by Maria Brophy
And then, one by one, each expert on the panel explained in their own words why they couldn’t give us exact percentages and dollar amounts. Every single licensing deal is different.
What a disappointment! I left that class learning only one thing, and that is, even the experts have no idea how to teach newbies what to charge. I vowed at that moment to create a system for myself. Fifteen years later, it’s nearly perfected, and now I can share it with you.
There are many factors to consider when it comes to working out a licensing deal. Deals can be huge, deals can be tiny. Some require a lot of work, some require no work at all. Sometimes, the deals that require the least amount of work on your end, bring you the most money. And vice-versa.
In some licensing deals, you’ll be asked to create all new art; this is where a lot of work comes in. In many licensing deals, you’ll only need to provide high res images of your existing art; this is less work on your end.
If you are doing a lot of work up front, you will need to make sure you get a large enough advance to cover your time.
Licensing art comes in many different forms and varied levels of complexity, such as:
SIMPLE: Allowing a company to use one design for a t-shirt or a single product.
COMPLEX: Allowing a company to use multiple images of your work for a line of products that will be sold in mass market.
NON-TRADITIONAL LICENSING: Allowing your work to be used for advertising campaigns, in-store point of purchase (POP) displays and online website banners.
All of these things are priced variably. Below I will give you basic guidelines based on how we charge for licensing, and you can use our pricing as a baseline to help you determine your own.
Keep in mind, if you are an artist that has a great brand recognition and is globally known, you can probably get a better deal than we do. If you are just new to the game, your deal may not be as good as ours.
In licensing, we refer to the client or manufacturer as the Licensee. You, the artist, are referred to as the Licensor.
THREE COMMON METHODS
There are three common methods of charging a Licensee for licensing your work:
ROYALTY: The manufacturer pays the artist a royalty percentage of their gross sales. The royalty is paid either monthly or quarterly for sales made in the previous period.
ROYALTY WITH ADVANCE UP FRONT: The manufacturer pays the artist a royalty percentage of their gross sales, and includes an advance payment up front at the time of signing the contract. This advance payment is later deducted from future royalties.
FLAT FEE: A one-time fee is paid instead of royalties.
HOW ROYALTIES WORK
Before we get to the topic of how much to ask for, let’s make sure you understand how royalties work.
Royalty payments are calculated based on the total (gross) revenues received by the Licensee for your products.
For example: You licensed your art to Perry Pickle Manufacturing for coffee mugs. They sell to a chain of stores called Racy’s. You have agreed to a royalty rate of 6% with a $3,000 Advance up front.
This means that Perry Pickle Mfg is going to pay you 6% of their total gross revenues generated. Also, they agreed to pay a $3,000 Advance up front, and they paid you the advance at the time that the contract was signed.
In their first quarter, Perry Pickle Mfg received $100,000 in revenues for sales of your products.
That means that you would receive a royalty payment of $6,000.00 ($100,000 x 6% = $6,000.00), minus the advance of $3,000.00 up front.
The advance is “recoupable against future royalties” so your first royalty payment would be the $6,000 minus the advance amount of $3,000. Your first royalty check would be $3,000.
HOW TO DETERMINE YOUR ROYALTY % RATE
Royalty rates depend on many different factors. The top three are:
The CATEGORY (or type) of product being produced
The QUANTITIES expected to be sold
The POPULARITY (STRENGTH) of the artist or brand
I’ll explain each one in detail:
CATEGORY: In the licensing industry, there is one thing that is somewhat standardized, and that is the percentage of royalties that are typically paid per product category.
The royalties range from the very low end of 3% all the way up to 20%. You can access details on rates for different products in the book titled The TLL Royalty Trend Report, which is about $400 at the time of this writing. You can also find out average royalty rates by doing an online search, but the information can be hard to nail down.
The average royalty rate varies from product type to product type. Below are some of the most common categories of products and their royalty rate ranges:
Posters 8% – 18%
Greeting cards 3% - 6%
T-shirts 5% - 10%
Ceramics 3% - 8%
Cell Phone Covers 6% - 15%
Shoes 3% - 8%
The average royalty rate is a good starting point for determining what a rate should be, but as you can see above, the range is vast. You have to take into consideration the other factors shown below.
PROJECTED SALES VOLUME: The higher the projected sales volume, the lower the royalty rate will be. If the products will be sold in mass market retailers and in mass quantity, the royalty rate will be lower, because mass market retailers (like Walmart or Costco) demand better prices, which means tighter profit margins for the manufacturer.
Usually, an artist will earn more money from a lower royalty rate when products are being sold in mass market, than they would with a higher royalty rate for products being sold in small mom and pop shops. This is because instead of selling only 500 units through small stores, your licensee will be selling 50,000 units through chain stores.
