Very tough indeed. If you were not specifically commissioned to make the image for the album, it may be difficult to charge what it is really worth. However, perhaps the publicity is of value to you in terms of getting future musicians as clients?
It depends on how special or iconic the image is- or is it one that lots of photographers could supply?
Make sure everyone understands the useage agreements. Can they use the image for other uses- posters, advertisements, etc.
Can you continue to use the image yourself, can you sell it?
If it is a popular album, you would likely be able to make some money selling fine art prints of the album cover to their audience.
If they are tying up all rights of use price goes up. Useage needs to be defined.
My guess is they expect to spend no more than $200, sadly they can get decent images for free and a little promised "exposure."
If the musician brings up the idea that you should offer a discounted price in return for increased exposure, ask how much he's discounting the price of his album in return for increased exposure and how much he discounts his fee for live performances in return for increased exposure.
Thanks for the thoughts and ideas. In the past I would have used the Getty Images calculator and adjusted from there but that whole market has changed.CD cover images are considered commercial use. Everywhere the CD is sold - physical copies, download sites, streaming services, ads - will display that cover image. Folk Music is not nearly as broad / popular as say pop or rock so the audience will be smaller so the license fee will be less. It unreasonable to license a CD cover image for a limited time so you will need a license fee commensurate with only get paid once for usage. You need to be clear in your license terms. If its for the CD cover, specify explicitly that in the license agreement and make sure your license excludes all uses not explicitly named in the licensing terms.
Rule number one in negotiating is never negotiate against yourself. See if you can find information on album sales for this artist. That will tell you more about the potential scope of visibility of your artwork. Ask the artist rep what is their budget for album artwork / cover art. If they say they don't have one, that's hogwash. Any reasonably well known artist in any genre has a record label that has a release process and marketing budget that includes cover art / album artwork.
If you have other images that might interest them, offer a package deal that might garner you more total licensing fees and give them a one-stop shop for all their needed artwork. You might go from $200 to $500 total as a result. It is a win-win for everyone. If it is a great image of the artist, is it something that would look good on merchandise? Total packages help promote the artist and increase your license fee.
Cold calling you is an indication they really like your work. Ask how they found it. Tell them how much you appreciate them contacting you. Just know that their number one goal is to spend as little as they can get away with. Don't sell yourself short, but be reasonable. In the end no one knows what you charged but you and them, so only you and they need to be happy with the outcome.
Again, just make sure the license agreement is explicit on allowed usage and that all usage not explicitly identified requires a separate license fee. Also make sure the license agreement explicitly states that you continue to own all rights including copyright to the image(s) licensed. You are not turning over copyrights to your image.
If you are successful you might strike up a good relationship with this artist's rep and the artist themself. Music photography is all about trust and relationships. This is a great opportunity for you.
I wish you all the best in your negotiations. Let us know how it turns out.