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'[OT] Getting paid by royaltys'
2006\07\19@134753 by Edward Cooper

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Dear group

I'm doing a consumer audio appliance project, the concept, design,  
and protos will be supplied by me, I'm looking around for  
organisations that are want to brand and take on this product, there  
will be significant costs involved in customising the product for  
their requirements, and probably an exclusivity agreement.

Now they want to pay me in royalties, with nothing up-front, is this  
a bad idea? I'll find it tough affordng it.
What rate should I be asking for considering this product will sell  
in the shops for $250-300 or so?
Should I ask for a up front amount, or should I bill them for my  
time? Should I subtract this from the
royalties.

I think this is a fantastic product and I hope it does well, but, I'm  
not willing to 'give it away'

Any ideas would be helpful - I'm a tad clueless :)

Cheers all
Ed

2006\07\19@143906 by Bob Axtell

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Edward Cooper wrote:
> Dear group
>
> I'm doing a consumer audio appliance project, the concept, design,  
> and protos will be supplied by me, I'm looking around for  
> organisations that are want to brand and take on this product, there  
> will be significant costs involved in customising the product for  
> their requirements, and probably an exclusivity agreement.
>
> Now they want to pay me in royalties, with nothing up-front, is this  
> a bad idea? I'll find it tough affordng it.
> What rate should I be asking for considering this product will sell  
> in the shops for $250-300 or so?
> Should I ask for a up front amount, or should I bill them for my  
> time? Should I subtract this from the
> royalties.
>
>  
Bad idea. Here's why:

1. If you commit to royalties-only, you are expecting them to honestly
pay you at their leisure.
It won't happen. People are human, and humans won't pay unless hammered
by lawyers to pay.
You don't want to have to deal with lawyers, do ya?

2. The ability for the product to be commercially successful depends on
many factors beyond
your control. Management is the key to success, not a "wowie" product.

> I think this is a fantastic product and I hope it does well, but, I'm  
> not willing to 'give it away'
>  
Then don't. Ask for a development contract, and ALWAYS ask for 30%+ up
front. However,
you will need to come across; if it doesn't work right, you can be sued.

>  
I have only seen ONE royalty scheme work to the benefit of the engineer.
It was a situation where the
firmware was very VERY complex. He simply charged $50 for each
microcontroller chip, which was
copy-protected. The client made the board, etc then to make it work, he
sold them the critical chip.

--Bob

2006\07\19@144909 by Gerhard Fiedler

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Edward Cooper wrote:

> I'm doing a consumer audio appliance project, the concept, design, and
> protos will be supplied by me, I'm looking around for organisations that
> are want to brand and take on this product, there will be significant
> costs involved in customising the product for their requirements, and
> probably an exclusivity agreement.
>
> Now they want to pay me in royalties, with nothing up-front, is this a
> bad idea? I'll find it tough affordng it. What rate should I be asking
> for considering this product will sell in the shops for $250-300 or so?
> Should I ask for a up front amount, or should I bill them for my time?
> Should I subtract this from the royalties.
>
> I think this is a fantastic product and I hope it does well, but, I'm
> not willing to 'give it away'
>
> Any ideas would be helpful - I'm a tad clueless :)

One approach is to see this as a two-level process. Every individual sales
process is determined by the relationship between cost of item, achievable
sales price, quantities and an expectation for the future.

This happens both between your customers and the consumer, and between you
and your customers. How much you can get from a customer is in part
determined by their vision of what they can get; they won't be inclined to
pay you more than they think they can make. And how much you can get in
general is in part determined by how big your market is (not necessarily
theirs) -- if you have more companies wanting your product, you're better
off than if you have more product than companies :)  If you have only one
customer, you don't have much choice: take what you can get from that one,
or leave it.

I think with consumer items, there is not really something like a
rule-of-thumb percentage. It seems to be mostly a question of marketing and
how good you can make the deal. (There's probably some kind of
distribution, but I'm not sure how relevant that is for any individual
case. You may have an item at the lower end of the scale, and with a deal
at the lower end you may still be getting a very good deal. Or the other
way 'round... All this only starts to make sense when you get into numbers
where averages start to make sense. That means /many/ designs.)

