4.3
Royalty bases: wholesale vs. retail vs. net sales
A royalty rate means nothing on its own. You also need to know what number it is applied to: the royalty base. The same percentage can produce very different payments depending on whether it is calculated on wholesale price, retail price, or net sales.
Key terms
- Royalty base
The sales figure the royalty rate is applied to.
- Wholesale price
The price you charge retailers or distributors.
- Retail price
The price the end customer pays.
- Net sales
Gross sales minus specific deductions allowed in the contract, such as returns or certain discounts.
- Deduction cap
A limit on how much can be subtracted from gross sales when calculating net sales.
- FOB price
"Free on board," the price of goods at the point of shipment, used in some direct-import deals.
The main royalty bases
Wholesale. Common for licensees who sell to retailers. The royalty is a percentage of what the retailer pays you. Consumer products royalties are often quoted on this basis.
Retail. Sometimes used when you sell directly to customers, such as on your own website or at events. Because retail prices are higher, the royalty rate on retail is typically lower than a wholesale rate for the same deal. Some licensors instead apply the wholesale rate to a "deemed wholesale" figure, often a set fraction of retail.
Net sales. Many contracts define the base as net sales, meaning gross invoiced sales minus certain permitted deductions. The details matter. Allowed deductions might include returns and trade discounts, while freight, marketing costs, and bad debts are often not deductible. Licensors frequently cap total deductions at a set percentage.
FOB. Used when a retailer buys products directly from your factory. The FOB price is lower than a normal wholesale price, so licensors usually charge a higher royalty rate on FOB sales.
Why the base matters so much
Two offers of "10%" can differ widely. Ten percent of a $40 retail price is $4; ten percent of a $20 wholesale price is $2. Always convert offers into a per-unit amount at your actual prices before comparing. If you sell through multiple channels, you may have different bases and rates for each, and your royalty reports will need to track them separately.
Example
These figures are illustrative only. Moonfox Apparel sells a Starlight Paladins hoodie at $30 wholesale to shops and $60 retail on its own site. Its license charges 12% of net wholesale sales, and 12% of a deemed wholesale price equal to 50% of retail for direct sales. Per wholesale unit, Moonfox pays $3.60. Per website unit, deemed wholesale is $30, so it also pays $3.60. If returns reduce a $10,000 shipment to $9,500 net and the contract allows that deduction, the royalty is 12% of $9,500, or $1,140.
Common mistakes
- Comparing royalty rates across deals without checking the base.
- Deducting costs, such as shipping or marketing, that the contract does not allow.
- Applying wholesale terms to direct-to-consumer sales without confirming how the contract treats them.
- Failing to track sales by channel, which makes accurate reporting difficult.