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Royalty rate assessment is a practical tool to gauge the impact of a royalty commitment in a technology contract to the business interests of the contracting parties. In this coverage, the terms 'royalty', 'royalty rate' and 'royalties' are used interchangeably.
A firm with valuable Intellectual Property IP by having spent sums of money to develop manufacturing know-how, patents or a trademark, can be expected to not only employ it for gain but to seek, by licensing it out: to recoup part of the expenditure incurred on development achieve such in the shortest period of time and attempt to obtain a profit from each of the markets in which the IP will be employed to the gain of the licensee.
A licensee under the IP, on the other hand, risks the potential loss of capital that would be invested for working the license the adequacy and protection in the rights licensed and and the uncertainties of any marketplace. The licensee's objective would, thus, be to minimize exposure to the costs and the performance of the technology.
This contest in objectives will normally be settled by a compromise of expectations. One of the key elements of this process is the royalty applied, amplified here. The royalty is not a single separate element but is a composite of the rate, the length of time over which it applies, the unit base of its calculation, the 'remaining life' of the licensed right , supportive assistance and other contractual obligations. Other license metrics, such as exclusionary rights modify the rate.