Intellectual property royalties – everything you need to know
Article – April 2020 | RoyaltyRange
Intellectual property royalties are payments made by a licensee to a licensor in exchange for the use of the licensor’s intellectual property. They are usually a percentage of the net or gross revenue made by the intellectual property, paid on a regular basis (often monthly, quarterly or annually).
In this blog, we outline everything you need to know about intellectual property royalties, including:
- What intellectual property royalties are
- How intellectual property royalties are charged
- How to value intellectual property (in preparation for setting royalties)
- Factors that affect royalties for intellectual property
- How to calculate intellectual property royalties
- How to find the market royalty rate for your intellectual property
What are intellectual property royalties?
When you create intellectual property, there are various forms of protection you can get to make sure other people can’t use or copy your ideas without your permission. These include patents and trademarks. If an individual or organization uses your patent or trademark without your consent, they are technically infringing your intellectual property rights and may have to pay you damages.
However, intellectual property owners often choose to let other people use their ideas or creations. This might be to expand their reach in untapped markets, or so that another company can develop and commercialize the intellectual property for the licensor. In these cases, the licensor must enter into a formal licensing agreement with any licensees, to protect the way their intellectual property is used and to ensure that they receive adequate financial compensation for its use by a third party.
When licensors enter into a licensing agreement, they need to set a royalty rate that will determine how much the licensee has to pay for the use of the intellectual property. Typically, royalty rates are a percentage of net or gross sales, as this means that both parties benefit in proportion to how well the intellectual property is performing. Intellectual property royalties can also be fixed fees.
How are intellectual property royalties charged?
There are a number of different ways to structure royalty payments, and these depend on various factors within the intellectual property licensing agreement. Here are a few of the different options:
- Royalty percentages: In most licensing agreements, the royalty rate is a percentage. So, if the royalty rate is 5%, then, for the duration of the licensing agreement, the licensee must pay the licensor 5% of the net of gross revenue generated by the intellectual property.
- Fixed fees: Licensors may decide that charging a fixed fee is more appropriate than a percentage for their intellectual property royalties. Fixed fees are still collected on a regular basis, just like royalty percentages, but the parties know the exact fee that is to be paid.
- Variable or fixed rates: For newly created intellectual property that hasn’t proven itself in the market yet, it’s common to agree a variable royalty rate. This means that the licensor will receive a lower rate until certain conditions are met, at which point the rate will go up. Variable rates are also often applied to certain volume or sales thresholds – for example, if a licensee achieves a certain number of sales, they’ll be rewarded with a lower royalty rate.
- Minimum royalty rates: Some licensors require licensees to agree to a minimum royalty payment. This means that, regardless of the royalty percentage or the revenue generated by the intellectual property, the licensor will receive a certain amount of money as a minimum.
In terms of how often intellectual property royalties are charged, most licensing agreements opt for monthly, quarterly or annual payments. However, it fully depends on your needs as a licensor, and what the licensee is happy to agree to. There is no single way to charge royalty rates.
Valuing your intellectual property
In order to set fair royalty rates, you need to know the value of your intellectual property. When you know the value of your patent, trademark, copyright or brand assets, you’ll be able to calculate your royalty rates more accurately and avoid the risk of setting rates that are too high or too low.
There are three main intellectual property valuation approaches you can use:
- Cost-based valuation
- Market-based valuation
- Income-based valuation
Whichever method you choose, you should make sure your valuation reflects the market value of similar intellectual property. To ensure this, you need to know the going market rate for your product or service. You can find this quickly and easily with a RoyaltyRange benchmarking study.
Keep in mind that intellectual property royalties can be affected by a number of factors, including:
- The strength of your intellectual property protection
- What stage of development your product or service is in
- How unique your invention is
- The market size
- The level of competition in the market
- The exclusivity of the licensing agreement
Calculating intellectual property royalties
When you know the value of the intellectual property in question, you can determine a fair royalty rate. One option for this is to find out what royalty rates other organizations charged in similar licensing deals, with similar intellectual property. Once you know this, you can use these rates as a starting point for your own intellectual property royalties and royalty payment structure, being sure to take into account the different factors that can affect the value of your intellectual property.
Find the market royalty rate for your intellectual property
You can find the latest data on intellectual property royalties in the RoyaltyRange database.
Use our One Search service to receive a bespoke report on the royalty rates set in relevant third-party licensing agreements, based on your search criteria. Or order a benchmarking study and get a full comparison of relevant licensing agreements, including a calculation of the royalty rate range.
You can use the boxes to the right to start your search for intellectual property royalties data.