Royalties for design: How much?

A personal project of mine has attracted the interest of a third party who wants to bring it to market. They want to set up a royalty based payment which I am fine with in principle but it is outside my experience. Can anyone offer any advice? What should I be aware of when signing the contract? How does one go about calculating a royalty?

Any advice is greatly appreciated.

Depends.

First question is do you have any IP?

Next is how much involvement will you have in bringing the product to market?

If your answers to both are not much, that is what you will get as a royalty.

Get a lawyer.

There is a great two-part primer on royalties on the core77 blog:

1.5 - 5% ( rockstar )

thanks for linking these! Hadn’t seen them before. Is there a topical list of past core articles somewhere, or did you just remember seeing this?

Wholesale or retail? I go above 5 (closer to 10) but of wholesale.

Is that for shoes? They must have a ton more margin to play with. Furniture royalties get down to 1% sometimes, but the gross margin can be down in the 20’s. It’s always calculated on actual sales, so that would be wholesale, unless the company sells direct of course.

You will have to invent the category that comes after rockstar being able to convince near 10% royalties out of a deal. Nothing I have worked in has near that kind of margin room.

Naturally my percentage figures are from whomever you are doing the design work for and the deal with. Cannot be a retail margin unless the design deal is with the retailer.

For advice to the OP, probably better to keep the margins in the human range. However, it is a deal between two people, if you are able to obtain a high number, go for it, there are no rules.

Yes, shoes. In my experience shoes have slightly better margin, it is true. For furniture I would assume the average selling price might be a lot higher so depending on the wholesale price the dollar amount might actually be similar.

Shoes will also have a shorter shelf life, meaning your product is sold for a limited period. If the producer doesn’t have a lot of tooling to amortize (or can spread it out over many SKUs) they can afford to pay more for design. If they good peoples.

I have two deals and they are both about 5% of wholesale. I would say that the range would be 1.5-10% and it depends on how innovative your idea is, profit margin, and what percentage of your innovation is contained in the product.

What is the auditing process for a royalty agreement? I’d like to know how a designer can be confident that a cheque for the royalties on 100 units is actually 100, not 150 and the factory isn’t selling another 50 off the back of a truck. Is having a penalty clause in a contract enough? Does the machinery have a counter that can be double checked? How does it work?

I suppose that depends on the company. But if they are cooking their books for you, they are likely cooking their books for everyone. And while I don’t police fraud, the government does (or, at least, in theory, is supposed to).

My agreement allows me to audit the accounting records with regards to “my” product. As a matter of fact, I get a report every year. And as my lawyer explained, if there were shenanigans and I sued and won, they would be on the hook for his fees plus triple damages.

We’ve achieved 8-10% on consumer products with the following caveats;

  1. We own solid, defensively written, Utility IP
  2. We develop the product to a manufacturable SolidWorks database (ready to rock & roll)
  3. We structure it on net sales with quarterly reports from the licensee
  4. we have a say in the market exposure per licensee

These cases have been the result of solid pitches where we have dotted our i’s and crossed our t’s - provided retail price point research, competitive landscapes, product benefit analysis and offered retail presentation POP advice.

Like others have said, I’ve heard furniture is very low and shoes & niche accessories can be very high.