Generally speaking, royalties for sales are calculated by multiplying a royalty share with a certain base price and a sold quantity.
Whilst the quantities sold can be determined without much interpretation from sales less returns, there are various common practices applied in the music industry to determine base prices.
Here is an overview of the base price options currently available in details for royalty calculations:
- Fix Price (1)
- income (2)
- Line PPD (3)
- Product PPD (10)
- List Price (4)
- Max (5)
- Max Payback (6)
- Payback (7)
- Min (8)
Fix Price
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Royalties may be calculated based on a fixed price determined by contract.
The fixed price must be specified in the contract in your main accounting currency (system currency).
The royalty calculation will use this fixed price regardless of the actual income of the sales.
”An example would be compilation tracks accounted at royalty rate pro rata at a price of 10.80 for Vinyl.”
Income / Net Revenue
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Royalties may also be calculated based on the actual net income of the label, also referred to as ”PTD (= Price To Distributor)” or ”PPU income (Price Per Unit)”. This is the amount the label is actually paid out from the distribution partner and should end up in the label►s bank account (probably before bank fees).
The net income is after all discounts and distribution fees from upstream business partners.
This option should be used for profit split deals.
Line PPD
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The Line PPD is the classic music industry Published Price to Dealer (PPD) as imported from a sales file.
In other words the Line PPD is the wholesale unit price base reported from your distribution partner before distribution fees. What other discounts or deductions are included in the reported PPD needs to be defined by the distributor.
Please note that not all distributors provide PPD information per sales line their sales files.
If your contracts require PPD information, you should make sure that it is delivered by your distributors in a standardized machine-readable form.
Product PPD
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The Product PPD also refers to the Published Price to Dealer (PPD) before Distribution Fees, which in this option is specified however per product in details – and NOT in the distributors’ sales file.
You can define the PPD at which a product should be accounted in LABEL / PRODUCT / selected product / Overview.
If your contracts require PPD royalty bases it is important that you understand the difference between these two options: In essence the ”Line PPD” is imported data from an external source and may change from month to month, whereas the ”Product PPD” is set per product in the application and semi-permanent, meaning that the base will only change if you change it manually in the specific product.
List Price
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This option refers to a default sales price fixed for a specific distribution account.
PRICELISTS are used to define specific sales prices to specific customer categories depending on product categories which are defined in our PRICECODES.
Max
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This option contains a price base definition depending on the higher value of two variables, a) the imported PPU Income and b) the price entered as Fix Price.
The Max rule calculates royalties on whichever value is higher.
Max Payback
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This calculation is used to provide a label or distributor with a guaranteed margin regardless of the selling price.
To use this option, clients need to define minimum guaranteed percentage margins per defined product FORMAT.
If the imported PPU Income from sales reports reduced by guaranteed margin for the related format is less than a specified payback for the same format, it uses the payback as royalty base, otherwise the PPU income less the margin.
Payback
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This option refers to an agreed Payback price fixed for a specific product format or specific product.
Paybacks can be set as default for formats like 12″, LPs, CDs, T-Shirts etc.
Specific products however can have ”Special Paybacks” which overrule the default paybacks set for a format.
Find more information on this option HERE
Min
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This option is the reverse case from Max: It compares a) the imported PPU income and b) the entered Fix Price and calculates royalties on whichever value is smaller.