Factors Affecting Royalty Rates in Brand Licensing

The global licensing industry was valued at $292.8 billion in 2019, with signs of continued growth in the current year. Much of that growth can be attributed to new entrants and established companies expanding deals to generate new revenue streams to remain profitable and competitive. 

As a result, calculating and managing royalty rates has become more complex. In our previous post, we discussed the most common royalty rates in licensing. This time, we explore the factors affecting those rates. 

In this article, find answers to the following questions:

  • How does the strength of my property affect my royalty rates?
  • How can I earn royalties from marketing campaigns?
  • Where can deductions be made to increase revenue?

Property Strength

The individual royalty terms the licensor and licensee arrive at depends mainly on the licensed intellectual property's power. If a brand or product is neutral in the marketplace, standard rates can easily be applied. If there is a significant amount of competition or brand demand has increased in a short period, deal-making can become tenser. 

Licensing stakeholders use the following criteria to evaluate the strength of their properties: 

  • Market dominance
  • Audience demographics
  • Strength of the license holder
  • Property's commercial past

To properly assess your property strength, you need to look at a vast array of data including past sales and previous royalty earnings. Previous reports will give you a close look at when and where your property has attracted the most interest. If you notice seasonal or incremental declines, the reports can help you refine your strategy or decide if the property in question is worth expanding further. 

Licensing professionals are used to evaluating such data quarterly or yearly, a practice that can result in overlooking key changes in the market and deciding on rates that licensees may not be able to honor. For example, if you own the license to a character from a film that performed well last quarter you can make plans for new extensions and find out that interest has waned when too late. 

Flowhaven’s sales reporting modules offer a simple solution. Able to process up to the minute data, our platform gives you the ability to look at your archival sales data to make informed decisions about your programs. Use customization tools to look at numbers by territory, by style, and more. 

Deductions

Licensees want to secure as many deductible clauses as possible to lower the net sales number and, consequently, the royalty rates. On the other hand, licensors look for maximum profit; hence, many limit the licensee's deduction rights.

Similarly, some licensors eliminate any reimbursement clauses from the agreement and require royalty calculation based on the gross sales figures. In this case, allowable deductions include retailer discounts, returns, and freight, each amounting to no more than 2-5% of the first billing amount. Other factors include retail and licensee situation, market size, product margins, and security measures.

Product Strength

Product strength can be just as important as property strength. For example, a deal for knit sweaters in South America may not be as lucrative as in Northern Europe. For licensing partners to come up with a fair royalty rate percentage, they need to know their respective product categories' average royalty rates.

Standard percentages for the most popular product categories include:

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%


In most cases, licensors determine the royalty rate based on the success of the branded products they've sold in the past. In some rare cases, the licensee can dictate the figure. For instance, if the product (or product category) sees significant gains at the market or the licensor's intellectual property is brand new. These days, licensors are generally unwilling to agree to less than 10%. 

To assess product strength, you can use the aforementioned sales reporting functions in addition to many other accounting functions available in the Flowhaven suite. If you have established a previous relationship with the manufacturer you have made a deal to release new products with royalty reporting functions that may be of particular importance as well. 

Flowhaven was built to help licensing professionals solve the challenges most commonly associated with royalty reporting. The solution can process custom deal parameters, giving you the ability to account for any way you structure your deal. The system is also a thorough replacement for manual computing, which has been known to cause catastrophic errors that are often overlooked until after a deal has gone into production.

Marketing

Marketing is a crucial ingredient in the recipe for licensing success, with skillful campaigns helping even the most simple products (think Pet Rock) become runaway successes. It's common for brand owners to require a small fee from every licensee to contribute to a pooled marketing fund. This contribution is usually a small percentage of the licensee's net sales from the licensed product. It is also common for licensors to claim minimum payments on a quarterly or yearly basis. The average percentage for marketing contributions ranges between 1% to 2%, yet it may grow substantially with time.

Licensors distribute the marketing budgets to purchase media and advertising space for all participating licensees' collective benefit. Some licensors may require license holders to pay a small advertising fee separately (usually the same 1-2%). In this instance, licensees can choose how their advertising contribution is spent. With the expanded advertising possibilities, licensees can encourage sales before the product has even been released. 

Exclusivity (or lack thereof)

Exclusivity is the granting of rights to perform an action on behalf of a brand, such as brokering deals for a specific territory as a licensing agent or manufacturing a particular type of good as a licensee. Exclusive deals have the potential to yield high returns. However, exclusivity does not always guarantee the royalty rate will increase.

The minimum guarantee tends to be higher in exclusive licensing agreements. The licensor must be sufficiently and timely rewarded even if there are issues impeding sales. Such high stakes deals motivate licensees to put their best effort into promoting and selling licensed products. By boosting motivation, licensors hope to justify the limited commercial capacity of their exclusively licensed properties.

As a rule, it's best to minimize or eliminate manual, paper- or excel-based processes as much as possible. Simplify computing by transferring data to integrated systems that can help compare your calculations to contract terms, and set up to ensure the correct monies are paid to you at the end of the deal. As mentioned in the preceding paragraph, the Flowhaven solution is the perfect platform for ensuring royalties and earnings are calculated accurately every time. 

The Flowhaven solution has optimized the process of granting rights to partners. As a licensor, our state of the art solution gives you the power to give full access to style guides, and other assets automatically based on the terms of your agreement or your own manual settings. Once a deal has ended, or you have decided to limit the reach of a given partner, you can easily remove access as well. 

To learn how Flowhaven is helping the world’s best teams improve the process of calculating royalty rates and increasing revenue, book a demo today!

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