Money Making Blueprint: How Do Record Labels Make Money?

Money Making Blueprint: How Do Record Labels Make Money?

Written by Jaron Lewis

If you want to make money in the record industry, but you don’t have much in the way of musical talent, you can start your own independent record label. This is also an option for musicians who are having trouble getting signed with a major label.

Before you set out on this venture, you need to know how record labels work. Most importantly, you need to understand how record labels make money.

How The Big Labels Do It

Independent record labels make money the same way the big players do. They choose the artists, arrange for recordings, have the tracks mixed and mastered, get cover art designed, and put the music out into the world, either on CDs or digitally. They are also responsible for marketing the records, getting gigs for the artists, and making sure radio stations are playing the songs.

When someone purchases a CD or a download of a song or album, the label takes a percentage of the profit. Typically, the label gets 15-20% of the profit made when an album or song sells.

Image Via Universal Music Group

Traditional Distribution

Major labels usually deal with distributors when they sell their artists’ music. These distributors make sure the albums get displayed where they can be sold. Smaller, independent labels often begin by selling directly to listeners, since they typically won’t be able to get a deal with a major distributor.

This means you, as an independent label executive, will be doing a lot of selling. You will sell albums at shows, at flea markets, on street corners, and maybe even directly to music stores. This requires a great deal of entrepreneurship and work. If you’re not ready to be a salesman, this is not the career for you.

Digital Distribution

Lately, CDs and other physical forms of music have fallen in popularity. Most people are buying their music in digital forms these days, on sites like iTunes and Spotify. If you want to make it as an independent record label, you need to understand how to make money by selling music on Spotify, one of the more popular sites.

Making Money Using Spotify

Spotify is a free music streaming service, although there is also a paid, premium option available that eliminates advertising and allows you to listen to saved music offline. Since so many Spotify users don’t purchase the premium option, how can a record label possibly make money by putting music on its platform?

Spotify keeps a record of every time that a song is played. They then pay out a small amount to the record label for each of those times. It is a very small amount, usually less than a penny per play. While this is less than you would get if you sold a song or album on iTunes, these amounts can add up if a song becomes popular. The record label takes a percentage of Spotify profits in the same way they would take a portion of physical record sales.

Also, if an artist gains some popularity through Spotify promotion, this can translate into concert ticket and merchandise sales, which the record label also takes a percentage of.  For this reason, Spotify should not be ignored as a potential source of income for record labels.

Don't Give Up

Making money as an independent record label is hard, and requires a lot of work. For those who understand how the business works, and who take advantage of all opportunities to make money, it should be a little easier to start making money.



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