Beginner’s Ultimate Guide to Royalty Rates Services
Royalties refer to payments provided to a licensor by a licensee in exchange for the right to operate under an idea or patent. One of the essential steps when it comes to licensing a patent or idea is establishing a royalty rate you’ll receive for you to grant the right or license to an individual, group or company for manufacturing and selling your invention. In this article, we will share your basic information how to calculate the right royalty rates, factors affecting royalty rate, and the protective measures you can put in place. The important elements affecting the royalty rates of a patent or idea include the following exclusivity (completed milestones of tests and certification), upfront sum (element of overall compensation), market potential, licensing to an infringer, related intellectual property included (experience in licensing), industry standard royalty rates, company standard rates, intellectual property stage (commercialization), testing and certification (risks and benefits), and investment required.
How are royalty rates calculated? One of the methods that franchisors use to establish their royalty rates is determined by the gross sales, wherein it is usually five to nine percent. Gross sales refer to the total amount of sales made by the franchisee without any discounts or reduction applied to family members, employees, allowances, adjustments, returns, or taxes. While there are some franchisors basing their royalty rates on their competitors, it should be dealt carefully because the success of a franchisor greatly depends on the royalty rates.
The general approaches in assessing the right royalty rate for intellectual property licensing include cost approach, the comparable market approach, and the income approach. In terms of cost approach, it takes into consideration the costs associated with technology upgrading, research and development, patent application cost, pilot-plant, and test-marketing. In terms of the success rate, the licensee pays a higher royalty rate for the product as in moves through the following stages: pre-clinical success (in vitro, 0-5 % royalty rate), phase I or safety (100 healthy people, 5-10%), phase II or efficacy (300 subjects, 8-15%), phase III or effectiveness (several thousands of patients, 10-20%), and launched product (regulatory body approval, 20% and above). Comparable market approach involves basing royalty rates on similar technologies or industry application. In order to get the appropriate share of the profit generated, the income approach focuses on the estimated profits of the licensor as generated by the licensee.
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