In keeping with the spirit of an album release, today we’ll talk about how to price your album. There are many different factors to consider when establishing a price, such as how much money you put into the making of the album (studio time, artwork, photography, advertising); how much money you hope to earn from sales of the album (after dividing money between band members, paying income tax, manufacturing overhead), and ultimately, what you think the album is worth.

Manufacturing Overhead: Overhead is the cost of doing business. So you rent a studio space for $500 a month, it costs you $750 to press new merchandise each month, and your entire band needs a cost of living wage; so when it’s all said and done, your overhead is likely several thousands of dollars per month.

Income Tax: Taxes paid on all incoming revenue. If you are a solo artist or sole proprietor, or your band is a co-owned LLC, you would generally pay the IRS your income tax quarterly as an independent contractor.

Many artists calculate what they’ll sell their album for by starting with the product cost. What I’ve heard a lot of bands say is “the CDs each cost $2 to press, so we need to earn at least $2.” This is called break-even pricing. What this strategy vies for is earning enough revenue to cover the cost of manufacturing. What it doesn’t take into account is how much money it cost to record the album in a professional studio, how much the photographer was paid, and how much time each band member spent practicing, recording, and promoting. Unless you’re opting for the freemium model (which we’ll discuss later on), this is the best worst-case scenario.

If you want to earn a profit on the sale of your records, what you’ll likely want to do is markup your sale price. Cost-plus pricing is when you consider the initial cost of manufacturing and add (plus) your desired profit. So it takes $2 to press each CD, and you want to earn a minimum of $5 profit per sale, so you sell each album for $7. In today’s economic environment, is this the most realistic price? If every other musician on the planet is selling their album for only $5, and you are selling yours for $7, who do you think the audience is more likely to support? Unless you have added value (bonus tracks, free downloads online, music videos, etc.), your competition is likely to prevail. Competition-based pricing is just that- pricing your products at the same price or lower than your competitors. I’m sure you’ve seen gas stations across the street from one another lowering their prices by mere pennies just to gain market share; well it’s not much different in today’s music industry where supply greatly outweighs demand.

Gross Profit: This is the amount of money you make before paying off your band members, income tax, and using the band fund to cover costs such as hotels and meals.

Net Profit: This is the amount of money that you earn after all expenses are paid. So you sold $1,000 worth of albums, but after living expenses, taxes, and per diems, you’ve got about $40 bucks.

With the increase in streaming programs such as Spotify, Pandora, and Rdio, many consumers, especially die hard music fans aren’t even buying much music anymore. Sure, they might pick up a vinyl record or download an album on bandcamp to support an artist they love, but in 2014, several artists surpassed over one billion plays each on Spotify. With this technological shift in the way we consume music, many bands, especially indie ones, are opting for pay-what-you-want or freemium pricing strategies.

Pay-what-you-want is so simple that it makes you wonder why no one thought of it years ago. Radiohead was one of the first bands to successfully execute this model with the release of In Rainbows in 2008, which saw millions of downloads worldwide. Many indie artists are using the PWYW method as a gamble. Realistically, most people will probably download your album for $0, but every once in a while you might get a very generous benefactor. I remember one time I was hawking my old band’s EP for $5 at a Warped Tour stop in New Jersey, and after hearing us, a young woman offered $20 for the 5-song EP that we recorded in our singer’s basement. She was heavily intoxicated and clearly incapable of making financial decisions, so I declined her offer as many times as possible before she simply shoved the $20 in my face. I gave her $20 worth of merchandise and sang her a few tunes on my ukulele, making damn sure she got her money’s worth, as that was the first (and last) time anybody paid me $20 for my music.

Finally we’ve arrived at the current trend in indie music, the freemium model. When I was going to university for marketing, I had always heard a term called “loss leader” which is a strategy that works well for major corporations. A loss leader is a product that the company sells for a low price or gives away in order to drive consumers to their establishments in the hopes that they will buy other items on which the company will profit. McDonald’s sells $1 large drinks in the summer in hopes that the customers will buy Big Macs and whatever other expensive crap they sell. It usually works. In the music industry, time and time again artists are realizing that the best money they’ll make is on the road. And how can you guarantee that people will come out to see your concert? Well, you can’t really, but giving them free music is definitely a start.

Recently, U2, one of the biggest bands of time immemorial, released their latest album for free on iTunes to all of its users. In all of my years avoiding pop radio and television, I suddenly found myself with a copy of an album which I had previously gone out of my way to avoid. I’d be lying if I didn’t enjoy the U2 tracks that came up on my shuffle, but will I ever go see them live? Probably not, but if it were a local band whose concert I could afford attending, I would definitely be more inclined to go than if they were charging me $10 to listen to their album.

We’ll touch on pricing again as we get into the 4th P, Promotion, covering topics such as discounts and incentives, but for now this is most of what you need to know in order to start pricing your album. Tune in next week to read about place; also known as distribution.