Let’s do the math

There is no question that manufacturers and importers have some very real and difficult challenges in this economy. The retailers continue to hammer their wholesale costs lower, while at the same time production suppliers and overseas factories are ratcheting up prices due to rapidly rising material and labor costs. Even shipping has gone through the roof. As the hard costs of manufacturing go up and selling prices go down they need to look wherever they can to recoup some of that loss, and soft costs - such as the royalties paid to product designers - become prime targets. Seems to be a bit of that going around lately.

Of course we really have no one to blame but ourselves. As a nation we have pushed the lowest price model forward until it has become the prime reason to buy – made in the USA, or locally produced, or retailer ethics, or quality, or any of those attributes that were once important to a buying decision now all take a backseat compared to low price. One needs to look no further than the exponential growth of the mass market discount stores for proof.

Here is the problem – let’s say you have a contract coming up for renewal that is paying you a 5 percent royalty. Your licensee is looking to cut costs, so they propose that they renew the contract at a lesser rate, say 3%. “Times are hard” you are told, “and this is only 2% less than what we were paying you. Our costs have gone up 10 to 15% - what’s the big deal?”

Um, not exactly a fair trade:

A 2% reduction on a 7% royalty is a 28% reduction in your pay.
A 2% reduction on a 5% royalty is a 40% reduction in your pay.
A measly 1% reduction on a five percent royalty is still a 20% reduction in your pay. If you worked in an office or warehouse and the boss came in and announced you were getting a 40% salary cut would you be sticking around?

We have seen all of these situations and worse. We once had a client ask to chop the royalties on an existing contract because, as he said, “You have made enough money on this product”. It was still selling well - he just wanted to cap our royalties. (No, it didn’t happen). We will be the first in line to help our clients stay competitive and work toward an equitable solution so we can all succeed, but that is the key – it needs to be equitable for everybody involved.

Of course every case is unique, but it is always a difficult decision to hold the line, and possibly end up walking away, because you believe that what you are providing is fresh, contemporary and valuable in today’s market (let’s hope it is…). Just make sure you know exactly what you are giving up before you agree to give it up.