The 6 Major Types Of Licensing Royalty Rates
Making sense of licensing royalty rates can be tough. Licensors often turn to consultancy services, local agents, or advice from other brand owners licensing into similar product categories to sort through it all.
To complicate things further, there are several types of royalties and each corner of the industry has its preference.
In this article, we'll cover the six most common types of licensing royalty rates and explain how they can impact your licensing deal.
Domestic Royalty Rate
Domestic royalty rates are like flowers, they pop up everywhere. Domestic royalty rates apply to virtually all categories of licensed properties and are most popular among products sold through conventional distribution channels.
These licensing deals generally involve the transportation of goods from domestic warehouses to distributors or retailers. The licensee's wholesale price should always be the base for royalty calculations, provided they will be sold to retailers on a domestic land basis. The manufacturer will typically absorb the cost of shipping the product from the point of manufacture.
The F.O.B. method sums up the process of delivering manufactured products free-on-board at the retailer’s point of production. In a F.O.B. deal, retailers are responsible for the costs of transporting goods to their final point of sale.
Because retailers are on the hook, they will often negotiate a lower selling price than the usual domestic landed price. Retailers pay less for shipping than licensees, securing generous discounts, and sometimes leaving brand owners to make up costs.
To make up for the decreased invoice amounts in F.O.B. deals, brand owners have to adjust the final royalty rate by around four percent. Lowering the rate helps you bring your total royalty income closer to what it would have amounted to in a traditional deal. With that in mind, F.O.B royalty rates can quickly rise to 12%-14%.
Royalty Rate Applied to Direct Sales
In direct licensing deals, retailers may (or may not) act as licensees. Some may not even participate in the brand licensing chain. If a retailer takes on the licensee role, their selling price (applied to direct sales) will usually rise. But this can unfairly increase the royalty amounts if the rate remains on the same level as in standard licensing deals.
Therefore, licensors may want to adjust the rate to balance out the final royalty outcome. If the retailer isn’t a part of the royalty stream, the brand owner will charge the licensee. On top of that, licensing partners may negotiate a mixed royalty deal, combining the already mentioned payment methods.
Royalty Rate For Services
Licensed service royalty rates are a special case because there is no one tactic that can be applied across the board. Licensors get to decide their rate based on the unique terms of their licensing agreements. The average royalty percentage applied to licensed services varies between 2-15 percent of the total buy, depending on the attractiveness of the property.
Another (easier) way to work licensed service deals is to charge an annual fee for the licensee’s right to use your intellectual property. In this scenario, the chosen (fixed) fee should reflect how extensively the service is used in its media buys and promotional activities.
Sublicensing Royalty Rate
Today, sublicensing is rarely heard of. But, if a brand sees the need to sublicense, both the brand owner and the original licensee are required to make royalty payments.
In most cases, licensors prefer a royalty rate that falls within 25% to 75% range of the sublicensing income. Their stake usually amounts to more than half of all profits. In rare cases, the licensee can negotiate a rate split and apply their own royalty obligation to the sale of sub-licensed products.
Licensing partners might also agree to divide the rate into several percentages according to the sublicensing categories. There are other factors to consider when sublicensing a property including the administrative and localization costs. Licensees usually pay these costs from the licensor’s share of sublicensing royalties.
Split Royalty Rate
A property can have a gang of stakeholders such as the brand owner and the trademark holder. If that is the case, parties normally lower the royalty rate. The royalty rate in a co-branded deal should match the licensee's contribution to the overall success of the licensing program.
Another example is a cross-licensing deal, where multiple properties contribute to one product. Here, the licensee pays a higher royalty rate, which is later split into equal shares or shares respective to each party's contribution. Individual royalty earnings will be lower than normal.
In this post, we mentioned just a few types of licensing royalty rates. Your licensing partners may (and should) find the rate that fits the terms of your agreement. In some cases, that may require you to combine several royalty rate approaches.
At times, brand owners may feel the need to dictate the rules of the royalty game. But to succeed, both partners should emphasize their unique contributions to ensure programs progress quickly and properly.
There’s a better way to calculate royalty rates and ensure agreements make everyone happy. It begins with Flowhaven. Our state-of-the-art system was designed by professionals who have experience overcoming the challenges of royalties across the industry. The Flowhaven tool includes calculators that support customer deal parameters, agreement validators, royalty reporting mechanisms, and royalty validators to help you every step on the way. To learn more visit our product page.