The 6 Major Types Of Licensing Royalty Rates
Defining licensing royalty rates can be tough. Frequently, licensors find themselves in need of consultancy services from local agents or advice from other licensors licensing into similar product categories. Even the most experienced brand owners at times face difficulties, all due to a vast variety of royalty types. In this article, we're listing the six most important of them and revealing what adopting each requires from licensors and licensees alike.
Domestic Royalty Rate
This type of licensing royalty rates applies to products sold through conventional distribution channels. This implies distributing goods from domestic warehouse to distributors or directly to retailers. A licensee’s wholesale selling price serves as the starting point for the royalty base in this scenario.
Domestic royalty rate applies to virtually all categories of licensed properties, provided they're sold to retailers on a domestic landed basis. At the same time, manufacturers normally bear the cost of shipping the product from its point of manufacture.
The F.O.B. method involves delivery of manufactured products on a free-on-board basis at retailers point of production. In an F.O.B. deal, retailers are responsible for the costs of transporting these goods to their final point of sale.
As they bear these costs, they will often negotiate a lower selling price for a product compared to the usual domestic landed price. Retailers pay less for shipping than licensees and thus retrieve significant discounts, which often causes licensors to carry losses.
However, to compensate for the decreased invoice amount in F.O.B. deals, licensors adjust the final royalty rate by circa 4%, in this way equating the royalty income to what it would have been in a traditional deal. Therefore, the average royalty rate for this type of deals may easily rise to 12%-14%.
Royalty Rate On Direct Sales
In the case with direct licensing agreements, retailers may (or may not) act as licensees or partake in the licensing chain. If a retailer takes on that role, their selling price (for direct sales) will often rise. Such alternation unfairly increases the royalty amounts if the rate remains the same as in the standard licensing agreements.
Therefore, licensors may want to make certain rate adjustments to balance out the final royalty outcome. In contrast, if a retailer isn’t a part of royalty stream, licensor will ordinarily charge licensee. On top of that, licensing partners may negotiate a mixed royalty deal, combining the aforementioned payment methods together.
Royalty Rate For Services
Royalty rates for licensed services represent a special rate type as there isn't one strategy that fits all cases. Each licensor gets to decide the rate based on individual terms of their licensing agreements. The average royalty percentage for licensed services varies between 2%-15% of the media buy, depending on the attractiveness of the property.
Another (much simpler) method of dealing with licensed services is to charge an annual fee for the licensee’s right to use an intellectual property. In this scenario, the fixed fee should reflect how extensively the service is utilized in its media buys and promotional activities.
Sublicensing Royalty Rate
Presently, sublicensing isn’t a widespread form licensing agreement. However, whenever a need to sublicense a deal comes up, both licensor and the original licensee are liable to royalty payments.
Generally, licensors require a royalty that falls within the range of 25% to 75% of the sublicensing income. Important to note, their stake usually amounts to not less than half of these profits. In rare cases, licensee will be able to negotiate a rate split and apply own royalty obligation to the sale of sub-licensed products.
Licensing partners may also agree to divide the rate into several percentages according to the sublicensing categories. Among other factors to consider when sublicensing a property(-s) are the administration and localization costs. Licensees usually pay these costs from the licensor’s share of sublicensing royalties.
Split Royalty Rate
Where several parties guard a property (e.g., the brand owner and the trademark holder), it’s common to agree on a lower royalty rate, enabling the licensed products to remain economically viable in the marketplace.
Other examples of split licensing royalty rates may also be met in the industry. For instance, whenever licensor and licensee are co-branding a licensing deal, the royalty rate is frequently lower. The 'co-branding' royalty rate should correlate with the extent of licensee's contribution to the success of a subject licensing program.
Another example is cross-licensing deals, where multiple properties extend into one product. In that scenario, licensee pays a higher royalty rate which is nonetheless split into equal shares or shares respective to each party's contribution. Ultimately, such splits lower individual royalty earnings by each party.
As we mentioned in the beginning, the above few standards of types of licensing royalty rates applied in the industry. Licensing partners may (and ideally should) find a specific royalty rate that best represents the terms of their agreement. Often that will involve a custom-made combination of royalty rate approaches, clauses, and provisions. However tempted licensors may feel to dictate the rules of the royalty game, it's essential that they realize that contribution on both sides is a ledge for the success of a licensing program. Therefore, it makes sense to seek compromise when defining the type and amount of royalty rate.