Royalty Rate Modeler
Find the right royalty rate by working backwards from the licensee's margin floor and the licensor's income target. Model a tiered royalty structure, volume thresholds, and the impact on both parties' economics.
Royalty rate sensitivity
| Royalty rate | Licensor per year | Licensee margin | Viable for both? |
|---|---|---|---|
| 4% | $5,600 | 42.4% | No |
| 5% | $7,000 | 41.4% | No |
| 6% | $8,400 | 40.4% | No |
| 7% | $9,800 | 39.4% | No |
| 8% | $11,200 | 38.4% | No |
| 9% | $12,600 | 37.4% | No |
| 10% | $14,000 | 36.4% | No |
| 12% | $16,800 | 34.4% | No |
How the negotiation zone is found
- Licensee ceiling
Sell price minus COGS and operating costs, minus the licensee's minimum margin on price, is the most royalty per unit they can pay. Divided by price, it is the maximum rate.
- Licensor floor
The income target divided by (sell price x annual units) is the lowest rate that meets the licensor's goal.
- Zone
If the floor sits below the ceiling, any rate between them works for both sides. If not, change price, costs, volume or the target before talking rates.
The tiered structure pays the tier 1 rate on units up to the threshold and the tier 2 rate on units above it. The blended rate is total royalties divided by total licensee revenue.
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