Inventors often seek to license their products to companies that sell on TV – infomercials, QVC or HSN – sales channels known in the industry as direct response television sales. They are easily dismayed to be offered royalties of 3% – 7%, averaging around 5%, of the net price. They had dreams (or delusions) of 10%-15% of gross sales price when they approached these companies with their consumer products.
Here’s one interesting fact that may help explain the numbers: 40% of the selling price is advertising costs. It takes a lot of financial investment up front to bring the product to market – a big risk for these retailers. They consider their upfront investment as their good faith “skin in the game.” They rarely will agree to additionally cough up an up-front licensing fee.
An inventor can typically expect the license agreement to provide a test period of 3 – 6 months and no upfront payments. These licensees will typically pay around 5% royalty and will be reluctant to commit to a minimum royalty or sales quota.
These are, of course, generalizations. Some deals are better and some are less advantageous. Negotiate your best deal. Just have realistic expectations so you don’t scare off your potential buyer (licensee).