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Digital Versus CDs: A Cost Benefit Analysis

If I was to give you a CD today, do you have the equipment to play it? I know I have a hard time playing CDs. If I am at home, there is no place to play any CD. The two places I have the ability to play the CDs are in my wife’s car and on my PC at the office. The question then becomes, for artists, is it still worth it to put your music on CDs or should you go down the digital route and forget all the hassle with CDs?

If you were to Google whether CDs are dead, you’d find plenty of articles and people who have essentially declared that CDs are dead. Well, it really doesn’t matter what my or anyone else’s opinion is, and who cares whether I have a CD player or not? What do the statistics tell us? Based on the ifpi 2015 report on the recording industry, physical sales still make up 46% of all recorded music revenues.

from ifpi 2015 Report on the Recording Industry

Based on the above graph, Digital and physical sales were essentially head to head in 2014. Clearly, physical sales are not dead, but what makes up physical sales? Below are the figures pulled out from the same report:

Now we have a better picture, and the picture is telling us that CDs are not dead because CDs essentially make up 43% of the total revenues. Although CDs are on a decline and a loss of $453 million is not chump change, there is still $6.5 billion in revenue on the table, which is still a major component.

Great, right? Not so fast. These numbers are providing the picture for most artists who have distribution deals. What about the indie and emerging artists that don’t have distribution deals? For these artists, does it still make sense to produce CDs? Maybe. Let’s run through a cost benefit analysis. Yes, that’s right, I’m trying to push the idea of supporting a decision based on numbers. I know, I’m a nerd, but let’s go through the exercise anyways.

So, what is cost benefit analysis? Investopedia gives a great explanation: “A process by which business decisions are analyzed. The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted.”

The most important thing on a battlefield is intelligence. Most armies and businesses spend billions in gathering intelligence to ensure that proper decisions are made, so why shouldn’t you, an artist, take the same approach?

Let’s get into an example of a cost benefit analysis. This analysis is going on the assumption that the artist is an indie artist, who doesn’t have a physical distribution deal, which means that the opportunity to sell the CDs will be at the live shows. The first piece of intelligence, which we are going to rely on, is that an Ipsos Research Survey found that 24% of respondents said that they would prefer physical as their format of choice for listening to music. What this means is that from 100 attendees at a live show, only 24 of them would consider buying a CD. In reality, people buy CDs to support the artist and for other reasons. I feel like 24% is a very optimistic number, but we’ll leave it at this number for the time being.

Here are additional assumptions:

  • Cost of production will not be taken into account, as you’ll need this for digital as well.

  • Cost for producing each CD is $2 and minimum order is 500 units.

  • One time cost for producing artwork is $500.

  • Cost for CD Printing is $0.50 per CD.

  • Opportunity cost (each artist’s estimated hourly rate) is $25 per hour.

  • You will draw 200 people to each show.

  • The number of hours at each show to sell CDs is two hours.

  • Selling price is $10 per CD.

  • You have 10 shows booked in the next year.

Based on the above analysis, it looks like producing and selling CDs makes sense. That being said, every artist will have different scenario. This shows that there is still a cost to CDs and the worst thing you could do is give them away to people like business cards. If you do, you are throwing them away. It still baffles my mind when I go to some industry events where some artist has put a whole bunch of CDs on a table for anyone to pick up. You’ve just given your money away.

In addition, one should be looking at alternatives, as well. If you were to take $1,750 of hard costs associated with the cost of producing the CDs, it might make sense to use the money to promote your band on social media in order to drive digital sales, which could provide you a higher benefit. Ultimately, you will need to look at what brings you the most bang for the buck.

There could be many non-quantitative reasons why you would need to produce CDs, but as long as you give the numbers a thought, you will be ahead of the game.

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