CDbaby – Small-time musician to multi-millionaire entrepreneur

Can you start a business without knowing anything about the business and still succeed.

Derek sivers did it with cdbaby. He learnt everything including programming on the go and built cdbaby into a multimillion dollar business.

Here is how he did it.

His struggles to find a distributor.

Derek graduated from Berklee College of Music and pursued a career as a musician. After struggling for a while, finally he released his own album. At that time, there were only a handful of online vendors for CDs and music sales.

Derek contacted Amazon and other big online music stores and asked if they would sell his album on their sites. They all turned him down when they heard he was an independent artist with no record label.

Derek says “I called up CDNow and I said, “Hey, I’ve sold 1,500 copies of it on my own at shows, would you guys like to sell it?” And they said, “Sure, who’s your distributor?”

When he mentioned that he did not have a distributor, No-one wanted to sell his Album.

That did not make sense for Derek. He wondered why he can’t become his own distributor and send his CD’s to them so they can sell and pay him. but all the online music stores wanted a reputed distributor to sell his album.

He contacted a lot of distributors but all of them kept rejecting him. A very reputable distributor wanted Derek to have $20,000 in the bank to be his distributor.

Derek’s goal with his album was not to make it a blockbuster and earn millions.

He says “And at that point I was just like, I don’t need to be in shopping malls in St. Louis, I don’t need to get it into every Tower Records in the country, I just want to make it easy so that the person who heard it last night on his college radio station in New Mexico can order it, right now.”

This was 1998(seems very old right!) and there was not a single place on the internet that would sell CDs of an independent musician.

Derek says “In 1998 and before, you could get distribution, but you were really judged along the way. It was only if someone who really believed in your music had signed you to a deal.”

He adds “What’s amazing to me now is that it doesn’t matter what anybody thinks — any musician with the most unlikable music, if they believe in it, they can put it out to the whole world. You don’t need a filter, you don’t need people at a desk approving you or maybe changing their mind, or maybe the one person who likes you gets fired and now you’re screwed. The whole thing has changed. ”

Should he give up his dream?

After all the hard work he put into producing and recording his album, Derek was not willing to just give up. He decided to sell his album on his own website. but he did not know anything about building website or how much it would cost, Undeterred, he taught himself programming and also how to build a website.

Derek says “Actually I started CD Baby with only $500 – $99 was for a copy of Dreamweaver to build the site, $20 for my first month of web hosting and then $375 for the SSL Certificate through VeriSign.”

Within a short time,his album was available for sale online on his website CDBaby.

When he launched CDBaby the site’s design was pretty bad. And instead of building a fully automated site, he did much of the order processing by hand. He quit aiming for perfection and just launched.

Would anyone else use his service

Soon after, a friend, who had the same exact problem, asked Derek to put his CD for sale on the site. Derek agreed and now he had two CDs for sale on his website.

And then another friend came in, another friend, another friend, before he realized it he had thousands of friends who were all selling their CDs on his website.

At that point he was still doing it as a favor. He even used to ship his friends orders. Every once in a while he went to the post office and dropped the CDs in the mail.

But there was a problem.

Nine months after launching, his site was only bringing in $15 a week. Others might have have assumed that the site was a failure, but Derek was patient. He gave it room to grow.

“I like building systems to help musicians.” he says
The concept of Derek’s idea was so great that he soon started getting calls from artists he didn’t know, asking him to sell their album on his website.

He then realized that his personal problem was a problem that all independent artists shared. They all needed a place to sell their music online. Furthermore, musicians want to spend their time making music, not going to the post office and maintaining an online store.
So, he said “Yes” and put their CD’s on his website.

Since he had to maintain the website, he started charging a nominal fee for his services.

“Imagine if you had a car, and your friends keep asking for rides, then eventually you charge a little money for rides, and later someone asks you how you got your taxi business off the ground.” says Derek

“It’s not like I had a great plan or strategy. People kept asking me to help so I just said yes.”
The first year, He was just selling up friends’ CDs on his website in his spare time. He’d only sell a few a week, so he would ship them in his spare time. Eventually this became a part-time job.

By the end of the first year, He hired a local guy to help him with shipping and emails, while he spent more time doing the back-end programming to improve the site, to add more features.

Derek did not have any office or warehouse.

Derek says “All of this was just run out of my bedroom. By the end of the first year the CDs had filled my bedroom and living room. In the second year, I moved them into the garage.”

Can he make money?

He started charging $25 per month and customers willingly paid him.

Asked about how he knew that this would work out. He says

“In a way, success was felt right away because everyone really loved this idea, friends told friends about it, and strangers kept coming to it, even though I was doing no work to promote it.”

“Big money didn’t come until four years later, but some money and enthusiasm came right away – so I knew I was on to something that could be big.”

The business slowly grew and grew and grew over ten years. A full year after he started it, it was only making $2000 a month. Then a year later, $5000 a month. A year later, $10,000 a month. A year later, $20,000 a month. It was only after year 8-9 that it got to $250,000 a month.

Derek Says “A lot of it was my selfless focus entirely on the customer. Since I didn’t really want to start a business, I was just focused entirely on helping people however I could. I didn’t care about profit – only that I made enough to sustain, to be able to continue doing it. This kind of philosophy becomes apparent in a hundred little ways inside a company. It changes how you handle phone calls, refunds, emails, policies, and everything else.”

He adds “Since I didn’t really consider it a business, I treated everyone like they were my good friend. This kind of casual warmth is what really drew a lot of people to CDBaby.”

A big opportunity

When Apple opened up iTunes, they partnered with Cdbaby to put Cdbaby’s catalog into iTunes.

