Music Distribution Process

It is important to place all your promotional and marketing efforts around the distribution process in seeing a successful campaign to generate buzz and consumer interest in every new music release. It is the label’s responsibility to find a way to get the product to potential consumers. This must be done wherever they may be, at the right time and in sufficient quantities to not only satisfy that current demand but also to meet projected demand based on anticipated continued promotional advances in given markets. This is a very difficult thing to do with precise timing and accuracy, for the market is unpredictable and widely dispersed. After 50 years of trial and error, even major labels are still trying to figure out a more efficient distribution system. As for small labels, the lack of effective distribution has caused many to fail in the marketplace. After all, the inability to achieve product placement at POS, and more specifically, in particular markets where there exists a demand or consumer interest, will take the wind from the sails of any new music product release.

Until about mid-20 th century, only a handful of companies were in the recording business. Each had its own procedure for delivering its products to consumers. With the rapid proliferation of labels in the 1950s, newcomers to the market often lacked an understanding of the essential need for a national network of distributors to get their products to retail outlets. Smaller labels would seek larger ones to distribute their records. Other new labels contracted the services of the growing number of independent distributors that were setting up operations in most markets. In the years since, some regional independent distributors have formed national distribution networks. Many of the distribution problems and inefficiencies that have troubled the industry since the 1920s remain focal points today.

Music retailing has been plagued by price wars among merchants, which have had a direct and culminating effect upon the distributors. Merchants fighting to remain afloat amidst irrational retail pricing competition appeal to their distributors for deeper discounts to help them survive the competition. Distributors can respond to these appeals most often when they can sell at high volume. For you economics majors, that’s “volume economics”: acceptance or realization of a lesser margin with the expectation of profiting more substantially overall by moving greater volume. But when a merchant becomes too aggressive buying-in and becomes over-burdened with expensive, stagnant inventory, the distributor will soon hear a plea for lenient “return privileges.”

Distributors try to strike a balance between overselling their accounts and offering an undersupply. With the former, both parties suffer the inconvenience and expense of returns; only the shipping industry, and possibly the paper industry, profits with returns. But when a distributor’s customers buy too conservatively and a recording hits suddenly, both parties miss out on sales when the merchandise is not available to the buying public. Consumer interest can be fleeting; the window of opportunity to profit from promotionally generated consumer demand can close rapidly. Smart distributors try to guide retailers in their buying so as to minimize returns, because when merchandise flows in the wrong direction, everyone gets hurt and the truth is that the title in question may not get a second chance, at least not in that particular market.

Returns

Distributors and sales personnel can often pressure dealers to buy more stock than they believe they can move as a result of internal or external pressures to move particular blocks of inventory or just inventory in general. This pressure will manifest various forms, generally in some way at least momentarily attractive to the merchant. Record companies or distributors will often offer merchants liberal merchandise return privileges or discount on volume purchase orders—any number of methods to entice the retailer to buy-in heavier than perhaps they had initially planned. In the past, practically all records and tapes in the US were sold on consignment; if you can’t sell the merchandise, return it for full credit. In the 1980s, most labels and distributors tightened their return policies. The practice now is often one that requires the merchant to return the stock within a predetermined time limit and to return only a pre-stated percentage of the total units originally ordered. Labels’ return policies accelerated the demise of vinyl products, especially singles. When record companies disallowed the return of vinyl 45s, many retailers were unwilling or unable to continue stocking them. Of course, this practice was common in the mid-80s; however, today vinyl is making a resurgence even in the digital age. Return policies themselves have become competitive aspects of distribution. They are very carefully stipulated and closely reviewed line items within distribution vendor agreements, often being one of the more heavily weighted factors in deciding which firm to go with. A distributor with extreme, punitive and restrictive return policies may have greater difficulty persuading retailers to buy from him or her, particularly independent music product. This is because with such stringent return policies, sell-through becomes even more critical and independent releases tend to have far fewer promotional dollars behind them, making sell-through far from guaranteed. Conversely, a distributor with very liberal return policies may find itself being taken advantage of in the wholesale marketplace.

Pricing

In order to get a distributor to carry your product, you’ll have to convince him or her that your records are going to sell-through or at least have the potential to do so. If you don’t have prior sales history to speak of for the title, you must demonstrate the potential of the release, even if just in a particular market or region. This means providing the distributor with at least college radio playlists and airplay confirmation, good reviews, proposed advertisement schedules for radio and print, current touring/performance schedules and additional current or proposed promotional efforts. Offering all of this to him or her to evidence potential will have an even greater impact if it is primarily relegated to one particular market or region.