Whether they will pay you up front for customization probably depends a lot
on how eager they are to sell that device. In general, there is always a
possibility to trade higher profit later against higher security of getting
paid now. It's partly up to you to decide. In general, I think royalty
payments are a bit of a problem. You need to have a good level of trust, or
enough money to hire someone to audit their books :)

Probably the only way to find out how your market looks like is to find a
few companies that might be willing to take it on, and compare their offers
and their "flexibility".

Gerhard

2006\07\19@175628 by Mike Harrison

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On Wed, 19 Jul 2006 18:47:31 +0100, you wrote:

>Dear group
>
>I'm doing a consumer audio appliance project, the concept, design,  
>and protos will be supplied by me, I'm looking around for  
>organisations that are want to brand and take on this product, there  
>will be significant costs involved in customising the product for  
>their requirements, and probably an exclusivity agreement.
>
>Now they want to pay me in royalties, with nothing up-front, is this  
>a bad idea? I'll find it tough affordng it.
>What rate should I be asking for considering this product will sell  
>in the shops for $250-300 or so?
>Should I ask for a up front amount, or should I bill them for my  
>time? Should I subtract this from the
>royalties.
>
>I think this is a fantastic product and I hope it does well, but, I'm  
>not willing to 'give it away'

At the very least you should insist on an advance, i.e. royalties on the first X units sold, and any
exclusivity agreement should have a clause that voids it if they fail to market/sell/make the
product in an agreed timescale so you are free to go elsewhere.

Royalty arrangements can be a pain, unless it's the sort of situation where you can supply something
like preprogrammed secure devices to keep track of numbers.

A company with the most honest intentions can get behind/muddled with paperwork, and without any
independent means to track sales, it puts you in a difficult position as you generally can't verify
that they are paying you correctly. Also, royalties are something that don't fit well into some
companies' accounting systems if they're not set up for it, and again this can lead to confusion and
uncertainty over payment amounts etc.

2006\07\19@182921 by Mike Harrison

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On Wed, 19 Jul 2006 22:56:50 +0100, you wrote:

{Quote hidden}

PS - the option of supplying ready-programmed parts is now more viable even for reasonable volumes
since Microchip added the pre-programming service to buy.microchip.com, as you can get programmed
parts with all the packaging/reeling/QC type stuff that a company may need for production..

2006\07\19@204357 by Ray Newman

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On Wed, 19 Jul 2006 22:56:50 +0100, Mike Harrison wrote:
{Quote hidden}

I agree,
No matter what if you don't get what you agreed to in a timely manner all rights have to
go back to you. NEVER NEVER compromise on this.

I made the same mistake, sort of, when I learned how by working with offshore
suppliers/manufactures I could supply a product to the customer cheaper than if
he contracted directly with offshore manufactures. This was Taiwan back in the late 80's
I'd figure I could offer the best design and manufactured price so I
started to offer free use of my designs to tie up manufacturing rights.

However royalties or manufacturing rights, IF a customer can't afford to pay you AT LEAST
reasonable fee for you help. Even the equal of what would be paid to an employee, then
he can't afford to to invest in real production. He is using you to attract investors for HIS company.

IF he finds investors they will want to cut out any extra cost.
Most investors never want to pay royalties because it is too open ended.

Also unless you are manufacturing, you will never know what his sales are.

I only found one company is good as their word about  royalties. Fisher Price Toys.

I have never heard of and good outcome of this type of agreement unless the company
HAS money and everything is in place and is privately owned by the "hands on" owner.

My 2 cents
Ray





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2006\07\19@220823 by John Chung

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Good idea Ray. The customer becomes a reseller! :)

John

{Quote hidden}

> > --

2006\07\19@233539 by Kenneth Lumia

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> Now they want to pay me in royalties, with nothing up-front, is this  
> a bad idea? I'll find it tough affordng it.

