How Record Label Deals Work

how record label deals work
Image Credit: Okay Player

If you have ever wondered how record label deals work, whether you are an unsigned artist or just want to satisfy your curiosity, stick around because I wrote this for you.

The music business has changed (and I’m stating the obvious) but the intention or rather the objective still remains the same – to sell records (from a record label standpoint).

First of All…. Nothing is Free

The average artist’s dream or end goal is to get signed by a major record label or indie and enjoy the perks that come with being a successful recording artist.

But everything comes at a price. And a record label deal is no exception.

Here’s how this works

We will start with the most simplistic or standard record deal that’s offered to the “new” artists.

Record labels (majors and independents) are in the business of selling music (I did mention this in the beginning of this post). Don’t listen to anyone who tells you otherwise.

When a record company signs you, their obligation is to pay for the studio recordings, which includes mixing and mastering, promotions, marketing, distribution (physical manufacturing and/or digital) and any direct costs which contributes to selling your music to the public.

They will do all those things for the artist in exchange for a large portion of the profits and ownership of the music copyrights which includes owning the master recordings.

The contract will state how the profits and royalties from record sales will be distributed. Very often the artist would keep say 5 % (this can increase should an artist sell more units, downloads, streams et cetera).

The reason why the artists get very little in royalties is because the labels are the one’s taking the financial risk.  

Some labels offer their artists an advance (it’s basically a loan) which can be used to pay for studio sessions, producers, personal expenses, etc.

But the advance will be recouped by the label against the artist royalties.  For example let’s say the label gives you a six figure advance and your album doesn’t sell enough units for the label to recoup their costs. That leaves you with a huge debt and that means you won’t see a royalty check until the label can recover their money from future albums.

If you have a one-album deal the worst-case scenario is that the label might refuse to hand over clearance (it happens). In recent times record labels have resorted to 360 deals in order to stay afloat, without this deal in place there is very little incentive for the label.

What’s the solution?

If the prospect of getting a record deal turns you off after reading the above there is another way around this.

Licensing Deal

A licensing deal allows you to retain ownership of your music. That means you will have to pay for all the recordings and once that is done you can license your product to a label.

The label will basically purchase the rights from you for a set period (say 3-5 years) and cover the marketing and distribution costs for your albums.

But the beauty about a licensing deal is that you get a bigger slice of the profits (depends on your agreement) and 100% ownership of the master rights.

Distribution Deal

A fully-fledged distribution deal is not for everyone because it requires that you have access to large sums of money, time, dedication and human capital.

In the digital distribution world you can probably pull this off with very little money and resources.

 But if your intention is to take a bigger pay cut (80% or more), manufacturing physical units, and doing everything that a real record label does, then you need lots of money!

All you need to do is to convince a distributor that you have a market for your music. If they are sold on your projections and numbers they would be willing to offer you are a replication and distribution deal.

With this type of a deal, the distributor is only responsible for ensuring that your products are manufactured and readily available in retail stores, that’s it! The rest lies upon your shoulders.


Record label deals are not one size fits all – they differ from artist to artist and label to label. Of course, deals can get complicated when the artist is a household name because their fan base and reputation allows them to negotiate for better terms and royalty payouts.   

I hope that I have given you a basic idea and better insight on how record label deals work. If you have any questions and thoughts please share them on the comment box below.

Thank you for reading.

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