If a distributor agrees to stock your record, he or she will ask for a wholesale price per unit, CD or vinyl. For full-length CDs it’s between $7.00 and $8.00. Vinyl is tricky in terms of price and can fluctuate, but is usually around $7.00 and $9.00. EPs (three to six songs) and extended length releases are slightly less and more, respectively. This is not the price at which retail buy-in will occur; it is the dollar return the distributor gives you. Based on these rather standard dollar-return figures, the distributor will sell your product to retail for about $9.49 to $10.89 per unit for a full-length CD. Retailers will be informed of the SRP, or suggested retail price, for your product but are actually free to price it as they see fit. Both the retail buy-in rate as well as your dollar-return rate are fixed (flat rate) and will not fluctuate based on anything retail chooses to do with respect to pricing. The system works; you need not worry about retailers trying to maximize profits by marking your product at outrageously high prices, therefore hindering sales. The system works because everyone in it is operating toward but one objective: to sell units.

Distribution Payment Terms

Distributors are generally looking to get the longest possible terms on which to pay out on a disbursement schedule. The disbursement schedule is the aspect you eagerly await. It is the product, or end result, of retail sell-through and the end of the distribution cycle. First, you advance the distributor “X” number of units of your release. (Get them to pay the freight or designate the shipping company they use.) Second, you invoice them on the units advanced (send them a bill). Depending on the terms you agree to, they are obligated to pay you within either 30, 45, 60, 90 or 120 days from the date of the invoice. As the label, you want to negotiate the shortest terms possible. As an indie, cash flow is critical and capital reserve is king. The sooner you are able to realize the fiscal return from sell-through, the sooner you are able to allocate additional dollars back into your project—dollars you will no doubt require to press more units and keep the promotional wheel turning. Your ability to successfully negotiate shorter terms will center on how badly the distributor wants to carry your record and how much faith they have in your title’s sell-through ability.

Regardless of the terms you secure, payment will transpire per the disbursement schedule set forth in your distribution agreement. Some standard elements apply to nearly all distribution agreements, such as the reserve or hold-back against returns. Some such hold-back clauses call for as high as 40% to 50% reserve to be maintained; some are as low as 10% or 20%. This serves as a protection for the distributor in the event that moderate to significant returns occur with your title. Let’s say based on placement your distributor pays you after 90 days on 500 units; however, after their next billing cycle with retail they receive 200 returns on your title. They’ve overpaid you; their only recourse now is to wait for the opportunity to take the difference out from future sales or call you up and request that you cut a check back to them. Now let’s say there was a 50% reserve held back; at the 90-day pay point, you would receive payment for 250 units with payment for the balance held in a credit account for your label.

At the end of that ensuing retail billing cycle when the returns came in, the distributor would not be hurt and you would be paid for the 50 units still outstanding after the deduction of 200 returns. Reading through this clause or line item in a contract, it seems complex—when in fact, as you can see, it’s quite simple. Your distribution agreement will stipulate as to how long each hold-back remains in reserve. Note that each payment disbursement will have a corresponding credit or deposit for credit in your account with the distributor. For example: if your agreement calls for a 50% reserve to be held back for 120 days, that means that when the payable 50% is disbursed to you, the reserved 50% is credited to your account and the 120-day hold-back time period begins.

Figure 5.1 Strategy

Protect Yourself

Though not a common occurrence, sometimes smaller independent distribution operations have been known to employ less than ethical tactics in dealing with small indie labels. The rule of thumb for dealing with a distributor is to only give them as many records as you can afford to lose. Some of these less than ethical practices include not paying, losing your invoice, going out of business, etc. The best way to safeguard against such circumstances and protect yourself is to keep your product selling. If sell-through is occurring, the distributor will require additional units, request payment for the previous block of units prior to forwarding additional units to meet the demand. The best overall safeguard is to keep in constant contact with the distributor and be aware of how your release is doing at retail. Also, when your distributor places an order with you for additional units, always ask for a physical PO (purchase order) and corresponding PO number. Be diligent, prudent and use common sense; keep good comprehensive records of all transactions with your distributor.

Invoicing

For your internal reference and records, assign each outgoing invoice an invoice number. The idea is to make it look professional; companies tend to give greater respect and attention to professional-looking documentation. No handwritten letters! Be sure to include their PO number on your invoice and clearly state the terms for payment agreed upon in the distribution agreement providing the due date for payment. You’ll need to find out who handles the distributor’s accounts payable and send your invoices to that person directly. If you experience delays or problems receiving payment you know is due to you, tell them to send your records back. Then, inform them of your intent to submit the invoice to collection and call a few collection agencies in their area. If you’ve got the PO number and have properly invoiced the distributor, then you have a legitimate debt for collection. If you decide to use a collection agency to obtain payments from your distributor, they will simply keep a percentage of the amount invoiced.

