Factors Affecting Royalty Rates in Brand Licensing
The global licensing industry was valued at $292.8 billion in 2019, with signs of continued growth over the next decade. Most of that growth can be attributed to new players and established companies making bigger and better deals to generate new revenue streams. They understand that licensing is key to remaining profitable and competitive.
As a result, calculating and managing royalty rates has become a bit of a contact sport. In our previous post, we talked about the licensing’s most common royalty rates. This time, we explore the factors affecting those rates.
In this article, find answers to the following questions:
How does property strength affect royalty rates?
How can I earn royalties from marketing campaigns?
Where can deductions be made to increase revenue?
When was the last time you assessed your property? The individual royalty terms the licensor and licensee arrive at depends 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 start to feel like a duel.
Licensing stakeholders use the following criteria to evaluate the strength of their properties:
Strength of the license holder
Property's commercial past
To gauge property strength, you need to look at a wide mix of data including past sales and previous royalty earnings. Archival 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, you can refine your strategy or decide if the property in question is worth expanding further.
Key market changes can be easily overlooked and you may end up deciding on rates that licensees can’t honor. For example, if you own the license to a character from a movie that broke box office records well last quarter you can make plans for new extensions only to find out that interest has waned in the time since.
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 data from any period of time to make informed decisions about your programs. Use customization tools to look at numbers by territory, style, and more.
Licensees want to secure as many deductibles as possible to lower the net sales number and, consequently, the royalty rates. On the other hand, a licensor's goal is to maximize profit, so they may limit the licensee's deduction rights.
Similarly, some licensors cut reimbursement clauses from the agreement and require royalty calculation based on the gross sales. In this case, acceptable 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 status, market size, product margins, and security measures.
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.
Here are the standard percentages for licensing’s most product product categories:
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 decide on the final number. For instance, if the product (or product category) sees significant gains at 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 techniques in addition to other accounting hacks available in the Flowhaven suite. If you have established a relationship with a manufacturer to release new products with royalty reporting functions the suite can keep everyone connected.
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 and all deal structures. The system is a full-proof 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 is a core 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 their licensees to support 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 case, licensees can choose how their advertising contribution is spent. With expanded advertising possibilities, licensees can encourage sales before the product has even been released.
Exclusivity (or lack thereof)
Exclusivity gives you the right to perform an action on behalf of a brand. That can include 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 fully rewarded on time even if there are issues impeding sales. High-stakes deals motivate licensees to put their best effort into promoting and selling licensed products. With boosted 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 like Flowhaven that can help compare your calculations to contract terms. These systems are 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.
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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!