Stack Them High, Sell Them Low: Can Creators ‘Get Lucky’ By Selling Merchandise?

Spotify has recently announced the ability for artists to offer merchandise to fans through their platform without taking any commission. Is this a valuable opportunity for creators or, as some have claimed, simply a cynical attempt by Spotify to improve its sometimes shaky relationship with artists? Is merchandising actually useful as a source of revenue?

All sorts of goods have been offered for sale by creators over the years. The American band Kiss has sold coffins; Boy band One Direction have their own line of toothpaste and toothbrushes; and recent Grammy award-winning band Daft Punk last year released a range of condoms packaged with the distinctive art of their hit record “Get Lucky” (although, as one commentator noted, they missed the golden opportunity to brand after their song “Harder Better Faster” instead ). The opportunities are endless.

When done well these offerings can make huge sums for their original creators. Pixar, for example, produced a follow up to their animated film Cars on the back of an estimated US $10 billion in revenue generated from merchandise associated with the first instalment. Even smaller movies such as the Australian work Beached Whale have been able to raise over US $2 million through such channels despite being made on a budget of only fifteen Australian dollars and being freely distributed on YouTube. With the decline of traditional revenue streams, such as licensing, merchandising is only likely to continue to be an important part of monetising works such as animation. Indeed capitalising on the market for merchandise will arguably be critical to long term success: it can even make money from beyond the grave!

This is not a new concept. For generations musicians have sold t-shirts and other goods at gigs while many museums over the years have found that free access to their collection can be offset by revenues gained from selling merchandise in the gift shop. Merchandising has long played a part in the business models of creators from across the spectrum of pursuits.

Old Money

Available under CC BY-NC-ND 2.0 by Christopher S. Penn

It has however become an increasing topic of discussion in recent years as the traditionally dominant revenue streams in some industries have dwindled. The recorded music industry in particular has seen increased attention paid to merchandise as falling record sales have been met with an increase in record labels signing artists to so called ‘360 degree deals’: deals in which the label takes a share of a several of their artist’s revenue streams rather than solely record sales. Merchandising is often included.

These kinds of deals leave the signed musician in an uncomfortable position. While the record labels see ‘360 degree’ contracts as a partnership with artists for mutual benefit it can be argued that for many artists they are not a good idea. Merchandising is one way in which a band can compensate for the fact that record contracts rarely provide the band with much revenue. Giving the labels a slice of merchandising revenue on top of the traditional record sales can therefore erode musicians’ earnings.

This is only compounded by the fact that the sums raised from merchandise do not appear to be large to begin with for most artists. Some studies have found that as few as five percent of musicians are able to earn more than a tenth of their income from the sale of merchandise and it seems clear that merchandise, while a nice bonus, simply doesn’t earn enough to play the bills for the majority. To lose a portion of this already meagre income may be painful.

One Direction Merchandise

Not all merchandising is this successful … Available under CC BY-SA 2.0 by Eva Rinaldi

In other sectors creators may even need to think carefully about whether some types of merchandise can be useful at all. For traditional visual artists, for example, the sale of merchandise may harm more than it helps. If merchandise bearing an image of an artwork is sold in close proximity to the original work sales may be cannibalised: Replicas can be a substitute for the original for some. If not carefully thought through therefore some types of merchandise may actually lose a creator money.

Even where selling merchandise doesn’t make an artist rich however it can still be worth doing. Merchandise can play a significant role in the building of a brand around a creator and their works and thus can benefit their career overall even if it contributes little financial return in the short term. A creators’ brand can have a big impact on their chances of success and some industry players have even gone so far as to argue that it is an essential consideration.

Overall therefore it appears that merchandising has many upsides and few downsides. While for most it may not prove to be a huge earner it can help to grow a brand and, if carefully thought through, will likely contribute at least a small increase to net revenue. While it is possible to assign cynical motives to recent efforts by Spotify to allow the sale of merchandise it therefore nonetheless offers a valuable avenue for creators to exploit.

Free is the magic number?

There has been a long history of giving away items for free as part of a business strategy. But can creators also benefit from this approach?

There has been a long history across many different sectors of giving away a product for free as part of a wider business strategy. Ranging from razors to videogames companies and individuals alike have explored the benefits that can be gained from an approach that doesn’t rely on making money from every element of their business directly.

When done well these efforts can yield great rewards. Trent Reznor’s Nine Inch Nails for example were able to gross over U.S. $1.6 million in revenue in one week alone from an album that was partially free. The first nine tracks of Ghosts I-IV are available direct from the official website, with the band using this initial overture to offer for sale the extra 25 tracks in the full album along with a variety of luxury additions. ‘Free’ can lead to big bucks.

When the free model is used poorly however this is not the case. An attempt to give away a free eBook with a digital ‘tip jar’ say author Steven Poole receive cash from only 1 out of every 1750 downloaders – a mere 0.057%. Simply giving the work away for free is not an instant path for success.

Key to adopting a business model with a ‘free’ component is an understanding of the underlying business logic behind the free offering. How, exactly, is a return going to be made? While the details may vary there are two overall approaches that can be taken: Using free offerings to build fame; and using them as part of a sustainable on-going sales strategy.

The first of these approaches is to use the free offerings to rapidly grow awareness of a product or brand. Free samples of soft drinks for example can be used quickly gain a large market of individuals who have tried (and hopefully liked) the product. A similar strategy can also be used by creative artists. Musicians can give away their early work for free to reduce the barriers to entry and encourage those who might be interested to listen to the band as they continue to produce new works. The potential audience for the artist expands bringing with it the potential for a stronger following in the long term that can be captured through sales of later works. A band based in LA – the Tony Pulizzi Trio – found for example that giving away sample CD’s of their music to the audience at a gig quickly resulted in a surge of interest that the band could capitalise on for future marketing efforts.