When you ship them your records, use the delivery confirmation service where UPS or the post office sends you proof that the distributor received your package.

Request for Return

It is standard practice in the record industry for record companies to allow stores and distributors to return unsold records for credit against what they owe. If it’s clear that a distributor is not going to pay you, demand that they return your goods. Most will probably want to return when it’s time to pay you, anyway. Then, after they’ve sent them back, they’ll turn around and order those same records back from you again! This is their way of avoiding spending cash on inventory that is sitting in their warehouse. When they re-order the records from you, they now have fresh 90-day (or whatever) terms to work with. One thing you must specify is that they pay freight on any returns.

Getting Started

Before we get into the nitty-gritty of getting and maintaining good distribution, I want to give you a general overview of how it’s all going to work. First, you’re going to create what’s called a “one-sheet”—a one-page description of your record that tells distributors and retailers why they should carry your record. The purpose of the one-sheet is to convince distributors and retailers to stock your record and to give them all the information they need to enter it into their computerized accounting and inventory systems. Keep in mind a one-sheet is simply a sales sheet. You will see an example of a product one-sheet in Figure 5.2.

Next, you’re going to mail packages containing your record along with the one-sheet to the distributors in your area. Then this is the hard part: you’re going to meet with them, either by phone or in person, and convince them to work with you.

Once you find a distributor who wants to work with your product and with whom you feel comfortable, you will enter into a business relationship with him or her by signing a distribution agreement, which is a short contract that outlines the terms and conditions of your business arrangement. At this point, the distributor will send you a purchase order, or PO, for a quantity of units. You’ll ship the units, and the distributor will try to convince stores within the area of your promotion or your designated launch territory to stock them.

The distributor will handle all the accounting and will pay you for the records either when they need more records from you or when you decide to “recall” the release.

If they need more records, they’ll send you another PO, and you’ll ship them more records, that is, if things go smoothly, where you’re shipping records (by your band and maybe others as well) to the distributor and in return the distributor is paying you for past shipments that have already sold at retail. The more records you have that the distributor wants, and the more copies of these records that are being ordered by retailers, the more attention you’ll get from (and the faster you’ll be paid by) the distributor.

Figure 5.2 Product One-Sheet Example from www.MVDb2b.com

(Beware: If your distributor is not using a computerized accounting and tracking system, they probably won’t be able to keep track of where they’ve shipped your records or find out how many have sold.)

Distributors and Promotion

Once you find a distributor, you will have to work to keep that distributor interested in your recordings and working on your behalf, especially if you do not have a proven volume of sales. Think of the distributor as a business partner who is working with you to achieve a mutual goal: selling your recordings. News about your promotional successes and performances is important because distributors will use it as leverage to persuade stores to carry your product. This is called retail promotion; many distributors, especially those with very large catalogs, do not truly engage in this practice on your behalf. Even with those that have sales teams who are only pushing the catalog to retail, not many individual titles within it are being pushed. This is what can set your release apart from the many others in the catalog. You must lend your diligent efforts in this regard. Send them all press releases, performance dates, radio data and promotional activity reports; offer to supply updated text for their one-sheets for your release, which are universally used by distributors as quick reference sheets. They contain the artist’s name, name of the record, label’s name, date of release, UPC bar code number and catalog number. They also provide a brief description of the recording, its genre, unique qualities, selling points, highlight well-known musicians, quotes from reviewers and important tour dates.

In the last few years, several independent music product distributors have increased their services to supplement the promotional efforts of their labels. These include: sending out regular newsletters that feature tour dates, news of airplay and clips from favorable reviews; paying for listening posts at retail record stores; booking concerts at retail outlets; taking out ads; sponsoring Internet radio stations that feature music from the labels they carry and linking their websites to Internet music stores.

When you are going to tour in an area that is serviced by your distributor, tell them in advance so they can persuade stores to take extra stock and put up special displays. Offer to meet store owners and salespeople. Let the distributor know about your plans for getting reviews and airplay and ask them for suggestions. Even if you are not touring, send your distributors all your press releases and favorable reviews to inform them of your progress. Find out about your distributors’ salespeople and deal with them personally. Add them to your mailing list, phone them occasionally and visit them when you are in their area. If you deal with distributors that handle many different labels, you will find that the salespeople are not always acquainted with the entire product they sell. Any input from you will give your title an extra push, and it’s generally serving the greater good to keep your release in their faces and on their minds.

