Loading...

Economic Models, Ray Dalio and DIY Music

So I’m working my way through Ray Dalio’s Principles right now and thus far it has been an enlightening read. The book actually recommended that I spend some time watching his truly excellent video called “How the Economic Machine Works”. You can go watch it right HERE, but it inspired me to write today about economic machines and the music industry. While he spends a lot of time talking about the importance of credit I wanted to delve a little bit into the basic idea of production being directly tied to income and the size of a market dictating whether you fall into a boom or bust cycle. I have always held the belief that if musicians thought a little bit more about the simple economic machine of the music industry they would find themselves engaging in more long term success and be able to more accurately calculate potential sales. All of this revolves around a core tenet of Dalio’s video, one mans spending is another mans earning.

This is sort off the crux of the music industry right? If you want to earn $40,000 a year or whatever you consider to be a good wage you need to find people willing to spend enough that you can earn that $40,000 a year. It’s important to remember too that for you to net that amount of money your gross will likely need to be double that if not more. So if one mans spending is another mans earning, this means that you are going to have a hard time generating that $80,000 of income. It’s also important to realize that when a fan spends $1,000 on music annually, even if it was ALL on your band, at least half of that would be going into tickets which you probably don’t always get a huge cut from. Of course it’s incredibly hard to find a fan who spends $1,000 on music annually. Yet there are all these musicians out there trying to make a living wage from this.

Consider this example, for every thousand people there are a few, perhaps two or three who eat, breathe and shit the music in your scene, not as movers and shakers but as fans. I’m talking about someone who attends 10 shows a month and spends at least $20 on merch every night they go out. Cool. These people exist and are good people to know for sure. They bring real value to the scene and their spending becomes your earning. The thing is – how many of those people can you expect to see on a given night on tour? Huntington, West Virginia probably only has one of those dudes, but there are twenty metal shows a month there. New York probably has a hundred, but they are spread out over dozens of shows a week. Once you start to realize this, you see that it’s very hard to find an economic model that shows you making a significant amount of money for every night when you’re out on the road.

This is why I always am an advocate for two advanced metrics for determining the success of your band. The first metric is the merch per head. You can’t always guarantee a great turnout, but what you can do is guarantee that your merch game is not only excellent but also that you can try and sell to every single in the person in the room. The merch per head thus is the amount of money you made from selling merch divided by the number of people at a show. If you are routinely clearing $5 a head that means that your band is probably doing something right and has a chance of going somewhere. There are ways to artificially bump up this stat, but again it’s based on the idea that one mans spending is anothers earning. It’s a lot easier to get someone to part with $5 than it is to get them to part with $20, and you are only trying to make $5 a head. People have limited discretionary income after all and your job is to make sure not all of it goes to beer.

The other advanced metric I like to use is the delta growth in income. This is another great way to make sure you are growing in a reasonable and effective way. The delta growth is the derivative of the increase in gross sales between tours. In other words, if your first tour you make $1000, the second you make $2000 and the third you make $3000 your band is growing, but growing consistently so the delta growth is 1. However if on your first tour you make $1000, your second $2000 and your third $3500 your delta growth is 500. This is just another way to apply basic economic principles to ensure that you are expanding in a way that is effective. It’s taking example from the more profitable aspects of the business and applying them to your DIY band. Understanding economic growth for a project is crucial as you map out the future.

There are obviously a whole bunch of other lessons that I am going to be extrapolating from Mr. Dalio in the next coming weeks and months but I think this might be an effective jumping off point. It’s important to look at the systems that run the music industry as similar to any other system. Hell, that’s why I got into small business consulting, so that I could understand financial systems better and thus bring more to my clients. You can never forget that the more you learn the more you earn, so you had better goddamn focus on trying to figure out how a lot of these individual components lock together to create something beautiful, predictable and potentially highly profitable.

Posted in Most RecentTagged , , , , , , , , , , ,

Leave a Reply