Royalty rates, the agreed upon percentage of gross or net revenues derived from the use of an asset, are among the most puzzling financial figures in brand licensing. Calculated based on an understanding of current and forecasted market conditions, royalty rates are a key indicator of an IP’s overall profitability and a concept that, if calculated properly, can give a brand owner unique insight into the strengths and weaknesses of their program. Below, we break down royalty rates and the factors that influence them, to help you find the rate that works for your business.
In most cases, the royalty rate is a reflection of the core IP’s strength. For example, the royalties for a certain popular cartoon mouse brand might be higher than those of a new, independent, animated character brand. However, a new popular video game title with a cult following might fetch more overall. Royalty rates should be calculated case by case and determined based on the retail price of the product multiplied it by your royalty percentage.
Some circles, such as tech, observe “the 25 % rule” which dictates that the majority of all profits beyond the minimum guarantee should be allocated back to the property owner. Though the rule has encountered some criticism, it aims to set a standard that honors the work of conceptualizing and creating the original IP.
Established brand owners have a key advantage when formulating royalty rates for new products. They can use historical data to determine how much customers are willing to pay for products featuring their IP, what retail environments their products perform best in and more. New licensors have a different challenge: they must use secondary factors such as online engagement or viewership (for TV programs) to gauge market demand for their items. Despite the marked differences, it is important that all persons licensing their IP, use informed metrics to determine their royalty rates.
Category standards include*:
* Source: The Licensing Library, 2019
To determine a royalty rate, brand owners need to know what rates are typical in a given product category. Moreover, they need to know how a product category is performing and if there is a gap in the market for their licensed product. Children’s meals at fast food establishments, for example, may be lucrative, but shifts in opinions on healthy eating may affect total earnings.
Today, categories including apparel & accessories and novelties have high royalty rate averages. Brand owners launching products in popular categories are able to negotiate higher or comparable royalty rates.
Category standards include:
Exclusivity is a critical concept in brand licensing. Exclusive agreements allow strictly designated parties to license their IP to specific licensees with set conditions. It is important to note that the minimum guarantee may be higher in exclusive licensing agreements because the brand owner is expecting timely and substantial ROI as a result of choosing the licensee.
A royalty rate is a financial figure that is impacted by all other financial figures related to a given deal. Changes to the minimum guarantee, sales slumps, production bottlenecks and more, can all have an influence on your royalty rate. Post-production costs including retailer discounts, returns and freight costs will be factored in as well.
Royalty rates are central to your licensing program’s overall profitability. While they are subject to factors beyond your control, including market conditions and consumer habits, royalty rates that have been properly calculated can yield high returns and help you determine if any changes should be made to their core IP, if you should renew deals with licensees and more.