Royalties may be the answer

Relax, share the risk with your client and don’t be afraid to offer alternative business models to maintain the focus on the design itself, says Julian Sanders

Amid the wealth of choice that exists in the design industry, now is the time to be offering new business models to clients. A royalty agreement can expel the financial discrepancies and disagreements that can often recur throughout the design process, ruining a relationship with a client and ultimately hindering the project. It is essential to keep everyone relaxed and maintain focus on the design, and a royalty agreement is an effective way to bridge that gap.

Working for royalties is simply a way of retaining an interest in your design work (a product) beyond the point at which the design work itself has been completed. It is an opportunity to share in the success of a piece of design work, that is to say sharing some of the inherent risk, with a view to benefiting financially in the longer term.

As a smaller consultancy, we are involved in product design and development as well as corporate and product branding and packaging. Without exception, all our experience of working with royalties relates to product design work. I am not yet aware of any instances where royalties get paid on branding, and I don’t know how you would begin to quantify it.

Royalty deals are becoming increasingly common in product design, as design consultancies become more and more aware of the potential benefits that come with them. About 30 per cent of our business is royalty-based, and this figure continues to grow.

There are primarily two beneficial reasons for undertaking work on a royalty basis. The first is clearly the financial rewards. The second, which can often be overlooked and is possibly less obvious, is that the shared interest in the success of the product can bring you closer to the client and help to foster a fruitful long-term relationship – you will have a common interest.

The client benefits from the initial design and development work being undertaken at a slightly reduced rate. Also, a royalty agreement clearly allows a design consultancy to demonstrate its long-term commitment to the work, as its financial interests lie in the ultimate success of the product.

The circumstances under which we would consider a royalty agreement are many and varied. It may, for example, be a small dynamic company with limited funds but a superb product opportunity requiring development. It provides it with the level of expertise and involvement that it might otherwise struggle to afford, and provides us with an interest in a product and potential long-term income stream outside of our regular consultancy fee-income. Alternatively, it may be a large multinational company where again a small percentage across a global market can provide a very welcome additional regular income, way beyond the length of time the design process has taken.

Let’s consider the process. It is relatively simple: we have a contract or agreement that clearly sets out the terms – for example, the percentage rate, when royalties are due for payment and how long the royalties run for. All these factors are up for negotiation. It also covers ownership of the intellectual property, which is usually passed to the client following the fee settlement.

Royalty rates typically range between 1.5 per cent and 6 per cent. You can work to an ‘offset’, meaning that the royalty payments only kick in once the initial design and development fees have been offset by the royalty payments. The nature of the product will also affect the rate. For example, if it is a fashion-related product that may only last a couple of seasons, the rate will typically be higher as you need to ensure that you gain any financial benefits that there may be over a shorter period. A product that may sell for years will result in a lower rate, with a longer payback period. A mixture of both types of work is the most beneficial.

There are, of course, risks associated with this type of agreement. You have to think long and hard before entering into a contract. The risk is usually reflected in relation to the negotiated percentage royalty rate – that is, the higher the risk, the higher the rate.

Working this way has been hugely beneficial to our consultancy. It gives us a source of income beyond our regular straight fee, which affords us the freedom to explore and develop our own work.

Julian Sanders is creative director at Cardiff design consultancy Studio SDA

Negotiating royalties

– Establish a satisfactory payment model early on – this starts the relationship off on the right foot

– Assess the extent and quality of the promotional marketing activity around the product

– The higher the risk, the higher the royalty rate – remember that both you and the client are sharing these risks

– A product that sells for a longer period will result in a lower rate. With a longer payback period, a short-term selling product will mean a higher rate

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