The lower the projected volume, the higher the royalty should be. If the products will be sold in specialty stores and in smaller quantities, the royalty rate should be higher. Specialty stores include gift shops, boutique stores, most online stores and non-chain retailers.
For example: A t-shirt manufacturer that sells in mass market stores (Walmart, Target, chain stores) might pay 4% royalties.
A t-shirt manufacturer that sells in smaller channels such as core skateboard shops might pay 8% royalties. But, their sales numbers will be much lower than what you would see in mass market.
STRENGTH OF THE ARTIST’S BRAND: If the artist is well-known or if their art is a strong seller, the royalty rates would be on the higher end of the scale.
If the artist is unknown and new to licensing, the royalty rate might be on the lower end of the scale. In some cases, a licensee that works with many artists will have a standard royalty to offer to you. At that time, you can decide if you want to accept their offer, or negotiate for more. A licensee that isn’t accustomed to working with artists will be more open to paying more.
Drew and I shy away from doing deals with manufacturers that work with a large number of artists. We have found that they tend to give the worst deals, often no advance up front and smaller percentages than what is fair. My theory on this is that they know they can get away with it, as many artists will agree to bad deals, because they don’t know any better.
The best deals we’ve made were with companies who do not work with a large stable of artists. They are often willing to pay a healthy advance up front and a fair royalty rate. They also are more likely to sign our own contract, rather than demand that we sign theirs. I always prefer to use my own contract, because my language is already approved by me and my attorney. If I use their contract, it is a lot more work for me to read through it and make changes to it.
We’ve been able to get some of our licensees to pay double the standard royalty rates, because they saw the value of licensing Drew’s work and knew that it would increase the sales of their products.
That said, the royalty rates that are considered standard are a good guide to use, but keep in mind, every deal is different and negotiable.
FLAT FEE METHOD OF P
AYMENT
A flat fee is a lump sum that is paid up front at the time the contract is signed. There are no royalties that will be paid later.
I like flat fees when doing a deal with a very small company, because their sales volume will be low and unpredictable. I prefer the money in my hand, up front, rather than having to wait for it later.
Flat fees may be calculated either:
By image (i.e. $500 per image x 10 images = $5,000); or
In just one specified lump sum (i.e. $2,500 total).
The flat fee method is best when the licensee is either a small company that does low volume, or a startup company that does not have a track record of sales.
The disadvantage to a flat fee royalty is that if the product sells beyond expectations, you may be missing out on sharing a piece of those revenues. But that isn’t really a problem, because you can protect yourself from that by giving the contract a short term, such as one year or eighteen months.
With a shorter contract, if sales are very good, the licensee will want to renew, at which time you will be paid again, or you can negotiate for a better deal.
How much of a flat fee should you ask for? Like all deals, the range is wide. I know of some artists who charge as little as $100 per image for a flat fee license. I find that to be extremely low, even if they are asking for fifty designs. It’s a lot of work pulling together all of that art, even if it is already created. In the greeting card industry, an artist might be paid a flat fee of $300 to $600 for a card design.
I’ve had deals in the action-sports market with small companies where I charged a flat fee of $1,500 per image, with a discount if they license more than one image at a time. I’ve had deals in the tech industry where I charged a $15,000 flat fee for a one-time use license.
It’s crazy that you can get so little from one company and so much more from another, but that is the way things work. There are different games being played in different pockets of the world. When you figure it out, you can work it to your advantage.
The flat fee amount that you get will depend upon three factors:
the strength of your brand and the value it brings to your Licensee
the competition in the industry and
what the licensee is willing to pay (and what you are willing to ask for)
Some industries have a lot more in their budget than others. We rarely do anything in the surf industry anymore, because it’s a dying industry with very little cash. Our most lucrative licensing deals are in the tech industry, the software industry and the automobile industry, as they have large budgets and are able to pay what we ask.
As with all deals, the most important thing is that you get paid what you feel your art is worth, and that you are happy with the end result.
ADVANCES WITH ROYALTIES
An advance is a dollar amount that an artist is paid up front, payable to the artist at the time of signing the contract. It is later deducted from future royalty payments. If the licensee doesn’t sell enough of your products and there are no payouts, you get to keep the advance. The advance should always be considered non-refundable.
Here’s a simplified example of how an advance/royalty deal would read in the agreement:
“A non-refundable Advance of $2,500.00 USD is due upon signing. The Royalty is Six Percent (6%).”
Or:
“A non-refundable Advance of $650 USD per image is due upon signing. The Royalty is Six Percent (6%).”
What I love about advances is the most obvious: you receive a payment up front. In most licensing deals, you won’t see royalties for a year or more because it takes that long to develop a line, sell it and get it shipped to stores. The advance is money now, which is when most of us need it.
What I also love about advances is that it is proof of commitment by the licensee. When they are willing to pay you money up front, it shows that they mean business.
