I found this article on (good for overview)
Methods of Calculating Reasonable Royalty Rates: "
Some time ago, Stephen of Patent Baristas fame, wrote a very interesting article on calculating reasonable royalty rates called What’s a Reasonable Royalty Rate?. Although the article is in the context of royalty rates for licenses with universities for therapeutic technologies, I believe the objective points regarding calculating royalty rates are worth repeating here at IP Counsel Blog.
Three methods of calculating royalties were described:
1. The Market Method – royalty rate is based on what others have paid as a reasonable royalty for similar technology.
2. The Cost Method – royalty rate is based on the cost of developing or obtaining the technology or intellectual property.
3. Income Method - royalty rate is based on the total revenues the technology is likely to produce.
The article further mentions that a practical way of deriving a reasonable royalty rate is to first develop an economic model that factors in the cost to develop the technology and the overall revenues expected from sales of the technology. The model should also include risk factors, such as expensive processes that may also delay time to market, or any other potential risk factors. For example, sales my start out slow at first for a few years before reaching higher levels of expectations. Lastly, duration of patent terms should be included.
It seems to me that a good starting point would be to develop an economic model that utilizes information from all three methods of calculating royalties. Develop a model that takes into account estimated or realized revenues, cost of development and bringing the technology to market and compare royalty rates for similar technology under similar or related circumstances. From a more inclusive model, you can glean a great deal of information about the technology and what its ultimate value would be to you in order to determine what you are willing to pay and whether you can obtain alternative technology for less.
It is not surprising that a great deal of effort must be used to evaluate a license agreement before negotiating a reasonable royalty rate given the increasing costs and other pressures researchers and manufacturers face when developing new technology.
(Via IP Counsel Blog.)
ANOTHER GOOD OVERVIEW you can get from WIPO's web site with the same conclusions. "Valuation experts" walk you through these methods in more or less sophisticated ways, but the conclusions are always the same: valuation is more an art than a science. Conclusion on my side: the value of a patent/invention is what you can get for it. What you can get is what you negotiate. That puts increasing importance to Negotiation Skills, a topic I shall come back to in later articles. In negotiations, you can use all the arguments you may derive from the three mentioned methods.
Nothing is objective in this game, so you need to be able to communicate effectively with your counterpart/partner. I learned a lot from Neil Rackham's S-P-I-N methodology (get the book at Amazon), on how to sell complex products and projects. I'll return to S-P-I-N in a later article.
My good friend, Henning Sejer from the Danish Technology Institute has made a good book and a workshop series to teach some of the tricks.
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