I spend most of my “spare” time these days working through the Executive MBA Program at the University of North Carolina at Chapel Hill. When I get the chance I try to tie in the program’s curriculum to the music business. Below is an excerpt from a contribution margin analysis project I did in my cost accounting class on the different channels where indie musicians can sell their music online.
The goal of an analysis like this is to assume all the fixed costs (recording, mastering, etc.) are sunk costs and examine the individual variable costs and revenue from the different lines of business. In this case the different lines of business include both direct and indirect (through a distributor) eCommerce sales of individual track downloads, full album downloads and physical CD sales. The data used in this analysis comes from an indie band who self released a new album in 2010 and uses a mid-tier distributor for both physical and digital distribution.
For those of you who just want to know the bottom line of this post here it is: musicians can make more money selling their music directly to fans online versus selling their music through online retailers like iTunes or Amazon. Utilizing direct eCommerce solutions like the ones offered by Audiolife, Bandcamp, CD Baby, Nimbit and TopSpin indie musicians can sell music directly to their fans and keep more of their hard earned cash at the end of the day.
I’m not suggesting artists shouldn’t use distributors to sell their music through retailers, they should. Artists should have their music available anywhere fans want to buy or access it. But let’s face it; turning a profit by selling music is tough and collecting every possible penny helps at the end of the day. Since selling direct typically provides better margins artists should seriously consider directing fans to their own webstore instead of iTunes the next time they play a live show or send out a newsletter.
If you are part of the minority of people on the planet who find reading cost accounting analysis projects riveting then please, read on!
Musicians now have more ways to sell their music online then every before. There are numerous online music retailers (including giants iTunes and Amazon) musicians can readily access through distributors for a relatively low cost. Musicians also have the multiple options available for easily and inexpensively setting up an eCommerce store on their website, allowing them to sell directly to their fans. The three primary types of eCommerce based sales available to musicians today: individual track downloads, full album downloads and physical CD sales.
The goal of this analysis is to determine if direct eCommerce sales or eCommerce sales through online retailers provides better contribution margins to musicians.
|Direct eCommerce Sales|
|Individual Track Download||Album Download||CD Purchase|
|eCommerce Provider Fees||$0.30||$3.00||$0.48|
Contribution Margin $
|Contribution Margin %||69.70%||69.97%||69.67%|
|Retail eCommerce Sale|
|Album Download||CD Purchase|
|Contribution Margin %||56.00%||56.00%||30.49%|
The variable costs for direct eCommerce sales include service provider fees of $.30 per transaction for individual track downloads, $3.00 per transaction for full album downloads and 4% of sales for CD sales. Direct CD eCommerce sales have additional variable costs of manufacturing the CD’s ($1.00 each), shipping costs ($3.00) and labor costs associated with manually fulfilling the order (5 minutes @ $20 /hr rate = $1.66 per order). The variable costs for online retail download sales include retail fees (30%) and distribution fees (11%). The variable costs for online retail CD sales include retail fees ($4.84 / unit), distribution fees ($3.15) and deduction fees from the distributor (8% of retail sales).
The contribution margin of direct eCommerce sales in all three product lines (individual track download, full album download and CD sales) is superior to the contribution margins of retail eCommerce sales by at least 10%. This data suggests bands should always direct fans to their own direct eCommerce store rather than to online retailers such as iTunes or Amazon when marketing their music to fans.