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It’s a good idea to examine what major record labels offer their artists and determine what is feasible for you as a fledgling label.
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Written by: Carolyn Young
Carolyn Young has over 25 years of experience in business in various roles, including bank management, marketing management, and business education.
Published on November 3, 2021
Updated on September 23, 2022
Investment range
$14,700 - $30,300
Revenue potential
$120,000 - $360,000 p.a.
Time to build
3-6 months
Profit potential
$24,000 - $72,000 p.a.
Industry trend
Growing
Commitment
Full-time
We all love music, which makes music big business. We know the names of the big record labels, but there are many smaller record labels in the industry. If you have a passion for music and discovering new bands, you could start your own record label and maybe someday you could be one of the big names.
Starting any kind of business, however, takes a lot of work. The key is to have the knowledge that you need before you start so that you avoid common mistakes people make when starting a record label. Here we provide a comprehensive 13-step guide to help you build a profitable business.
Starting a record label requires time and effort. You will be taking a significant risk, so educating yourself is critical before making the decision to launch your business.
Every business has its positives and negatives, which you should weigh before deciding if starting a record label is a good fit.
Here are some basic pros and cons of starting and running a record label.
In 2021, German research firm Statista valued the global music industry at nearly $29 billion((https://www.statista.com/statistics/272305/global-revenue-of-the-music-industry/)) despite the pandemic taking a chunk out of the previous year’s revenue mainly due to canceled concerts and festivals.
But music streaming has increased sharply of late, and independent record labels today control nearly 42% of the market, with more than $3 billion in annual revenue.((https://www.statista.com/statistics/587216/music-streaming-revenue/))
In the past decade, according to Statista, streaming revenue has leapt more than 30-fold, from just over $400,000 in 2010 to $13.4 billion in 2020. The opportunity is there for the smart entrepreneur.
Trends in the record label industry include:
Challenges in the record label industry include:
The most popular music streaming platforms in the US as of 2021 are:
The startup costs for a record label can range from about $15,000 to $30,000. These totals assume you’ll be setting up a recording studio, which you can do in your home when you’re first starting out.
You will need certain items to launch your record label. Here’s a list to get you started:
Start-up Costs | Ballpark Range | Average |
---|---|---|
Setting up a business name and corporation | $200 - $200 | $200 |
Licenses and permits | $200 - $300 | $250 |
Insurance | $100 - $500 | $300 |
Business cards and brochures | $200 - $300 | $250 |
Website setup | $1,000 - $3,000 | $2,000 |
Initial marketing and promotions budget | $2,500 - $5,000 | $3,750 |
Studio equipment and setup | $10,000 - $20,000 | $15,000 |
Legal costs for contract drafting | $500 - $1,000 | $750 |
Total | $14,700 - $30,300 | $22,500 |
Your profit will vary depending on:
Your largest ongoing expense will be promoting your artists and your label. Choosing to produce albums or CDs will of course increase your costs, but most small record labels today are digital-only.
Record labels generally have profit margins from 15 to 20%. If your artists bring in a total of $10,000 in monthly revenue from the start, your annual revenue for the first year will be $120,000. At a 20% margin, this would mean a profit of $24,000.
As your brand gains recognition and your artists become more popular, revenue should increase, perhaps to as much as $30,000 per month. This would mean annual revenue of $360,000 and a tidy profit of $72,000 if you’re able to maintain your margin at 20%.
The barriers to entry for a record label are high. Your biggest challenges will be:
Now that you know what’s involved in starting a record label, it’s a good idea to hone your concept in preparation to enter a competitive market.
Since you have no track record in the business, you need to find a way to stand out from the competition.
Look at what is happening in the music industry. What types of music are hot today? Might you know any emerging artists in those genres? It’s best to get out and network, attend industry events, meet music professionals, and become part of your local music scene.
Choose your preferred genre of music and then seek out strong, undiscovered artists. A good way to start is to check your local event listings and start attending concerts you find of interest.
