How Much That Best Buy CD Costs

OK. I’ve been to a bunch of music industry seminars in the past few weeks and I’ve learned some new things about the business while reinforcing others. One thing I learned at ReMix Hotel that was quite interesting is that Best Buy charges to stock CDs in their store. This got me thinking about how much a CD at Best Buy (or another big box retailer) really costs. I know I just bought a bunch of CDs all for $7.99, but how much did they really cost. Not just how much it costs for me to buy it in the store, but, how much it costs everyone in the whole chain; the record company, the distributor, the band/artist and the consumer.

For the record label, there are many factors in the cost of a CD. The obvious cost, the cost of manufacturing the CD, can be under $2 per unit for a basic design with a simple jewel box and more than $2 per unit for more complex packaging like a digipack – for example, the new Nine Nails album, Year Zero, cost 83 cents more per until to make because of the packaging and the size of the booklet (although Trent paid for this expense directly, not the label – herald sun). Before the cost of manufacturing, the first cost the label incurs is the advance given to the artist. This money is to be recouped against record sales. This could be in the hundreds of thousands for established major artists or thousands for smaller, unknown artists. To this recoupable money the cost of marketing, promotion and advertising is added. Also added to this are other expenses, like flying label reps round the country to see the band in studio and in concert, hotel accommodations, promotional CDs, giveaways, music video production. Depending upon the artist, factoring in all these expenses, the total the cost per unit to a label could be very high. Let’s say the total cost of all this is 5 million dollars, and 1 million CDs are pressed. The total cost per CD would be $5.

The distributor will usually pay a a few bucks above what it costs the label to manufacture, not necessarily the real cost figured out in the example above. This will come out to $3-6 per unit, sometimes more. In special cases sometimes the distributor will get free CDs to distribute to retailers (see next section), or to use for promotional purposes; for example, the product buyers at retailers will get an advance copy of a CD to determine if they want to stock it.

The retailer usually pays a wholesale price between $5-10 (sometimes more) per disc and sometimes the retailer gets paid, or receives free product to sell. But there are cases where the label is charged to have the CD stocked; Best Buy charges $2 to have an album stocked in its store. Best Buy effectively gets a $2 discount on the wholesale cost of a CD. This is kinda backwards of the traditional distribution model where the retailer buys the CD from a distributor at a wholesale cost of about $5-10/disc, basically paying for the privilege of carrying the product. In this case the label is paying for the privilege of being stocked by the retailer. The $2 will most likely get charged back to the artist as a promotional cost incurred by the label.

There are also special promotions where the labels will give the retailer “free” product to sell in exchange for better placement in the store – on the end cap, at eye level on the shelf, at the check out counter – or for the store to list as a sale item in their Sunday circulars. If the retailer doesn’t sell as many units in the amount of time as they think they can, they have the option of returning the un-purchased CDs for credit. Again, depending upon the record deal, the cost of the CDs given to the retailer for “free” can be charged back to the artist as promotional expenses.

After all this the artist is handed a bill for $5 million dollars. Because of the way most record contracts are structured it is difficult for the artist to pay this back at a reasonable rate – the artist usually earns 10% of 80% of the retail price which is paid after the advance and other costs are paid back. So, the band doesn’t get paid for any record sales until the $5 million is paid back. Also, the artist will also not get paid or credited on the sales of CDs that the record label categorizes as “promotional expenses.” All those CDs that the retailer is selling are “promotional items” and count in SoundScan and towards Gold and Platinum awards, but the sale doesn’t get credited to the band against the money owed for the advance. The cost of the CD to the artist ends up being the total money that the label puts out for the record, plus those other expenses and charge backs for CDs used as promotional product.

After all this we, the consumer, can buy a CD on sale for $7.99-9.99 when the retailer gets free or cheap CDs, and upwards of $18.99 when the retailer pays the $5-10 wholesale price.