The club giveaway offers can have a dramatic impact on an artist. First, the artist will only receive about 50% of their usual royalty rate on sales through clubs. This is because the royalty payable by the club to the label is very low (less a container deduction), based on 85% of sales. The rationale for the lower royalty is that the marketing costs are higher for record clubs and there are a lot of people who never pay for the records ordered. Moreover, the mechanical royalty to the songwriters is also reduced (usually 75% of 75% of the statutory rate). Finally, there is the unseen factor that the clubs' special offers devalue the product in the eyes of the public. If the public can buy eleven CDs for a penny, how can an artist be worth $25 for a concert? Because of the low monetary rate of return to the labels and acts, some major record companies are no longer licensing their catalogs to the clubs.
When an artist signs a record contract, there is always language that allows for the label to license the artist's product to record clubs, for a reduced royalty to the artist. However, the artist can attempt to negotiate certain provisions into the contract that will lessen the financial hit to the artist from record clubs sales. First, the act can try to exclude record club sales entirely. Second, the artist can ask that the record company agree that the number of royalty free records distributed by the clubs will not exceed the number of records sold. Hence, even if the number of free goods exceeds the number sold, the label still has to pay a royalty on that excess. Third, the act can request to be paid a straight 50% of the company's net licensing receipts.
Record clubs will probably always be around in some form (but are evolving due to the internet). Although they can provide exposure and sales to an artist, it is important for the artist to try and maximize the royalty payable on such club sales.
Ben McLane Esq