However while this offers the potential for future benefit it carries with it significant short term costs. Works must be produced and released at the artist’s cost without any guarantee of return, and skimping on quality to accommodate the lack of revenue can do more harm than good: poor quality work will likely drive people away rather than encouraging them to stay. While this can be mitigated to some degree by exchanging the ‘free’ work for something of short term value, such as demographic data for marketing or social media promotion, some artists have argued that pursuing a strategy of giving away lots of work for free is ultimately self-defeating as it creates an expectation of free that makes it difficult to charge in the future.

Giving entire works away for free is not however the only way to use free as part of a business model: it can also be used as part of a sustainable sales strategy. In addition to the freemium business model, discussed a previous blog post, creators have found success by limiting the free offerings to samples of a larger, purchasable, work. Authors such as the New York Times Bestseller Brandon Sanderson regularly release sample chapters of their past and upcoming books for free and several large newspaper websites have adopted a model with allows readers to view only a limited number of free articles before requiring a subscription.

This does however require that the underlying work is capable of being released in segments: releasing only the corner of a painting for free is unlikely to draw in purchasers for the full work!

While both approaches involve giving something away for free there are significant differences in the eventual gains and the costs associated with each approach. Giving away entire works for free will build awareness and interest in the product, but at a significant initial cost and with no guarantee of return. Giving away smaller amounts can generate an interest in the work without undermining its value, but ultimately still requires a purchase and is of limited use for some types of creative works.

So can giving away products for free benefit creators? For some at least it can. If used as part of an overall strategy free can capture attention, give consumers a taste of a work, and, ultimately, make money.

Crowdfunding The Revolution

Once described as a revolution in funding, crowdfunding has now grown to the point where it is being used to fund revolutions itself. But is it always a good option for individual creators?

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By Villa Giulia, Public domain via Wikimedia Commons

While crowdfunding has arguably been around for generations it has shot to particular public attention in the last few years. It has gone from being described as a quiet revolution in business to funding political revolution in the form of a recent full page advert in the New York Times protesting the Turkish government.  Projects have been set up for aims as diverse as ensuring accurate reporting of controversial court cases and sending struggling artists to perform at the Edinburgh Fringe. Crowdfunding is becoming popular.

And it’s easy to see why. With the persisting financial crisis, entrepreneurs and smaller businesses have often found traditional sources of funds to be lacking. Crowdfunding has proved an attractive alternative: last year alone, over U.S. $2.7bn was sourced from backers to fund over a million successful projects. Some even raised as much as a hundred times their initial goal. Raising money from the crowd can allow individuals to start small with greatly reduced start-up costs while at the same time allowing them to retain creative control of their works. Without large investors exerting control over intellectual property rights crowdfunded artists are often able to choose freely whether to monetise them or give them over to the commons.

From the perspective of business models, crowdfunding efforts break down into three broad arch-types: lending, donation, and reward. The first of these, lending, is the one that most closely resembles traditional funding opportunities. However this route can often prove extremely difficult in practice, particularly for the individual creator. Offering shares or securities in return for investment is a complex and legally regulated field and while it is possible to arrange crowdfunded investments within this framework individuals in particular may find it challenging to make sure that they are aware of and comply with all of the necessary laws without resorting to expensive legal help.

It is unsurprising therefore that creators have turned predominately to the donation and reward approaches. The donation model is straightforward – the project is funded through contributions from backers who receive nothing in return other than the success of the project. While this has proven the most frequently used model to date there has also been significant use of a rewards based model whereby the backer receives either a financial return of their investment with interest or, more frequently, goods such as a copy of the finished work.

These approaches offer advantages to creators that extend beyond simply gaining funding. A successful funding campaign demonstrates the market value of the idea and the creator behind it to future investors, generating information about the audience and demand for the project. In addition, involving the backers in the project helps drive publicity and awareness of the creator and can help the creator to involve their audience and engage them with the creative process. Increasing fan investment in the community in this way can only help in the long term.

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(c) 2013

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Therefore, as a source of capital in these cash starved times, crowdfunding can offer an attractive prospect to budding creators. But is it all as good as it seems? The potential for a successful campaign to improve a creator’s reputation is matched by the potential for an unsuccessful campaign to damage it. Over half of the projects on the largest crowdfunding site Kickstarter do not meet funding goals, often by significant amounts.

Indeed people often join projects only after it looks like they will be successful. In addition, some categories of projects are more likely to be successfully funded that others: videogames for example receive as a category six times the investment as other types of project, but very few of the extremely successful projects are in fields where individual creators predominately work. While crowdfunding sites that are more suited to creative endeavours and which specifically target the arts exist, the amount of funding available on them to date is a fraction of that available from the largest sites. The massive funding seen in some projects may simply not be obtainable, and even unnecessary, for some individual creators.

Crowdfunding campaigns also take a lot of time and energy – more than many creators realise. In order to be successful at crowdfunding, creators need to: put together a polished pitch; manage communications with backers; keep track of finances and funding allocation; and, motivate pre-existing communities of supporters to get the best chance of success. For individuals, keeping track of all of these aspects on their own can present a huge challenge. However, failing to meet it can lead to upset backers and a damaged reputation that few can afford to ignore.

While crowdfunding offers a valuable tool for funding creative endeavours it doesn’t offer a magic bullet to solve the perilous finances of many creators!