Your products, essentially, are the artists that you sign. You will be promoting and selling them so that they generate revenue. However, you are also providing services to the artists: recording, promoting, and distributing their music; and helping them build their brands.
It’s a good idea to examine what major record labels offer their artists and determine what is feasible for you as a fledgling label.
As the label owner, you will need to pay commissions to your artists, as well as their songwriters and publishers. Artists typically receive 10-15% of the revenues from their music, while composers and publishers receive 30% or more, which means you as the label owner will end up with about 60% of the revenues, give or take.
Publishers are responsible for the music itself and ensure that it is protected by copyright laws. They handle the future use of the music, as when music is covered by another band, for example.
When everyone else is paid including the artist, the record label generally receives about 60% of the revenue.
It might be a good idea to research other record labels and examine their commission models. Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.
Your target market will depend on the genre you choose. It’s probably wise to first find promising artists, then orient your label and promotions toward their genre.
In the early stages, you can have a studio in your home at first and run the entire business from there to keep costs low. But as your business grows, you’ll likely need to hire workers for various roles and may need to rent out an office and a separate space for your studio. You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.
When choosing a commercial space, you may want to follow these rules of thumb:
Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.
Here are some ideas for brainstorming your business name:
Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.
Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that setn your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.
Every business needs a plan, a rough outline that helps guide a startup through the launch process while maintaining focus on key goals. A business plan is also crucial for helping potential partners and investors understand your company and vision:
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist at Fiverr to create a top-notch business plan for you.
Registering your business is an absolutely crucial step — a prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.
Plus, registration is exciting because it makes the entire process official. Once it’s done, you have your own business!
Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to record labels.
If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state.
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your record label business will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the main options:
We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using ZenBusiness’s online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.
The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.
Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate on a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.
The IRS website also offers a tax-payers checklist, and taxes can be filed online.
It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.
Securing financing is your next step and there are plenty of ways to raise capital:
Bank and SBA loans are probably the best options, other than friends and family, for funding a record label business.
Starting a record label requires obtaining a number of licenses and permits from local, state, and federal governments.
Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits.
You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more.
You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.
This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties.
If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.
Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.
Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your record label business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.
Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.
Business insurance is an area that often gets overlooked but is vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.
Here are some types of insurance to consider:
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.
You may want to use industry-specific software such as Reprtoir, AMPsuite, and SoundCloud to manage files of tracks and videos, share playlists, make royalty accounting easier, find new artists, and more.
Some of your business will come from online visitors, but you should still invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness.
Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products:
Take advantage of your website, social media presence and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:
Website development is crucial because your site is your online presence and needs to convince musical acts, and their fans, of your expertise and professionalism. They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google.
You can create your own website using services like WordPress or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web developer to create a custom website for your business.
Unique selling propositions, or USPs, are the unique characteristics of a product or service that set it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your music label meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.
Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your record label could be:
You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a record company, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in the music industry for years and can offer invaluable insight and industry connections.
The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in music. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.
Since your label needs to have a recording studio, you will likely need to recruit some employees right off the bat. These would include:
At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.
Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.
You’re now ready to start your record label. If you’re lucky, you’ll just need a couple of artists with a huge fan base to make your sales go through the roof. It’s wise, though, to always be on the lookout for promising new artists. Once you find a few, consider if their genre is what you want to focus on. You may want to be open to more than one genre at first so that you don’t miss out on artists with real potential.
Either way, to sign high-potential artists you are going to have to sell yourself and your label and have a comprehensive marketing plan for those artists.
Depending on the quality of your equipment, start-up costs for a record label range from about $15,000 to $30,000 if you set up your recording studio in your home. Better quality equipment is often worth the investment because it will likely produce better music.
It’s pretty much impossible to start a record label with no money. But that doesn’t mean you can’t find another way. Reach out to everybody you know and ask if they might have access to funds or potential investors. An entrepreneur should be willing to exhaust his or her contact list to fulfill his dream.
There are several bits of red tape to complete. You’ll need to establish your business name, choose an entity type, register for taxes, and obtain the required licenses and permits for your area. For a record label, you will also need to hire an attorney to draft contracts for you.
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