How To Launch a Music Startup: Willingness to Pay

image from media.linkedin.com This post is part of the How To Launch a Music Startup series by Brenden Mulligan, which focuses on building a company that creates online products for musicians. Mulligan founded ArtistData, which was recently acquired by Sonicbids, and can be found on Twitter at @bmull.

image from blog.vendavo.com In the last post, we covered one of the first major metrics for your artist-focused business's plan: market size. We had an interesting discussion in the comments. Some thought 500,000 was way too much. Others thought it wasn't nearly enough.

Now we're moving on to figure out how valuable this market is from a revenue standpoint. The term "willingness to pay" basically covers how likely your customers are to pay you for the product or service you provide. Essentially, this is like asking yourself "Even if I build a kick ass product, will artists open their wallets, or are they too cheap/broke?"

The reason this is important is if there is a high willingness to pay, then the market size doesn't necessarily need to be huge. If there's a low willingness to pay, you need a larger market to make a real business. The goal of this post isn't to find an exact number, but to get a conversation going.

My hypothesis is that generally there is an extremely low willingness to pay in the music services area. Artists are having a hard enough time building self-sustaining music careers, so their willingness to pay for additional services is very very low. A key driver is the feeling of need.

You have an advantage if you build a service that musicians feel they need. For example, I don't know any artists who would not put their music on iTunes, even though we all know iTunes returns a much smaller cut of the actual sales price. But artists still put their music on iTunes because it's where most consumers shop, and thus a necessary evil. Email management services are also becoming a need in our business, as there is a big movement to own your customers (a movement I fully support). And to do this, most bands need an email management service to do that (FanBridge and Constant Contact are examples). Artists are a lot more willing to pay for these services now than 3 years ago, when they didn't seem so necessary.

If you build a product that is a nice-to-have, but not a need, it will be a harder sell. ArtistData is one of these products. It saves artists TONS of time, but it's not absolutely critical to their success, especially early on. It's workflow management, and by using it they can be more effective, more thorough, and more consistent in less time (leaving them more time to be creative, write songs, etc…).

Another example of a product that I'll rooting for but faces similar dynamics is Next Big Sound's Premiere product. I've never seen a better designed product made for bands. It aggregates all social media metrics and lays them out in an unbelievably clean and understandable dashboard. But the question is, will bands actually pay for this aggregated info?  Or will they see this as a nice-to-have instead of a need-to-have?  The NBS guys are obviously positioning it as a need, but will artists bite?  I'm hoping they do and looking forward to finding out.

So if you can make your product solve a critical need, artists will pay for it. Not a surprise, but what's important is that they are much less willing to pay if it's not an absolute need. In those cases, they'll always choose free.

Before I end, I'd like to say that I'm trying to paint a realistic view of this market, and then once we have that, discuss ways to build profitable products and great companies for it. It's important to understand the foundational metrics that we face selling services to musicians though.

Okay! Hoping for a lot of comments on this one. Also always feel free to reach out to me on twitter. So fire away!

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  1. Thanks for continuing the series, Brenden! (Though I have to say that after the last two installments, it sounds like you are holding back on this one; or are maybe just busy.) I’d be curious what Chris Anderson (re: his freemiums and cross-subsidies) has to say on the subject. Maybe you could comment on which artist services you have seen successfully use “free” as a way of developing a revenue base later or in parallel.
    Another sub-topic is that sometimes the services are rolled out before the potential customer base realizes they need it. With any “disruptive technology” (to use a phrase from The Innovator’s Dilemma), adoption is not always immediate. However, sometimes by the time customers do adopt it, it is too late for veterans of the particular industry to throw their hat into the ring.
    And finally, this brings up the emerging shift in the Internet from Web to Single-Function app. Which can allow for a low price and thus a low barrier to entry. So thoughtfulness about a focused scope of the service can help lead to a price that potential customers can digest.
    Thanks again! Really great contribution to the field!
    Dmitri Vietze
    http://www.DubMC.com (world music trade industry blog)
    http://www.rockpaperscissors.biz (global music publicity firm)
    http://www.FlipSwitchPR.com (take a guess)

  2. If you can show a direct connection between paying for a service and a return on investment greater than one, you can probably make your case. But there are some challenges:
    1. Most services don’t run controlled tests. So if a musician is using multiple services/tactics, it may be hard to establish what service/tactic was responsible for the profit. You can really only prove cost effectiveness by isolating the service/tactic and run two identical tests with the artist/band, one using the service/tactic and the other not.
    2. Since not every artist/band succeeds no matter what they do, it’s hard to claim that using your service is going to make a difference. Even if two different artists/bands use a service in exactly the same way, they may each not achieve the same results.
    3. Most artists/bands have limited financial resources. So usually they have to decide where to spend their money. Some services are more important than others even if they are both fairly priced. Artists/musicians and their managers have or should have a priority list of what they need to do when. Some services just have to wait until the artist/band has the money or is at a stage in their careers when it is most beneficial or when they can use it most effectively.

  3. I’m really enjoying this series. I look after a site called RadarMusicVideos – we enable artists and labels to find and commission music video directors online and also help promote music videos. Our commissioner clients range from majors (Mercury, Island) to small independent labels and unsigned artists. Pricing has been our trickiest issue and isn’t necessarily sorted yet!
    We’ve decided, as our commissioner market on the whole have severely limited budgets, we’ll charge them on a one-off, per brief basis. We also have an annual option which costs less, but even majors prefer to use the one-off per brief option.
    Previous pricing models included retrospective charging based on % of budget (a short-term, introductory strategy for obvious reasons), followed by a recurring subscription model. We abandoned the recurring subs model pretty quickly – labels/artists are incredibly wary. On the other hand, directors are more than happy to pay a small recurring sub every month to keep in touch with new briefs.

  4. Ya, the word saturated is a little less than an understatement.
    First off, the whole freemium thing is such a great idea and has obviously worked for a ton of companies (including Artistdata, Bandcamp) because artists in general are needing to get really creative about ways to create income.
    We’ve found, since launching, that the word “need” is very relative as well – it all depends on what level of artist you’re targeting. Since launching our website builder we run into piles of artists that want to bake us cakes for creating something so simple and necessary for them to function yet others don’t feel like having a website is a need (& would rather just stick to Myspace, Fbook, and selling tunes on iTunes etc.)
    The mailing list manager comment I totally agree with in that I can’t imagine this ever becoming obsolete. We will always have a need to communicate with people which is why we built this piece right into our system. However, over the past couple of years I’ve seen tons of artists transition out of the mailing list idea for Facebook Fans…

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