Doing Business With a Distributor

The price at which distributors buy from record labels is commonly 50% to 55% of the retail list price. Variations are based on your discounting policies, leverage in the marketplace and number of units sold. Written agreements with your distributors should specify the discounts, when and how often you will be paid and the amount of promotional units you will provide for giveaways to sales personnel, retail, etc. Discounts as high as 60% are given to distributors for large volume buys. Distributors order inventory and, being wary about paying for product that might be returned, specify that payment will not be made until the stores have paid them. Stores pay distributors on a monthly or quarterly basis; they return unsold merchandise, generally after 90 days. The label and distributor agree to take back unsold and defective units. This means the record label consigns units to distributors and the distributors consign them to the stores. Distributors make accountings to labels on a quarterly, semi-annual or annual basis. They will want some free promotional records and want to make at least one copy available to each store they service as a way of introducing your product. Your written agreement with them should specify how many recordings they can make available as promotional giveaways or samples. Ensure that these copies are not just extras that will be returned for credit by using stickers that say “Promotional Copy, Not for Sale” or by otherwise distinguishing “promo” copies from sales copies. Once you have received an order from a distributor, you must ship or deliver the units at your expense. Include an invoice that states the terms of sale with each delivery.

Collection

The biggest headache in dealing with distributors is the long wait for payment. Their primary reason will be that store payments are delayed. To expedite payment, distributors may offer incentives such as an additional 10% to 15% discount for cash on delivery with returns accepted only for damaged merchandise or a sliding scale discount and a one-for-ten policy. The label gives the distributor a free unit for every 10 bought and paid for within a specified period, usually 30 days. Distributors assess stores for late payment, usually 2% to 5% of the amount owing. You can use some of these same tactics with a distributor.

Many labels report that a period of six months is common before they see the first payment for new inventory and there are distributors (and stores) that delay payments for a year or more or never pay—a practice that has occurred often enough to warrant warning you about it here. The practice is often discriminatory: the distributors first pay labels whose products sell faster than others and those that have done business with them for a longer period of time. They will often delay payments to new labels or labels with sloppy business practices. Collecting money is one of the least appealing aspects of selling. If you are not persistent, distributors will think that you do not care when you are paid. The labels that are the most persistent are usually paid in a timelier manner. It is very important to find out something about distributors’ payment reputations before you deal with them. Ask owners of other recording labels. People are usually willing to share their experiences, particularly the negative ones. You have real leverage to collect only when your recordings are selling quickly and your distributor must reorder, or when you put out a second recording to follow a record that has sold well. Many labels report cutting off distributors from receiving more product the very first time payments lapse beyond 90 days. This may sound hard-nosed, but it is accepted as prudent business practice and lets companies know you are not willing to be taken advantage of. You can expedite the collection process only through constant diligence. Develop a personal working relationship with key personnel. Visit and talk to your distributors as often as you can. Tell them about your performance and promotional successes as they occur or in advance. Regular and personable communication is the best method for assuring they will not neglect you. Always put an audit clause in your agreements that specifies you have the right to visit their accounting offices once during a calendar year and audit their books for your account.

Sell or consign only small numbers of units to distributors at first, so if sales increase rapidly and the distributor needs more recordings to keep up with demand, you can refuse to provide them until the last consignment is paid for. Your chances of getting paid are better anyway since the amounts involved are small. Distributors know their retail accounts and can often make fairly accurate estimates about the rate of sale for your release. Their initial order will be based on that knowledge and further based on your promotional outlook and marketing plan.

Be extremely diligent about collections. If distributors miss an accounting period, send the distributor a certified letter stating that they missed the payment date. Start phoning and ask to talk to the accountant. If you are told repeatedly that the accountant is “out of the office,” complain to the person on the phone. Keep bothering them. Recognize that you are financing the distributor. Not getting paid on time means that they are using your money for maintaining their own cash flow or other inventory management issues not related to your product.

An alternative to trying to expedite the collection process is to simply accept the fact that you have to wait to be paid. Even so, you must put limits on what you will accept. The foregoing is not meant to discourage you from using a distributor but to inform you that it often takes a while for money to get back to you, so plan accordingly. Always have some reserve; never expend everything in hopes that you will be paid before you will need additional units pressed. When you do find distributors that sell your product for you and pay on time, acknowledge them graciously. Consider any move to a new distributor very carefully; weigh possible profits against the loyalty and hard work of your current distributor.