs), and others are implicit (and cause a reduction in the band’s income—an example of these would be the credit card charges).

Selling 100,000 CDs at $10 should have generated an income of $1 million. However, the band received only $505,600—in other words, half of the income (and remember that this example assumes the act sells its music directly—the income would have been greatly reduced if sales went through retailers). Let’s have a look at where the rest went.

The figure that leaps out here is the charge by the manager, which accounts for 15 percent of the income (although, do remember that the manager’s charge is 20 percent—the discrepancy arises because some expenses have been set against the income before the fee is calculated). However, before you judge the manager too harshly, remember that this is not straight profit for the manager. From this figure, the manager will need to fund her office and many of the costs of running the band. Also remember that in this example, the manager doesn’t take a cent until the recording costs have been recouped, so there is a risk that the manager may not generate any income.

You should also note that in some ways this is a slightly unrealistic number. Conventionally, a manager will take around 20 percent of gross earnings (that is, earnings before any deduction). However, that percentage is normal when a band may be on a royalty of 18 to 23 percent of the price that the CD is sold to a retailer. In other words, if a CD is sold into a shop at $6.00, then the band might receive $1.20 (before the manager’s cut), and the manager would take $0.24 per CD sold.

By contrast, under the business model set out here, the manager could be taking $1.79 per CD sold. This may sound like a large number until you remember that calculated on the same basis, the band could be taking $7.17 per CD after the manager has taken her cut.

If you are going to adopt this business model, you may want to have a discussion with your manager about what expenses should be included or excluded when calculating her fee.

Just to close off this discussion, if the manager was looking after a band with a major recording company, then she could expect perhaps 1 million albums to be sold, generating a fee of $240,000. However, using this business model, we have assumed that 100,000 CDs are sold, which will generate a fee of $179,000. Although $61,000 isn’t an amount to be sneezed at, the fees for the manager in both scenarios are in the same ballpark, suggesting that the fee level may be reasonable.

I will talk more about managers in Chapter 8.

For me, the next charge that leaps out is the cost of the credit card company. You will see that the credit card charges exceed the cost of manufacturing the CDs. This is not an abnormally high fee (although I did round it up). For illustration, a credit card company may charge 2.9 percent of the purchase price plus $0.30 per transaction. If the CD had been priced at $14, then the credit card fee would have been $0.70. Unfortunately, this is one of the charges you have to accept because there really isn’t a viable alternative.

As you read earlier in this book, one of the benefits of running your own career is that you can retain control. To a large extent, you can decide who you work with and how much money you want to spend. This example has illustrated the costs for producing and selling a CD. However, many of the expenses could have been managed in a different way.

For instance, if you had recorded the album in your own studio, you could have cut approximately $100,000 from the budget (although there will be a cost associated with setting up and running your own studio). By contrast, you could have chosen to work with a producer with a world-class reputation and paid $1 million plus for his services.

One of the most important factors in the project I have just illustrated is the break-even point. This is the point at which the project ceases to make a loss and starts to generate a profit.

In simplistic terms, once you have covered the expenses, then the project will move into profit. (Figure 5.3 illustrated this principle.) However, in reality, the break-even point is actually a moving target, because the expenses get larger over time. With the example I have just illustrated, this is particularly so in two areas:

You will also have noticed from this example that there was no way that costs would be covered with the first consignment of CDs. Indeed, costs were not covered with the second consignment. It was only after the delivery of the third batch of CDs that the project moved into profit.

There was a logic for ordering insufficient product to cover the costs (in other words, there was a logic why a conscious decision was made to order an amount of product that could never bring the project into profit): controlling cash flow (in other words, not spending more money than was on hand so that as much money could be retained in the business as possible). Keeping a tight rein on spending also has the effect of controlling potential losses. If all of the CDs had been purchased in one lump, it would have cost an additional $42,000 (or perhaps slightly less with a discount for bulk). This would have made a total expenditure of $52,000 on the CDs. Splitting the purchases meant that the band was not left with $52,000 worth of unsold stock (and didn’t have to store and insure the stock).

As a side note, you should also remember that there are other sources of income that could be derived from the music (for instance, online sales, licensing for inclusion on compilation albums, and licensing for use in film and television). All of these additional sources of income could be used to offset any losses.

To return to the subject of the break-even point, this is probably best illustrated by the graph set out in Figure 5.4.

Figure 5.4. This graph shows how the break-even point is a moving target due to the increasing level of expenses. When sales income exceeds expenses, then the band starts to generate some income.

As you can see:

Lastly, do remember that some expenses are included by way of a reduction to income (specifically credit card charges, which are not explicitly shown in Figure 5.4).

In Figure 5.4, it may look like the band doesn’t fare particularly well. In this business model, the band takes the greatest risk and finances the project. Unlike under a conventional recording contract, the band will also get the greatest reward. Figure 5.5 illustrates this point.

Figure 5.5. This chart shows how the respective proportions of the income are split as sales increase. With greater sales, the fixed costs become less significant, and the band’s profits increase.

This graph shows how significant each financial element is as sales increase. You will see that initially, all of the income is dedicated to meeting the costs. As the income grows, the manager’s charges are also paid. When the project has broken even, then profits are generated and the band can share in the gains.

However, you will see that as sales continue to increase, the profits increase considerably, too. If you were to extrapolate this graph, you would see that the fixed recording costs (including the band expenses) would become comparatively tiny, and the band’s profitability would increase further. Indeed, as the sales increase, the band’s profits tend toward 80 percent of the net income (but will not reach that figure because there is always the expense of pressing further CDs to meet increased demand). The band will never reach 100 percent income because the manager will always take 20 percent.

One point you should note about Figure 5.5 is that the graph is intended to show the main proportions and does not show (for instance) the expense of credit card transactions. Also, until the break-even point, remember that the expenses will exceed income. Until this point, the graph illustrates the relative proportions of the losses.

As a last point, could I remind you that this is a book about building a career in music, not a manual about releasing your own CD? If you are going to release your own CD, then you will need to undertake considerable research (and hopefully, this chapter gave you some pointers about some of the financial aspects that you should be considering).