The Key To A Successful Business? Royalties

If there’s one lesson from the market economy, it’s that businesses don’t always thrive on sales. Instead, the most successful model seems to be royalties – getting paid for intellectual property. 

There is a fundamental difference between revenue from sales and that gained from royalties. Sales require constant expenditure to generate income, while royalties don’t. Once the licensed product or service is out there, clients have to pay for it forever. 

In this post, we look at why royalties are the key to a successful business and then look at some of the downsides of using them (and how to manage them). 

The Benefits Of A Royalty-Based Business

Here are some of the positives of running a royalty-based business. 

Lower Overheads

One of the main benefits of a royalty-based brand is the lower overheads. It doesn’t cost as much to render goods and services to clients, customers, and the public. The hard work has usually been done and the task is simply to create as many instances in which the IP is being used to drive revenue higher. 


There’s also the fact that businesses that operate using royalties are also more scalable. The licensed product doesn’t usually require more infrastructure or staff to facilitate the sale of more units, so the company can grow its revenues faster than it makes investments. 

For many entrepreneurs, a business model like this is the holy grail. After all, the purpose is to earn profits. 

Passive Income

Finally, many royalty-based businesses generate passive income. Sometimes, they don’t require any management at all to run successfully – just a sales portal of some description. Once the product is out there in the marketplace, it generates revenues by itself. 

The Problems With Royalty-Based Businesses

Of course, royalty-based businesses aren’t perfect, and if you try to start one, you will likely still run into problems. 

Unpredictable Income

One issue that sometimes crops up is an unpredictable income. Sometimes payments will be high, and then other times, you won’t receive anything at all. 

Unfortunately, the amount of money you make will depend on the fluctuating sales of the licensed product. In some cases, these can fall to zero when new technology comes along or tastes change. 

Loss Of Control

Sometimes, you can also give up control over your product when you accept royalties. Other people might sell it on your behalf, leading to branding and presentation issues you want to avoid. 

You can mainly deal with this issue by using technology lawyers, but you should include legal advice from the start. If you don’t, you could easily wind up using the wrong strategy and even regret your decisions later on. 

Tough Negotiations

Lastly, royalty-based businesses often face tough negotiations when trying to obtain decent royalty rates. Many companies want your services, but they aren’t always willing to pay the fees you demand. 

For some entrepreneurs, this type of roadblock can be disconcerting. Developing a product or service that can command a royalty is extremely challenging and deserves a decent reward.


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