What Kind of Royalty Can I Negotiate for My Product

Q. I have developed a unique perfume that I have been selling online and in my community. The great thing is women really love it. My dream is to go global and think I should sell the rights to my formula to a bigger company. What type of royalty percentage can I expect?

A. Excellent question, but first, here's a question for you.

Which is the better deal? Would you rather receive a 7% royalty on $50,000 worth of sales or a 1% royalty on $5,000,000 of sales? Even though 1% doesn't sound too impressive, of course it's the better choice in this example.

It's easy for inventors and entrepreneurs to get tripped up on royalty percentages. Yes it is one factor in the income generation equation, but the bigger driver will always be units of product sales. This said, you should focus on finding corporate partners that have a strong but realistic incentive to actively sell your product in the marketplace.

In just about every industry, potential licensing partners project all costs associated with bringing a product to market before sitting down for serious royalty payment negotiations. The company will also measure product uniqueness, the strength of the competition and ongoing consumer education and advertising needs. Simply stated, the more a corporate partner has to spend, the lower the royalty percentage.

Take for example the pharmaceutical industry. Royalty percentages are based on the development status of the technology or product. A patent may get 1% to 2% royalty; a pharmaceutical product with strong clinical trial support may secure a 3% to 4% royalty; and a proven drug that is already in the marketplace may secure a 7% to 10% royalty.

These days in the consumer goods industry, royalties can range between 4% and 12% with higher rates paid to health and beauty aid products than, for example, food products. And, expect established brands with a regional or national following to get more generous royalty treatment than a relatively unknown brand with unproven customer acceptance.

Sports stars and celebrities who license their name for shoes, perfume and clothing lines can command double digit royalty rates. Apparel licensing rates range from 2% to 15%. Food licensing rates range from 4% to 5% in part because gross profit margins on grocery products tend to be less than other consumer product goods. Royalty rates in the toys and games industry range from 3% to 12%, again with much depending on the specific product category and gross profit margin flexibility.

Entrepreneurs often complain that they have a tough time getting into corporations to present their product ideas. And they are right. Corporations are sensitive to receiving unsolicited ideas because of the risks of intellectual property conflict on products with patent potential.

Because your product competes in a relatively crowded drug store or department store category, you will have to present an unusually strong business case to potential partners. Look for complementary benefits to a proposed business partnership. For example, manufacturers that have excess production and packaging capacity are promising candidates for product line or brand extensions. If you are determined, you can find them.

Join the Yahoo! Startup Incubator discussion. Send your startup questions to susan@takecommand.org.

Susan Schreter is a 20-year veteran of the venture finance community, MBA-level educator and policy advocate for small business owners. Her work is dedicated to improving startup operating performance with reduced personal risk to entrepreneurs. She is the founder of www.takecommand.org, which offers the largest centralized database of regional and national small business funding sources in the U.S., including angel clubs, micro-finance lenders, venture capital funds and more. Follow Susan on Twitter @TakeCommand

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