Royalty Report Deconstruction: What You Need To Know About Validating Licensing Sales
Everyone in the licensing community knows what a royalty report consists of and what information it contains. However, the practice of validating royalty reports is significantly underestimated and therefore under utilized. Today, we will explain why this practice is important for brands looking to scale their licensing business.
In essence, a royalty report provides insights into the four essential matters of licensing sales, which are:
- Which products has the licensee sold?
- When, where and how did she they sell these products?
- What royalty rates apply to the products and what is the overall royalty amount?
- How many products has the licensee sold and for how much?
In this article, we will “deconstruct” a royalty report and explain which additional questions licensors need to answer to validate the sales figures associated with their licensed products.
To make the job easier, let’s first take a look at a royalty rate template.
SKU CodeSales DateTerritoryChannelRateUnits SoldTotal SalesAmount1231.1.2019USSample Retailer10 %20020000$2000$
A typical royalty report consists of a spreadsheet with specific sales lines. Each row of this spreadsheet represents a single sales line associated with a unique SKU (Stock Keeping Unit) code inherent to an individual product. The columns of the spreadsheet represent different sales “parameters”, which relate to the questions listed above. These parameters are all based on the initial licensing agreement. Finally, each sales line describes the respective values per the specified parameters.
Now, it all should perfectly align and you are officially ready to start validating your (hopefully) sales-heavy royalty reports.
Or are you?
Why do you need to have the practice of validating royalty report in the first place? And what is the ultimate meaning behind the metrics in the report?
While the reporting standards are nearly the same within the global licensing industry, not everyone tracks them similarly. Besides, the meaning of these parameters in the business context isn’t always so clear.
In our practice, we have found that many licensing businesses benefit from tracking their sales analytics. The advantage lies in the ability to analyze revenues from selling particular brands, products, or combinations thereof.
If you are an owner of such business, you want to know the distinct “why’s” behind the data you receive in sale reports.
So, let’s dive into the subject.
Question 1. What products has the licensee sold?
Why it matters?
In a typical royalty report, products are rarely reported by their names with the specification of the granted right, subject brand, and the initial agreement. Instead, each product submission is identified by an SKU code that identifies specific products from the list of all SKU codes authorized within a single licensing agreement. If your agreement has multiple properties licensed within a single granted right, or numerous granted rights, let alone various brands per an agreement, you will find it difficult to figure out who is who upon receiving a report. Therefore, you should ensure that each SKU code submitted in a report is on the list of SKU codes authorized for sale upon receiving a report.
Question 2. When, where and how did the licensee sell the products?
Why it matters?
While knowing SKU is one half of the product validation battle, making sure it was sold in a legit manner is the other half. Validating the sales date and territory per product submission, or SKU code in our case, can make this task significantly easier.
As to the sales date, we can narrow down our validation to the three essential questions:
- Have the sales been made within the agreed period?
- Is there a valid minimum guarantee indicated in the agreement that each SKU is associated with?
- Have the reported SKU codes been created/approved before the sales date?
The same principle applies to the sales territories and channels through which licensee has sold the products. That is, there should be a match between the reported regions and channels and those specified in the agreement itself.
If this is not the case, then the licensee appears to have breached the contract. In this case, you as a licensor have the right to penalize the licensee (though we recommend using judgment).
Question 3. How many units of products have the licensee reported and what is the sales revenue?
Why it matters?
The volume of product units sold multiplied by the price per unit makes up the total sales amount. This amount is essentially the base for further royalty calculations. Therefore, you need to know these original sales figures to verify that your royalty income over a period is fair. Validating sales volumes by period is especially crucial for analyzing the current and forecasting the future trends for your licenses and assessing your licensee partnerships. Here is what such graphs could look like in a brand licensing solution:
This chart tells us how much revenues each SKU category has brought in dollars over a period of time,
...While this one explains how many units per SKU category have been sold.
Question 4. What royalty rates apply to the products and how much royalty income you are to receive?
Why it matters?
The format and percentage of your royalty rate are the factors that ultimately determine what licensee will pay to you at the end of each royalty period. There are specific types of royalty rates that apply in brand licensing, and the royalty rates vary significantly by the type of the property, the product category, and the industry. Upon receiving a new royalty report, you should verify that the licensee based his royalty calculations on the right royalty type and rate and that the royalty sum is consistent with the estimations.
Royalty data, especially if accumulated over time, makes it easy for licensors to spot market trends, gaps, and conflicts. This allows for a better estimation of deadlines, resources, and time in the future. This, however, is the topic of our next conversation (and next blog post).
