8.2
Calculating royalties: worked examples
Royalties are usually calculated as a percentage of a defined sales figure, but the result depends heavily on what that figure is and what deductions are allowed. Walking through simple examples helps you check the math in any contract.
The basic formula is royalty = royalty base × royalty rate. For consumer products, rates commonly fall somewhere in the high single digits to mid-teens as a percentage of wholesale, but they vary widely by category and deal. The fictional examples below use round numbers for clarity.
Example 1: Wholesale base. Moonfox Apparel sells 1,000 Starlight Paladins T-shirts to retailers at $12 each, with a 10% royalty on wholesale. Royalty base: $12,000. Royalty owed: $1,200.
Example 2: Net sales with deductions. The contract defines net sales as gross sales minus returns and approved discounts, with deductions capped at a set percentage. Moonfox invoices $12,000, has $500 in returns, and gives a $300 discount. Net sales: $11,200. At 10%, the royalty is $1,120.
Example 3: Direct-to-consumer. Moonfox sells 200 shirts on its own website at $25. Some contracts apply a different rate or base for direct sales, such as a lower rate on retail price or a deemed wholesale price. Always check the contract's definition, as it can change the result significantly.
Keep a spreadsheet that mirrors the contract's definitions so each quarterly statement is easy to reproduce.