Royalty revenue, 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. The royalty rate is set 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 their program.
Despite their importance, many licensors still struggle with the manual effort that goes into the royalty calculation process. From spreadsheets to outdated tools to accounting systems that are unable to process custom deal parameters, inefficient computing has led to revenue loss and inaccurate assessments of licensing program health.
Below, we offer a comprehensive guide to royalty rate calculations and tips for success.
In most cases, royalty revenue 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 revenue is the result of sales multiplied by royalty percentage.
As a rule, it’s best to minimize or eliminate manual processes as much as possible. Simplify computing by transferring data to integrated systems that can help compare your calculations to contract terms, and ensure correct monies are paid to you at the end of the deal.
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
Flowhaven tools can help you and your partners analyze your programs in real-time, from any device with comprehensive dashboards that show you not only royalty earnings but sales report by territory, SKU performance, and more. These insights help to refine strategy and risk by increasing access to historical records, pinpointing tactics that correlate with certain outcomes, and highlighting differences between current and past market conditions.
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:
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 and expected revenue. Post-production costs including retailer discounts, returns, and freight costs will be factored in as well.
Implementing a thorough royalty calculation system means equipping your team with comprehensive tools that allow them to track royalties from agreement to recoupment. Cutting-edge licensing relationship management tools like Flowhaven allow you to manage all of the stages in between including calculating royalties with even the most complex deal parameters.
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.
When you have a tool that does the calculations for you, you not only save your team time allowing them to focus on the work that really matters, you mitigate risk. Knowing that you are working with accurate numbers, no matter how the nature of your deal changes, will allow you to maintain trust among your partners and ensure that you never lose out on key earnings.