Two close boyhood friends grow up and go their separate ways. One becomes a humble monk, the other a rich and powerful minister to the king. Years later they meet. As they catch up, the minister (in his fine robes) takes pity on the thin, shabby monk. Seeking to help, he says:
“You know, if you could learn to cater to the king you wouldn’t have to live on rice and beans.”
To which the monk replies:
“If you could learn to live on rice and beans you wouldn’t have to cater to the king.”
- Parable borrowed from jlcollinsnh.com (an excellent personal finance blog)
There are myriad ways to judge financial success of your business, especially because your business is really 4 businesses (recordings, songs/publishing, performances, and merchandise). Below we’re going to look at a few of the basic ways to judge success.
One way is to look at the top line. This is your gross revenue. The more you make from licensing, the larger your crowds at concerts, the greater your gross revenue. Say your licensing and concerts yield you $100,000 in a year - that’s your top line.
Another way to look at financial success is to measure the bottom line in relation to the top line - this is called your profit margin. Using the $100k example above, after all expenses to crew and management and travel you end up with a net of $30,000. That’s your bottom line. Your profit margin here is 30% ($30k/$100k). In the live touring business with management, biz mgmt, lawyer and all the standard expenses of touring you can expect a profit margin of 30-35% on average.
Another metric is to look at profit per member. Using the above example, imagine the business was owned by one person so profit margin of 30% and $30,000 for one person is $30,000 take home pay for that person. Imagine that business with 4 members and you’ll see that the take home pay per member is $7500.
Using these three options above, how would you be inclined to judge success? I think most of us would judge success by the first option - top line. Visually we can estimate this level of success very easily. How many people could they get into an show? How many plays on Spotify? Those are the sexy numbers.
I would make the case that metric #1 above is also the worst way to judge success for yourself even though it’s the sexiest. I find that when you look at the big picture and simply state, I want to get there, you end up spinning on that image and getting depressed that you’re not there instead of focusing what’s in front of you right now. What’s in front of you right now is that you have a band and you can play some shows and record and distribute a record, all for very little money. So…
What you really want to focus on is the most unsexy - reducing expenses right now and driving up Metric #2 - your bottom line. You want to shoot for the moon, and you should. If you want to be an arena act, that’s great. Just know that there is one skill that you can learn now that will travel with you all the way to the big leagues - and that’s the skill of keeping expenses trim. Of running a lean business. Learning how to judge what expenses or investments are important for what stage of growth and when to invest to get a certain return. It’s a thoughtful process and skill and I often turn to Mr. Money Mustache when I need a pep talk or some inspiration… and you should too. Learn how to run a tight ship now and then when the money does come pouring in, you don’t squander it because you’re a seasoned money manager.
Metric #3 above, the profit margin per member is my next favorite. Pull back the covers and you’ll realize that sometimes a band making twice as much money as another may actually take home less money per individual. One band makes $900k and has 5 members and a 22% profit margin - each member takes home $40k. Another band makes $450k and has 4 members with a 50% profit margin and each member walks home with $56,250. (These are based on a true story :).
There is no right way to get the profit per member to the sweet spot. It’s a dance of lifestyle choices, artistic vision, and judging what’s important for the critical path. What is clear is that the skills you develop in thinking about each investment/expense along the way and purposefully pushing yourself to maximize each stage of development with the resources at hand will go with you throughout life.
The ultimate goal is to live comfortably on your art and be able to save and invest for your future self. The best way to do that is to increase your profit margin.