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Royalties

Three-fourths of Royalties Based on Net Wholesale Sales in 2018

Contact the editor at karina@plainlanguagemedia.com

Three-fourths of the licensing agreements signed in 2018 calculated royalty rates based on net wholesale sales, according to TLL’s Annual Licensing Business Survey. It’s overwhelmingly the most common measure, and the one we use in reporting average industry-wide royalty rates ourselves.

The basic structure of compensation for most licensing relationships involves a royalty per unit of merchandise sold, less allowable deductions. (Licensors authorize very few categories of deductions, and typically limit allowable deductions to a maximum of about 2% to 5% of the first billing amount.)

Thirteen percent of royalty rates are calculated based on retail sales price. Retail sales-based royalties are normally lower, adjusted so that licensor income is roughly comparable to what it would have been if the typical rate was calculated on the net sales price.

The most common reasons licensing executives chose one royalty method over another are product category-based and country-specific norms—for example, traditional print publishers compensate their authors based on a book’s final retail sales price, and prefer to pay licensors the same way. Countries like Japan conventionally pay royalties on retail.

The next-most common measure licensing executives use is used in F.O.B. (freight on board) arrangements, making for 7% of all agreements. In these cases, the retailer buys the licensed item when it is still in the country where it was manufactured and is responsible for shipping it back to the U.S., as well as for customs and ground transport. The F.O.B. price charged by the licensee is significantly less—thus, the royalty will jump up to compensate.

The remaining 5% of licensing deals based on ‘other’ measures for royalty rates include those based on gross profits, cost of production (such as in direct-to-retail deals), and more “completely unique” calculations (as one respondent to TLL’s Survey put it).



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