Run, don't walk, for the exit.  Companies that can't afford
up-front money probably can't afford the marketing and
sales costs either.  It is also possible that they have no
idea of the sales volumes they will see for the product.  
This means that all the development cost burden is on
you.  If they only sell a few, its really no big deal for them
if they are paying just a royalty.  It is a big deal to them
if they fronted money and then it doesn't sell.  The flip
side is that the product is insanely popular.  In this case,
paying the royalty is basically a burden on each unit.  If
the product is successful, the company will eventually
want to reduce product cost (this means you).  At that
point, they will hire someone that gets paid to do a
new design (hopefully not a rip-off of yours) that they
can then sell in place of your product.

In terms of royalty payments - don't expect much.  
Although I hate throwing numbers around because
there will be countless replies telling me they are
wrong here goes nothing:

Sells in shop for $250, means retailer purchased it
from the manufacturer for about $125.  The actual
value is typically 45% to 65% of retail, depending
on the track record for the product.  Fast moving
products demand higher compensation for the
manufacturer, slower moving products require
concessions from the manufacturer.  The manufacturer's
costs are basically 1/3 for the product, 1/3 for people
and 1/3 for marketing/sales, again varying depending
on the product.  That leaves around $125/3 = $42 to
build and test the unit.  Even if you managed to be 10%
of the actual product cost, that is only $4.20 per unit.  
And that doesn't even take into consideration the auditing
costs to make sure your getting paid!  

Remember, you are carrying the NRE for the product,
so if it doesn't sell well, its no real problem for them; if
it does sell well, they can hire somewone to create an
equivalent unit.  Think about it.  Let's say one engineer
($84,000 per year) working, let's say 6 months on the
project would be $42,000.  At the equivalent of the
royalty payment of $4.20 per unit, the engineer will be
paid for in $42,000/$4.20 = 10,000 units.  You can adjust
the numbers to suit local or foreign engineering costs and
estimated development time (remember, they are
mimicing (if not copying) your design, so development
may be faster than yours).

I suggest that you get paid up-front costs (at least to your
breakeven point), then get a smaller royalty payment.  If
things go south, at least you're not in the hole.

You must remember a simple point - Engineers don't
get rich being engineers, they must morph into really
good business people to make money.

Ken
spam_OUTklumiaTakeThisOuTspamadelphia.net


{Original Message removed}

2006\07\20@061017 by Peter

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On Wed, 19 Jul 2006, Edward Cooper wrote:

> I'm doing a consumer audio appliance project, the concept, design, and protos
> will be supplied by me, I'm looking around for organisations that are want to
> brand and take on this product, there will be significant costs involved in
> customising the product for their requirements, and probably an exclusivity
> agreement.
>
> Now they want to pay me in royalties, with nothing up-front, is this a bad
> idea? I'll find it tough affordng it.

I would answer no. If they want it, you can do a preliminary contract
for a limited supply, and set a price so you do not lose money, with an
option to switch to sales percentage later. It is not reasonable to
close on sales percentage of a product that has never been sold yet.

just an opinion,
Peter

2006\07\20@063445 by Gerhard Fiedler

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Kenneth Lumia wrote:

> You must remember a simple point - Engineers don't get rich being
> engineers, they must morph into really good business people to make
> money.

I thought that was worth to repeat it. I really think you either need a
(trusted) partner who is good at this, or you need to take the time to
learn and study it, or do whatever it needs to get good at it.

Making money is like sex: most people seem to feel that you "just know"
whatever you need to know. My experience shows that this isn't so... there
are few things that can't be studied and learned to some degree.

Gerhard

2006\07\26@170322 by alan smith

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ahhh..but step back a minute.  YOU might think tihs is a really cool thing, but have you done any sort of marketing analysis?  Consultants are hired often to design something form someone for a fixed fee.  I've done some pretty wild off beat designs but been paid for it, and have no clue if they really were as good as they thought.  Some were pretty flat out stupid, but....fine, here is the design...go for it.
 
 If there really is a market, then build prototypes and start showing them and see if anyone bites.  Harder than it seems.  In the states, getting into Costco or Sams Club is a major deal but easier if you have the contacts.  BUT...like just about every retailer you will have to have a stock of 5K to 10K units availalbe to immidiate shipment.  Thats an investment to make, considering they will not talk to you seriously unless you have that available.
 
 Staples is running a thing right now looking for new ideas....would if fit into that mold?
 
 So, want to give us any clues on what this is?

               
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