Royalties

On Feb 13, 2009, at 4:17 AM, Duncan wrote:

Hi John,

I got a surprise when I read the income statement in the book and your sample royalty agreement together. If the normal royalty in gift and housewares is 6% and net income % is 9.9% then 60% of the profits go to the designer... Or do you mean 6% of net income (gross revenue - cost of sales)?

***What are profits? Are they what's left over, or are they an expense, as drucker says? The biz entity nets 10% of revenue, the designer nets 6% or revenue, net is net. It is what it is. People get paid what they are worth. Your competitors are paying it. You leave out of your equation all of the other expenses that go to support the lifestyle of the biz owner that hired the designer.***

I found out that often licensees shoot for 25% of net profit, so that 60% is significantly higher... unless I've got something wrong is this because at this level we pay more for everything?

***Different industries have different ways of calculating... it is what it is, practice settles the matter***

Depending on the product, of course, it doesn't seem to me that the designer warrants such a high royalty, simply because 25% is usually a rate applied to licensing patents (which would attract a higher royalty than a design on its own).. but in this case we're just licensing the design, we are doing all the work, we could go to another designer, and they get a royalty in perpetuity for 2 weeks of work?

***Patent is IP law and monopoly and wrong to begin with, plus you are making the false assumption that patented items somehow are more valuable. If there is any correlation at all, patents = failure. As to going to another designer, I think you underestimate the value of the best designers.

At this level, the design is the thing. the designers get royalty in perpetuity for the ones that work and the ones that fail. they make nothing on the ones that fail. Further, rarely is a design right it its first iteration and rarely is a design saleable for more than 3 or 4 years before you dump it in favor of newer more profitable designs. The designer does a lot more work than you imagine.

John

Bookmark this post --- Email this post