CD Cost Breakdown

This is an extract from an interview with Toby Marks from Banco De Gaia.

"These days, £12.99 is a common retail price, so I'll start there. From that figure, 17.5 percent VAT is paid to the government by the shop, so subtract £1.93 and you have a net of £11.06. Shops generally mark up about 50 percent on the wholesale price charged by the distributor, so in this case the dealer price is £7.37, of which 17.5 percent VAT is paid to government by the distributor. Many shops get a discount due to their buying power; small independent labels might get a few percent, while big chains like HMV or Virgin might secure around 10 or even 15 percent. I'll assume an average discount of eight percent, so the net to the distributor will be £6.78. The distributor takes usually between 20 and 25 percent commission, but for this example I'll say 25 percent. That means that the net to the label is £5.09, of which 17.5 percent VAT has to be paid to government by the label, if the label is VAT registered.

"The MCPS (Mechanical Copyright Protection Society) take 8.5 percent of the published dealer price, which, in this case, is 8.5 percent of £7.37. (Bear in mind that the set dealer price declared by the label is not necessarily what they actually receive from the retailers if a discount deal has been struck.) In this example the MCPS collect 63p. This is eventually passed on to the publisher, if there is one, or the songwriter(s), less MCPS commission, which I think is around seven percent. If there is a publisher, they will then take 20 to 30 percent before eventually, many months later, passing the rest on to the songwriter or writers.

"Manufacturing costs vary hugely, depending on quantity and packaging, but if you keep the artwork and packaging simple, a fair figure for a run of 1000 CDs is 60p each. Promotion costs can theoretically be unlimited but, as a very rough guide, £1000 will buy one quarter-page B&W ad in DJ and Muzik magazine, and will pay for 2000 flyers, and a mailout to about 500 people. That works out at £1 per CD for a batch of 1000.

"After these expenses, the label can expect to receive about £2.86. Out of that they will have to pay for recording and mastering, the latter costing anything up to about £1500. You also have to budget for artwork, unless you do it yourself, and the glass-mastering process, which is the actual master the factory creates to produce copies from. To put it into perspective, if you were signing an artist and they were on just a low-ish royalty rate of 14 percent of dealer price, the royalty would work out at £1.03. Paying for that from £2.86 would make it hard to stay afloat at this level. The other option is a profit share which, in my experience, generally means splitting what's left after the label has paid for all of the above expenses, including artwork, promotion and mastering costs. On a run of 1000 CDs, I wouldn't expect to see much profit — in fact, I wouldn't expect to break even. Managers vary, but in my experience they take about 15 to 30 percent of the band's income before tax (in this example, £1.03 per CD). In my case it used to be 17.5 percent of what I received, excluding VAT.

"Be aware that if you are not VAT registered, you will be paying 60p plus VAT (70p) per copy for manufacturing, £200 plus VAT (£235) for glass mastering, and £1000 plus VAT (£1175) for your adverts and flyers. But you will still only be receiving £5.09 from the distributor. What's more, if you did want to increase the price to earn more, in order for the label to receive an extra £1, the retail price has to go up by £2.80!"

If you'd like to see how that breakdown works on paper, here's how the calculations can be done:

Retail Price	£12.99
VAT paid to government by shop	£1.93 (£12.99/1.175 = £11.06)
Net to shop:	£11.06
Shop marks up 50 percent of
Official Published Price to Dealer (PPD)	£11.06/1.50 = £7.37
PPD	£7.37
Shop gets eight percent discount	£7.37/1.08 = £6.78
Net to distributor	£6.78
Distributor takes 25 percent	£6.78 × 0.75 = £5.09
Net to label	£5.09
(Label pays 17.5 percent VAT to government if it is VAT registered)
8.5 percent of £7.37 PPD to MCPS	£7.37 × 0.085 = £0.63
(20 to 30 percent of £0.63 taken by publisher)	£5.09 - £0.63 = £4.46
Manufacturing cost of £0.60	£4.46 - £0.60 = £3.86
Promotion cost of £1.00	£3.86 - £1 = £2.86

So the label gets £2.86, less any artist's royalty at 14 percent of PPD (£7.37 × 0.14 = £1.03), and less mastering, artwork, and wages for freelancers.

I've put these figures into an Excel worksheet; see what happens to the figures when you change the RRP…

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