Derek Says. “I went up to Apple’s office thinking that this was going to be a meeting with, you know, a marketing guy. And then Steve Jobs himself walked out, saying, “It’s really important to us to get every piece of music ever recorded available in the iTunes Music Store.” Since we’re not talking about physical product, there’s no reason not to. There were a few other indie labels there, and he was saying to them, “Even if you have an album that’s out of print, that isn’t even worth you pressing up a thousand copies anymore, let’s just get a digital master of it and make it available to the people that want it.”

This was a brilliant move by Steve Jobs.

The existing “pre-internet” thinking was that consumers would buy only hits and since stores had limited shelf space, they stocked only the hits..

Steve Jobs turned this upside down.

Derek says “So it was really kind of a different mindset for music retail. Not just like, “Hey, we’ve got 100 square feet of floor space, we need hits, baby, hits hits hits!” It was, “Get everything up and selling.” Which is just the most indie-friendly attitude you can have.”

He adds “And I think it’s really because iTunes did that, that everybody else had to catch up . . . That whole mentality was just kind of tossed out, because you never know what’s going to hit — there might be some obscure band that no one’s heard of today, but tomorrow they’re going to be on a reality show, and 50,000 people are going to want that album that day. So the idea is, let’s get it all up and selling, why not? ”

When the iTunes Music Store launched, CdBaby started distributing digital audio to the big online sellers of digital music.

“So we became both a store and a distributor. But only for independent musicians. No Madonna or Miles Davis. Only musicians who are putting out their own music directly, without a record label.” Says Derek.

Cdbaby continued to grow because it had a personality of its founder.

Should his business be like any other typical business?

Derek says “If you go to any rock-and-roll part of any city in the world, you can see so many quirky shops, whether it’s a skateboard shop or a record store. There are so many great examples out there where the owner pours their personality into it.”

“Maybe it’s because record stores are often an example of that. If you’ve seen the John Cusack movie High Fidelity… It’s this classic example of a record store, where they’re like, “No, you can’t buy Stevie Wonder here! Get out!”

“That’s a great role model to have. Your business can be as quirky as you want it to be. People love that. Nobody needs another sterile paint-by-numbers, typical business that’s doing what every typical business does.”

“Put yourself into the mindset of the customer. If you’re a customer in the world, which do you appreciate more, another cookie-cutter business that’s absolutely normal, doing business the normal, safe way, or the one where you walk in and the owner is a quirky bird that has funny policies? You appreciate that more. Knowing that you appreciate that as a person, why not—when you’re creating your own business—be true to that?”

Success

Revenue continued to increase and cdbaby was making $4million in profit a year.

Derek says “I’ve only ever done what I’m passionate about. I don’t believe people should ever do anything just for the money. You should find what you love to do, and find a way to make money doing it.”

A lot of investment firms called Derek to invest and grow it bigger. He always turned them down.

“I want my business to be smaller, not bigger,” he’d tell them. and that always ended the conversation.

Derek says “So many people, when they start a business, they so desperately want to be big, big, big, they want to be billionaires, they want to please everybody. So they’re in that horrible mindset of “How do we please everybody?” That’s when you do things like make these policies that are sure not to offend, because you don’t want to turn away a single customer, because you want to be a billionaire.”

He adds “On the other hand, if you realize you only need to please 1% of the market, the ones who really get what you’re trying to do, then you do things in a different way.”

After a while, Derek did whatever he felt had to be done for cdbaby and he felt complete with it. In fact, he had automated it completely that it was just going smoothly without his presence.

Derek says “I did a complete rewrite of the software. I fixed all of the mistakes, bugs and all of my regrets, and I made this amazing version of everything I ever wanted the website to be. I launched it, and it went well. Then I had this sense of completion like “I’m done. I don’t know what else to do with this ‘thing’.” It got to the point where I felt my clients were actually more ambitious than I was. They wanted to grow their careers, and I didn’t want to grow anymore.”

“Seth Godin, the author of a bunch of books like the Purple Cow, has been a mentor to me over the years. When I told him about this situation, he encouraged me to sell. He said, “You know, if you care about your clients and your company, you should sell.” It was the idea that I was doing my company a disservice by remaining at the helm when I was feeling completely unambitious about it.”

At this time, He was getting a lot of offers. One time, he got three offers in the same week. One was from Amazon and the other one was from a company called Disc Makers. Amazon outbid Disc makers by several millions.

Yet, Derek sold CDBaby to Disc Makers in for $22 million dollars.

Derek says “I chose Disc Makers to buy the company. Amazon was in the running and was actually willing to offer much more money, but I’d known Disc Makers for seven years, and they had already been dealing with independent musicians for many more years than that. I felt they would do a better job of taking care of my clients by knowing my clientele and understanding them better than Amazon. Yes, I chose Disc Makers for less money because I just felt my clients would be in better hands.”

“I really sold for personal reasons, not for money. I just felt done with it. Like a painting after a painter puts the final brush stroke on it, I just felt I had nothing more to add. The business did everything I wanted it to do, and I had no more vision for it. I realized I was doing my clients a disservice by remaining the leader of something when I didn’t want it to grow anymore, so I sold it to a company that felt it had a long way to go.” Derek says.

“Don’t stay in hiding, trying to perfect anything. Launch too soon, not too late.” Derek says.

His advice on how to become successful and make a lot of money

Asked about his advice on how to make a million dollars, he says

To get to that million-dollar size, it has to be something that’s a system that runs while you’re asleep. If you make something that depends on you being hands-on, it can never grow to an unlimited size. You have to build a system.

keep your focus entirely on helping people, not on the million dollars. If you’re just focused on the income, you’ll do stupid things that don’t actually add any value to the world, but that promise you riches.

Add value to the world. Give more than you receive. Be selfless and go over-the-top in helping people.

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