Royalty rules drive the selection process for royalty software. The software needs to support the royalty rules that you use today and may need tomorrow.
The key test is can you create a royalty contract that duplicates; with 100% accuracy, the rules in your printed contract. If the system can’t your calculated royalties will likely resolve on human intervention, which will fail at some point in time.
Common Royalty Terms
- Royalty period. Royalties made be paid monthly, bi-monthly, quarterly, semi-annually or annually.
- Minimum payment amount. If royalties payable are below a specified amount; usually $50 to $100, the balance is carried forward to the next royalty period.
- Reserve for returns.
- First payment threshold. The first royalty payment is not made until royalties payable exceed a specified amount. Example, a threshold of $500 means that the first royalty payment is not made until the amount owed reaches $500.
- First payment lag.
- Recovery amount. Royalties are calculated on the life to date sales that exceed a specifie amount. Example, a publisher may not pay royalties on the first $1,000 of sales.
- Cross-collateralization. This clause allows negative royalty earnings on one title to be applied against another title.
Common Royalty Rules
- Per unit royalties. This is where you pay a fixed amount per item sold.
- On-off fee
- Royalty based on format (hard, soft, audio, digital)
- Royalty based on discount
- Royalty on below cost sales. Many publishers have a clause that says no royalties are earned on sales made at less than cost.
- Royalty based on customer
- Royalty based on sale type (foreign, wholesale, direct, etc.)
- Royalty basis (retail, gross, receipts, margin, net)
- Royalty escalators (unit, retail price, net price)
- Escalators by contract, format, product or sale type.
- Accural or cash based. Accural based royalties are earned when the sale is made. Cash based royalties are earned when the sale is paid for.
To give you an idea of how royalty rules can be implemented here is a screenshot from the Easy Royalties software.