The Royalty Revenue Calculation Roadmap
Haunted by the sound of calculators computing royalties? You’re not alone. Royalties—the amount of gross or net revenue derived from the use of an asset—are among brand licensing’s most puzzling financial figures.
Royalties are based on an understanding of current and forecasted market conditions and are a key indicator of your IP’s overall profitability and health.
Most licensing pros dread the manual processes that have defined the royalty revenue calculation. Sure, no one uses an abacus, but spreadsheets and other outdated tools leave businesses vulnerable to miscalculations. If they aren’t caught early, Even the smallest errors can cause partnerships to fray after the product has already hit the shelf. If those tools can’t process custom deal parameters it can lead to revenue loss.
Below, we offer a quick guide to calculating royalty rates and expert tips for success.
How do I calculate my royalty rate?
The royalties for a certain popular cartoon mouse brand might be higher than those of a brand new, independent character brand. However, a new popular video game title with a cult following might fetch more overall. It helps to know how well your property is received in the marketplace.
Do you have an engaged fan base? Is there an established market for your product? What price will you sell your item for?
When you feel confident about your brand’s value, you can move onto formulas. The base formula for royalty calculation is royalty revenue = sales x royalty percentage.
You can choose to keep things old school, and do the math for each and every SKU. Or, you can simplify your computing by transferring data to a system that can help validate your calculations against contract terms, and ensure you get the exact amount you’re owed at the end of the deal.
How do I assess product health?
Established brand owners have a key advantage. 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 have to rely on 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 everyone licensing their IP, use informed (and recent) stats to determine the best royalty rates.
Here are just a few category standards:
Art: 3% - 12%
Celebrity: 3% - 15%
Entertainment: 6% - 16%
Collegiate: 2.5% - 20%
Corporate: 3% - 12%
Designer/Fashion: 4% - 12%
Events: 9% - 14%
Sports: 4% - 15%
* Source: The Licensing Library, 2019
The Flowhaven Licensing Suite can help you and your partners analyze your programs any time, anywhere.
Easy-to-read dashboards show you royalty earnings, sales reports by territory, SKU performance, and so much more. This peek behind the curtain can help you refine your strategy and avoid risk.With historical data at a bird’s eye view, you’ll even be able to see where you made the best decisions.
How can I tell if there is a demand for my product?
Brand owners need to know how a product category is performing and if there is a gap in the market for their licensed product. To determine a royalty rate, brand owners need to know what rates are typical of each product category. Children’s meals at fast food establishments, for example, might be money-makers, but shifts in opinions on healthy eating can affect your potential earnings.
Today, categories including apparel & accessories and novelties have high royalty rate averages. As a result, brand owners launching products in popular categories can negotiate higher or comparable royalty rates.
Take a look at the category standards:
Accessories: 3% -18%
Apparel: 5% - 17.5%
Consumer Electronics: 3% - 10%
Food/Beverages: 3% - 12
Gifts/Novelties: 5% - 17.5%
Health/Beauty: 5% - 12%
Publishing: 5% - 15%
Sporting Goods: 2% - 15%
Toys/Games: 5% - 15%
Video Games/Software: 1% - 20%
What other costs should I factor in?
Don’t forget, royalty rates are financial figures that are impacted by all other financial figures related to a given deal. Changes to the minimum guarantee, sales slumps, production bottlenecks, and more, can all influence your potential earnings. Post-production costs including retailer discounts, returns, and freight costs should be factored in as well.
Royalty calculation shouldn’t send a shiver up your spine. Having an effective royalty calculation system is the key to keeping calm. It will equip your team with comprehensive tools that allow them to track royalties from agreement to recoupment. Cutting-edge licensing relationship management tools like Flowhaven take care of all your calculation needs and even support complex deal parameters.
Royalty rates are central to your licensing program’s bottom line. While they are subject to factors beyond your control, including market conditions and consumer habits, royalty rates that have been calculated well can yeild high returns. They’ll also tell you if any changes should be made to your 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.