The Three Parts To Every Transaction Musicians Need To Know
File Under: Building Your Music Business
Your music business -- and the money you make -- is never straight forward. Although some fans might pay you directly for some transactions, most filter through a chain of people: the customer and the business activity, a middleman, and you. Understanding how these three parts work and the effect they can have on the money you make will help you make the best choice when choosing what services to use for your music business. To help you make the most of your time and money, it's worth understanding these fundamental concepts and dive into the details:
1. The Customer and Business Activity
If you're going to be successful in selling your music, you need to define your customer as clearly as possible and know what drives their business activity with you. For example, it's easy to understand the customer when you sell your music in digital stores: the customer is the fan purchasing the music and so you know how to influence them to improve your sales. But who's your customer when it comes to royalties? For radio stations, it's the music directors. For movies, TV, and advertising, it's the music supervisors that choose the music. These are the people who influence how often your music is performed so that it gets picked up in Performing Rights Organizations (PROs) surveys to generate the income. Getting these "customers" to do more business for you are very different from selling music directly to fans.
Here are other examples of who your customers are and their business activities.
- Digital Music Sales: Music fans buying music. This could be further broken down into different groups that might like your music if you write for many different demographics (that you should use stats to understand) or different genres of music.
- Radio Performance Royalties: Driven by Radio Station music directors choosing to play your music on their stations. The more often played, the more royalties generated.
- TV, Film, Ad Performance Royalties: Driven by being placed by music supervisors, cue sheets being delivered to your PRO, and the shows, ads, and films being played often enough to get picked up in surveys.
- Sync Licensing: Driven by being placed by music supervisors, and executing a contract with the media company.
In today's music industry, for most business activities, you'll be choosing your middleman before doing anything with your customers, since it's the middlemen like digital music distributors who help in getting your music out in the world to your fans or PROs to collect the money for performances (including your own.) You'll want to choose your middlemen carefully, not only because they're your business partners, but also because they each have different strengths and weaknesses. Plus, they each take a different cut of money for their services.
Here are examples of middlemen that you might be working with:
- Digital Music Distributors: Organizations that get your music delivered to music sales and streaming outlets like iTunes, Amazon, Spotify, and more. Examples include CDBaby, Tunecore, and Distrokid -- each with a very different royalty and cost structure.
- Performing Rights Organizations: Organizations that collect royalties on your behalf and distribute it based on surveys of places where your music can be performed. Examples include BMI, ASCAP, and SESAC -- each having different strengths and weaknesses on how they track music and distribute funds.
- Print on Demand Merch Manufacturers: Print-on-demand merchandise manufacturers each have different cuts, options, fees, and even minimums before they pay you the money you made, and you need to compare them before you choose which you'll use.
Although this is third on the list, it's one of the first things you need to set up correctly so others can transact and do business with you. Each middlemen you work with will be asking for a Tax ID. The questions for you will be:
- Sole Proprietorship: Will your tax ID be your personal social security number with all business income and expenses tracked through your personal taxes?
- Business Entity: LLC or Corporation: Will your tax ID be an Employer Identification Number (EIN) which is used to identify a business entity such as an Limited Liability Company (LLC) or corporation? If so, then you can separate your business income and expenses separately from your personal taxes requiring you to fill out another set of taxes and tax forms each year.
Keep this fundamental structure in mind as you build and plan out the next phase of your music business. You'll be more effective at choosing the right business partners to do business with, as well as better at generating business from your customers to drive more income.
#musicbusiness #distribution #royalties #businessPhoto credit: Steven Depolo