Royalty rates are an important party of licensing – after all, it’s how you get paid! Everybody wants to know: how do I get the highest royalty rate? First let me tell you that royalty rates average about 5%. Over and over, across different industries and lots of different products, a royalty rate of 5% is standard. Once in awhile it might be 3% if the product involves huge volumes or consumables, and rarely I’ve seen some rates as high as 7% or 8%.
So how do you get those higher royalty rates? There are a couple of things you can do. I want to say right away that I don’t recommend using these strategies very often. If you get an offer of 5% I think it’s pretty fair for both sides, but I know that some of you want to “squeeze” the rate higher so I am going to share a few tips.
- Take the Risk Away. If you are already selling your product and you have proven sales, that’s one way to get a higher royalty rate. People ask me all the time, “Steve, should I license? I’m already selling my product” or, “I’m a little tired of manufacturing myself, and I want to license, should I?” That’s absolutely fantastic! I tell everyone, if you’ve got proven sales that you can show a potential licensee, and say “Hey, I’ve been selling x, y, z on Amazon (or maybe a couple stores)” you can get a higher royalty rate. Guess why? Because you’ve taken away risk! It’s fairly simple.
- Show Proof of Consumer Demand. Do a crowdfunding campaign. I like crowdfunding campaigns, but I don’t think everyone should start a business just because they’ve raised a little bit of money. Trust me when I tell you that most start-up businesses don’t fail because they don’t have funding. They fail because of a long list of other reasons, much of which has to do with the experience of the people starting the company. But I do think that you can use crowdfunding to show “proof of demand” for you product. Don’t set your target sales numbers so high that you get other people looking to copy your idea. Set the numbers a little bit lower. I had one student set his goal for 10k units and guess what? He got a licensing deal. It was practical. The crowd funding campaign demonstrated to his potential licensee that people wanted the product. That’s one big way to show proof of demand. Would I recommend running a crowdfunding campaign? No. I don’t think you have to. But there are some of you out there that want to do it, and it might lead to a higher royalty rate. Just be careful. A lot of people are copying products from successful campaigns and getting them to market before yours.
- Have a Patent. You’re kidding me! I always say patents aren’t necessary to license most ideas, and that’s true in my experience. But, if your product is already patented and the claims are ‘broad’ you probably can negotiate a higher royalty rate. But should you run out and file a patent just to get a higher royalty rate? I don’t think so. The time and money to write, file and ultimately obtain a patent isn’t usually worth it. But if you already have one there’s a good chance you’ll probably get a higher royalty rate. Check out my YouTube video about the value of patents.
- Show Proof of Retailer Demand. That’s right. If you can get to a buyer that sees your product (and make sure it looks really good) you can sometimes get a higher rate. Have a 3d computer generated graphic artist design your product so that it looks like people can buy it today. Then you can show it to a buyer. If a buyer likes it, that shows interest. If a buyer is willing to write a purchase order, you can use that to show your licensee that the demand is already there for your product! It takes a little bit away from risk.
- Make it Easier to Get Started. Maybe you’ve got models and prototypes and CAD drawings, etc. for your product. Sometimes those things will help you get a higher royalty rate too. But I’m here to tell you, that’s not what you should be focusing on.
I had to write this blog because so many people ask me about this topic. But all the things I mentioned to you cost money. I would rather come up with a lot of ideas, spend very little money, and get an average royalty rate of 5% then spend a lot of money and time on one idea – which may or ay not result in a higher royalty rate.
I think it’s a numbers game at the end of the day. I truly do. I’m never thinking of the highest royalty rate. I prefer to think about minimum guarantees (which I’ll write about another time), combined with a royalty rate that’s reasonable. There’s the word to look for: reasonable. You want to be business partners with your licensee so starting out being reasonable is best.
I’ve given you five examples of how to get a higher royalty rate. It’s all about demonstrating the value of your product idea. The average royalty rate is about 5%. And while the examples above may lead to higher rates, it’s never a guarantee. Don’t waste time and money. I advise you to be reasonable and get lots of ideas to companies. It’s always a numbers game!