Royalty Calculation and the Royalty Management Lifecycle™

Royalty records management might be the most confusing part of your business. Mistakes here can cost you money and damage your recipient relationships. To clarify this intimidating process, the MetaComet® team has created the Royalty Management Lifecycle™ model.

The Royalty Management Lifecycle™ breaks the process into 4 distinct phases: acquisition, sales, royalty calculation and reporting, and distribution of payments and statements. By looking at each step individually, you can identify opportunities for efficiency and avoid many pitfalls that come by the overwhelming complexity of doing it all at once. The breakdown also suggests useful tools that will help you make major improvements to each phase of royalty records management.

Watch this video to learn more about what opportunities and dangers the Royalty Management Lifecycle™ model exposes, and read on for more information about the royalty calculation process.

What is the Royalty Management Lifecycle model?

The Royalty Management Lifecycle outlines the 4 key steps of royalty processing:

• Acquisition is the phase when a company signs an agreement with an author, inventor, or other royalty recipient. It typically requires:
• Creating a new contract.
• Sharing the contract and revising it as necessary.
• Executing the contract.
• Storing the contract for future reference.
• Recording the contract details.
• Onboarding the new royalty recipient.
• Sales is the period when the final product is released to market and sales start to come in. There are many areas where sales data can create inefficiencies:
• Combining multiple sales files into a single sales database.
• Mapping sale types (e.g., foreign, domestic, paperback, and ebooks) from sales reports to those described in your contract terms.
• Converting multiple foreign currencies.
• Ensuring that all sales are properly accounted for and royalties are paid on time and correctly.
• Royalty Calculation & Reporting is the stage when the company figures out what it owes to its recipients. Some royalty managers spend weeks each quarter on this process, which can involve hundreds of thousands of transactions. After processing the data the organization will generate royalty statements, month-end reports, advance roll-forwards, outstanding reserves, and other necessary records.
• Royalty Distribution is when the company shares royalty statements and payments with its recipients.

What is the process for calculating royalties?

The calculation of royalties involves a detailed process influenced by multiple factors. Each company has its own rules, which differ based on their unique agreements with recipients. 

For instance, the factors involved in the royalty calculation process for a book publisher are likely to include:

• The list price of the book, in all of its published formats.
• The sales numbers for the book in all its formats.
• Whether the contract specifies retail royalties, which are based on the list price of the book, or net royalties, which are based on the actual revenue the publisher receives.
• The royalty rate, which may be affected by the triggering of a royalty escalator. 
• What discounts the publisher has given to retailers.
• The volume of book returns within the royalty period.
• Whether the publisher is holding back a reserve.
• Whether the royalty earnings have met the advance earn-out point.

For more information about these factors and terms, please see our articles on 15 Frequently Asked Questions About Book Publishing Royalties or Publishing Royalties 101.

How are royalty rates determined?

Royalty rates can differ significantly depending on the business model. 

For example, in “hybrid” book publishing, both publishers and authors share the production costs, which often results in higher royalty rates. For instance, authors might earn between 50% and 90% of net sales.

Conversely, traditional publishing models involve the publisher assuming most of the financial risk, leading to lower royalty rates. For ebooks, this might be around 25% to 50% of net sales, while paperback royalties are typically around 10%. Hardcover book royalties usually reflect a percentage of the list price rather than net sales. Royalty rates can also fluctuate with discounted sales.

Additionally, in traditional publishing, publishers often acquire all rights to the content. This allows them to license the work for other uses, such as foreign markets or film adaptations, with subsidiary rights royalties generally set at 50%.

(See our article How Are Royalties Calculated? to learn more about the factors involved in negotiating royalty rates.)

How are royalty payments processed?

Traditionally, companies referred to their royalty statements and issued checks one by one to their recipients at the end of each royalty period. Some small companies still process royalty payments this way, but most now generate payments through their accounting software and/or electronic payment platforms, issuing checks or electronic payments in a more consistent, efficient, and trackable process. The best royalty calculation software will automatically generate payment files that can be directly uploaded to the user’s accounting and/or payment software. 

Why is royalty records management important?

Regular financial audits are a necessary part of doing business: business partners, investors, tax agencies, and your royalty recipients all need to see proof of accurate, honest, and legal financial calculations and record-keeping. Therefore it’s crucial that all sales data, royalty calculations, and royalty payment information is kept in a secure and easily accessible system.

What is royalty automation?

As you can see, the royalty calculation process can be complex and challenging. The MetaComet® suite of royalty software tools automates the process and saves time, ensures accuracy, and eliminates stress for your royalty processing team.

Royalty automation can impact every step of the Royalty Management Lifecycle. For example:

• During the Acquisition phase you can securely share the contract and communicate with your recipients about deal terms through the Royalty Portal, automatically recording the conversations and storing the contracts in one accessible place.
• During the Sales phase you can use the Sales Aggregator to seamlessly ingest and consolidate all of your sales files, regardless of format and currency.
• Royalty Tracker® streamlines the Royalty Calculation & Reporting process, saving you up to 90% of the time you are now spending on making calculations using complex and error-prone spreadsheet systems. It allows you to process a full period’s worth of royalty calculations with the push of one button. Detailed and informative reports are just one more click away.
• Royalty Tracker® also automates the Royalty Distribution process, creating payment files that can be directly uploaded to your accounting and payment system, and sending professional and accurate royalty statements to recipients by email and/or through the Royalty Portal.

Want to learn more?

If you’d like to see how MetaComet royalty calculation software can ease your workload and transform your royalty records management, contact us to schedule a demo today. We’ll show you how our solutions can be customized to meet your company’s needs and eliminate the stress around the royalty calculation process.