Royalty Licensing Model: Fixed Fee vs Percentage of Purchase (Excel XLSX)

Earning royalty licensing income is a great form of passive income. This template lets the user forecast sales counts and amounts for up to a 50-year period. The final output is a present value of each royalty scheme (fixed fee vs percentage of sale) and shows a sensitivity table of present values based on varying levels of fee values and sales volume.

Fixed Fee Per Sale:
In this scheme, the licensor receives a predetermined amount for every unit of the product sold. The fee remains constant regardless of the selling price of the product.

Percentage of Sale:
In this scheme, the licensor receives a percentage of the sales revenue for each unit sold. The fee is variable and directly proportional to the selling price of the product.

2. Predictability:
Fixed Fee Per Sale:
Provides a stable and predictable income for the licensor since the amount is fixed per unit sold.

Percentage of Sale:
The income can be variable and less predictable as it depends on the selling price, which can fluctuate based on various factors like promotions, market demand, etc.

3. Risk and Reward:
Fixed Fee Per Sale:
The licensor bears the risk of pricing the fixed fee too low, potentially leaving money on the table if the product sells at a high price. Conversely, if the product's price drops or if there are heavy discounts, the licensor still gets the predetermined fee.

Percentage of Sale:
The rewards and risks are shared between the licensor and licensee. If the product does exceptionally well and sells at a premium price, the licensor benefits more. However, if the product's price drops, the royalty received also decreases.

4. Complexity:
Fixed Fee Per Sale:
Simpler to calculate and administer as it involves a standard fee per unit.

Percentage of Sale:
Requires regular auditing and monitoring to ensure accurate reporting of sales and correct royalty calculations. It can be more administratively complex.

5. Market Conditions:
Fixed Fee Per Sale:
Can be advantageous in markets where product prices are expected to decline or where there's a lot of discounting.

Percentage of Sale:
More suitable for markets where there's potential for product prices to rise or where premium pricing strategies are employed.

6. Motivation for Licensee:
Fixed Fee Per Sale:
The licensee might be more motivated to increase the selling price since they retain all additional revenue beyond the fixed royalty fee.

Percentage of Sale:
The licensee might focus on volume sales or other strategies, knowing that the licensor shares in the upside and downside of pricing changes.

Conclusion:
Choosing between a fixed fee per sale and a percentage of sale royalty licensing scheme depends on various factors, including market conditions, product type, administrative capabilities, and risk appetite. Both have their advantages and challenges, and the best choice often depends on the specific circumstances of the licensor and licensee.