Royalty Rate on Products: a Passive Income Dorea Team, April 28, 2024 It’s not a new idea; people want to have a right to what they build or create, specifically artists and novelists. They want a share of each item that will be sold in the future. As a salesperson, it seems a bit unfair to you to give a share to the first creator! As blockchain emerges these days, artists use this concept in their works on NFTs. They could put a royalty percentage on each contract (the average royalty percentage is 0.8%, which is too low!). After a while, some marketplaces added a royalty feature as an obligatory solution to support artists and encourage them to create new NFTs. Total royalty earnings are down tremendously relative to former market highs. In December 2023, about 3,339 Ethereum were paid out to artists and creators ($8,315,512.38 at current USD rates). but they got no good results! Marketplaces removed this obligatory one by one, and artists could still put royalty on the minting stage. but still, royalty profit is a big market for many. [Blockchain Royalties] It’s not about NFTs and artist market states; it’s just about how you could leverage this concept in your business as an entrepreneur. Let’s dive into it in more detail. First of all, what is the royalty rate? It is an agreement between 2 people or 2 businesses about what percentage of the profit will be given from business “A” to business “B” under the license of business “A.”. Imagine business “A” has a good pasture that leases to business “B.”. In return, business “A” wants to have a share of the profit of the land; it wants 10% of the profit in each harvesting season. That’s the royalty rate for Business “A.”. ‘Royalty’ originally applied to the share of the proceeds that the Crown demanded of its subjects for any exploitation of the assets owned by the Crown. Remember one thing: “Keep the royalty rate as low as possible to maximize your profits.” It’s a law. [Wikipedia] How could I make a decision about the rates of royalties? similar licensing agreements in your industry: try to look for similar licensing agreements in your industry and a standard base for them. You could always consult with an expert in that field. value of property: the uniqueness of your product/land could give you a vision of the rates of royalty. more uniqueness, the higher the rates of royalty. your customer business model: always look at the business model of your customer and the profit margin. The higher the profit margin they have, they will pay a higher royalty rate for your product/land. Types of Royalty Rate fixed royalty rate: this type of royalty rate is a fixed price that doesn’t cover the fluctuation of prices or profits in the market. For example, if you assess the income of a harvesting farm in the US at $350,000, you want to have a share of that. You want $10K for each year. If the farm has $400K in income, you still have just $10K—no more! If your economy has an inflation issue, this type of royalty rate is not a good option for you. Percentage Royalty Rate: In this type of royalty rate, you put a percentage on the agreement, for example, 10% of the share each year. This type covers the increase and decrease in profit. If the farm has $350K in income that year, you get 10%, which means $35K, and if the income increases and reaches $400K, you will get $40K. It covers fluctuations well. Minimum Guarantee Royalty Rate: The customer must guarantee the minimum price for you on the license, even if it has any income/profit that year. For example, if a business agrees to a minimum guarantee of $10K per year, it will have to pay that amount even if it does not generate any sales. [Faster Capital] Ultimately, the choice of royalty structure is a strategic decision that should align with broader business goals and market dynamics. By understanding and effectively negotiating these terms, businesses can secure a revenue model that supports sustained growth and fosters mutually beneficial partnerships. Articles