One of the challenges my clients often face is how to determine a royalty rate for licensing an invention or other intellectual property. I start by offering the following fundamental observation:
The licensor needs to know the licensee’s business model and profit margin, because the royalty must be less than the licensee’s profit.
An article in the September 2006 issues of les Nouvelles, a quarterly publication of the Licensing Executives Society International, agrees with and expands upon this observation. “Fair And Reasonable Royalty Rate Determination – When Is The 25% Rule Applicable?” was written by Ove Granstrand, Professor of Industrial Management and Economics at Chalmers University of Technology (Goteborg, Sweden). (more…)