The advance is an insurance policy should something go wrong. It hedges against the possibility that there will never be royalties paid in the future, because if a company is willing to pay an advance, then that means they are committed fully to the product sales.
Without commitment by the licensee, sales might not materialize. Sometimes the products never make it to the marketplace or are dropped from the line. And that means no sales, which means no royalties payable to you, the artist.
One reason we almost always require an advance for Drew’s work is that it helps me to weed out the serious from the not-so-serious licensees.
If a company is willing to pay us an advance, I’m convinced of their commitment to the success of the product’s sales. How much of an advance should you ask for? It depends on the size of the deal and what the Licensee is willing to pay.
One artist I know that regularly licenses his work, who is very well-known, won’t even consider doing a deal without an advance of $10,000 or more. For most of our licensing deals, where Drew is providing existing artwork, we require a minimum of a $6,000 advance. You might be wondering how we came to this number. It is a number that I have found that will provide us with the cash flow we need to spend time on it, and, it’s a number that most Licensees will agree to.
But, there have been times when we agreed to $4,000, because that is all that the Licensee would pay. We are flexible for deals that we are very excited about.
Insider Note: $4,000 is a magic number. It’s a dollar amount that most companies, large or small, can easily say yes to.
There have also been times that we got more than a $6,000 advance. One of our licensees uses a large number of images, and so we charge an advance of $15,000 every two years when we renew our contract with them. We have worked with them for over ten years, and they have no problem paying it because they know that Drew’s images help them sell more products.
We ask for a larger advance for deals where Drew has to do more work up front, such as market research, design and creation of an entire new line of artworks. The amount of the advance will be close to our weekly or monthly rate, depending upon how much time we estimate it will take. Without the proper amount of advance, Drew isn’t able to put in the time required to do his best work, and there’s no point in doing it at all unless it’s his best.
Sometimes we will charge the licensee a fee per image as an advance. For example, if the licensee wants a dozen or more images, we charge $650 per image (with a minimum of ten). A per-image fee enables the licensee to add more images as they need to, and gives the artist financial incentive to do the work involved.
On very rare occasions, we will sign a deal where there is no advance payable up front. However, we would only do that if it’s something we are extremely excited about and if there is no work up front on our end. We have found that without an advance up front, the licensee has less reason to put all they have into the sales of the products.
It doesn’t matter what you charge as an advance, really. If you only charged someone a $500 advance, and they pay it, it shows that they are serious. And it puts money in your pocket now, rather than having to wait a year or two for the license to mature.
When it comes to renewing a contract, know this: if your artwork is the reason a company is selling a high volume of products, you should be paid well for it. You are solving a problem for them, that they otherwise couldn’t solve themselves. That solution is highly valuable in the commercial marketplace. Remember this when it’s time to renew a license agreement; at that time, you can ask for more money up front and a higher royalty percentage.
GUARANTEES
Some artists will require a Guarantee in their licensing contract. A Guarantee is a minimum set dollar amount that you will be paid, regardless of sales. For example, every quarter you will be paid a minimum of $2,500, if the royalties owed to you fall below that amount.
Sometimes the Guarantee is a dollar amount paid per year rather than per quarter. You can get creative with the Guarantee; just as with everything else, a Guarantee is negotiable.
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sp; THINGS THAT GO WRONG
This is worth repeating, because so many artists miss this and they pay dearly in a loss of income. If the deal you are about to enter into is going to require an excessive amount of work on your end, it’s crucial to require an adequate advance or a design fee to cover your time. That way, you don’t have to wait the twelve months or more that it takes for royalties to generate before you get paid.
Remember, there are no guarantees that a license will generate any royalties at all. Even when the client is excited to work with you and they make a million promises, things go wrong.
What could go wrong, you ask? Below are a few examples:
Company goes out of business: One year we did a deal with one of the largest toy companies in the U.S. Drew spent weeks working on designs for a kid’s skateboard line. The line was advertised in magazines throughout the U.S. We were very excited about it. Then, unexpectedly, the company went bankrupt. The line never made it to the marketplace. There were no sales, and so there were no royalty payments. Luckily, we were paid a generous advance so that Drew’s time was covered.
New guy comes in: One time we signed on with a kid’s clothing company. They had their Drew Brophy line ready to go, after weeks of work on our end. Then a new partner came in and changed everything. The line never made it to retail and no royalties were generated. We had been paid an advance up front, so we were protected from losing a month’s worth of work.
Licensee joins the Navy: One of our first licensing deals was for license plates. The Licensee was a nice young guy. We put time into getting him all the artwork he needed. Then, not even a year later, he decided to quit it all and join the Navy! No royalties were earned, and only a small advance had been paid. We lost money on this one.
The flip side to all of this is that for every deal that isn’t successful, there’s one that is successful. You have to sign on with many companies because some will be duds and some will be good.