Working for Royalties as an Industrial Designer

If you are an independent industrial designer or want to be one, you will likely come across clients who pay with royalties, where you usually don’t get paid upfront but instead collect a percentage of the profits of a given project or product. After ten years of working as an independent designer, I can share the positives and negatives, and all that needs to be considered when jumping into this financial agreement.

📃 How it works

Simply put, as an external entity of the company you are licensing the creatives right for them to use your art for financial gain. I am no lawyer or financial expert, but this is the gist of it. Once the company produces your design, artwork, or creation, and sells it to the public they will pay you a percentage of the profit, usually off the wholesale price.

💲 Percentages

In the industrial design world, I have seen the percentages vary by category, but these are not standardized, some companies pay more and some less. Traditionally, when you are licensing a design whose unique selling proposition is based on how it looks and not a given function the percentages will be between 3–5%. Categories like furniture, tabletop, decor, home goods, packaging, and cosmetics fall under this umbrella. The reason is, that companies know that aesthetics change, are not universal, and are in ample supply. On the other hand, if you are offering a functional feature or solution which is rare or has never been used before you can look at royalties between 7–10%, if not more. Traditionally, these categories include electronics, appliances, toys, home improvement, and gadgets. Why higher? Well, the way a design looks can easily be copied with little protection from design patents unless the brand has a dream team behind it. However, how a product works or performs can be patented under a utility patent giving it stronger protection and greater longevity to the product that will be commercialized. As a designer, you may be able to negotiate higher rates if you offer more than just the product, such as marketing opportunities, PR exposure, or access to a specific audience.

🚫 Challenges

It use to be that if you were a product designer, say, Charles and Ray Eames, you will make a design for a brand or manufacturer and that product will sell for years to come. This was a lucrative model, but with more design brands embracing design thinking, good design became much more mainstream, while that is good, it accelerated the cycle of the brand’s product portfolio and forced them to have new products much quicker; eliminating designs that while great did not fit the new trend or the new pricing and marketing strategy. As such, today we live in a world where a product has a much more limited lifespan than before, yet the royalty format remains the same, promising designers a portion of riches that most likely be a fraction of what they hoped for.

Aside from the financial arrangement, there is a perception downfall. When was the last time you valued something that was given to you for free? Likewise, if you immediately accept to work for free, it sends the message that not only for that client but others you would work for free. It sets the precedent that your work has little to no value, and which will be a pigeonhole hard to get out of. You will never be able to charge a penny to that client.

So while this seems like a less-than-ideal arrangement, royalties can be a nice source of passive income if done right. Below are some of the questions I asked myself when choosing a royalty deal.

1. What is the Brand’s distribution?

One of the most significant challenges of working on a royalty model of payment is that the designer often does not know the sales structure or distribution of the brand selling the product. While brands get to see your work on your website, no brand will open their books for you to get a sense of how much they sell. I have had brands tell me a new collection sells a million a year, and my BS radar starts to set off. Do your research and learn about the brand and who you are working with like you would get to know your future spouse, because some of these relationships may last a lifetime.

This lack of information can make it difficult to predict how much profit the designer will make from the project. So a good way to get the sense is to Google the brand, and see what kinds of sales channels they are in, what stores carry them, what physical stores they have, and even their social media to see if they are connecting with their customer base.

2. Percentage follows the price

Getting royalties of 10% of a product that retails at $200 and sells a yearly volume of 500, might be less beneficial than 3% of a product that retails at $50, but sells 10,000. Let’s do the math by using the wholesale price of these products (divided by two); Product A makes ($100 x 500 x 0.1 = $5,000), while Product B makes($25 x 10,000 x 0.03 = $7,500). Even if the projections of Product B are optimistic, and sales are let’s say just 30% of the total volume ($2,250), it's pretty good and will most likely surpass Product A in the long run because is a much more price-accessible product. For this reason, if your products fall under high-end luxury items that will sell in limited amounts you will want to aim high to balance the lower production, similarly, if your item will be available for the mass consumer market, a smaller percentage is reasonable and will yield results in the longer run.

3. What is the Brand’s team structure?

Another challenge that industrial designers face when working on a royalty model, is that they are an outside entity. You don’t know the day-to-day of the brand’s operation, who calls the shots, or what dialogue goes behind the scenes. A brand may change its structure, operations, or personnel, which can cause the project to be stuck in limbo. I have had many projects be shelved or die, just because new management had a new vision, the director changed jobs, or even someone’s spouse didn’t like it. In this instance, you have a choice to make, to fight with new the leadership for them not to kill your project or be on their good grace for what they have in mind next. In some other cases, there are “too many cooks in the kitchen”. Product development is fun and many people surrounding the project might want to share their vision of what the product must be. It is important you keep track of the scope of the project and who the decision makers are so that your investment is not multiplied by two or three because you are trying to make everyone happy. This volatility can be frustrating, given you are working with no benefits, putting your time and resources upfront, and with little to no knowledge of what happens inside the brand.

4. How much are you willing to spend, and how much will you get in return?

Designers who work on a royalty model take all the R&D risk with little guarantee. This means that designers must invest their time and resources into developing a product without assurance of its success or profitability. These resources include your office space, computer, software licenses, time, your personnel, any investment you made to grow and stay up to date with trends, and much more.

Creative projects can move quickly once in a blue moon, but most require revisions and improvements to achieve the desired quality. From acceptance to market, a product may take 2 years. In addition, if the company is not well-structured, it may change its approach, sample the product incorrectly, or select a factory that cannot achieve the design vision. Therefore, it is crucial to anticipate the best and worst-case scenarios financially and emotionally. This can be done by conducting basic research on the brand’s pricing structure and its competitors’ pricing. Then, an estimated wholesale price can be calculated by dividing by two the retail price, which you can then multiply by the estimated yearly volume. It may take one or two years to break even, but if the number is too far from the estimated worst-case scenario operational cost, the project may be very high-risk and ultimately not worth your investment.

💖 Positives

Despite these challenges, there are also opportunities for designers who are willing to take on the risks associated with designing for royalties. For example, if a product is successful, designers can earn more money over time than they would if they were paid upfront. Additionally, designing for royalties can be a great way for designers to build their portfolios and establish a reputation in the industry given that they might get a project much more easily than if charging a flat fee. Once you have launched a few royalty projects you can then sit down and collect the check.

Industrial designers can mitigate these challenges when working on a royalty model of payment, with the following things in mind.

1. Better Contract

Negotiating a more favorable contract with the brand, sounds obvious, but sometimes you want the project so bad you are hesitant to push back on bad terms. Better terms might include an upfront payment for the designer against future royalties, it makes the brand have some skin in the game and keeps your cash flow positive. The amount depends on the project and its scope. I wrote a second article “5 Key Things to Look for in a Royalty Contract” which highlights some of the main considerations when looking at a licensing contract.

2. Diversify

I made the mistake of blindly believing in one brand whose CEO I knew for some time, I spent a full year where I invested 60% of my time and resources in this client, and it almost cost me my business, so put your eggs in different baskets. This might mean taking on multiple projects simultaneously, seeking out other payment models, such as a flat fee or hourly rate, or developing your own products and selling them independently. I usually recommend not investing in royalty projects unless you have a cash flow positive, and surplus to spare. If you have a team a royalty model can become a budgeting black hole and you want to avoid this at all costs.

3. Finders Keepers

Build strong client relationships with clients that make the model work. Once you know a client delivers, manufactures, and sells your product, stick to them. Three out of ten clients I have worked with end up yielding profits, and it will take time until you realize it, so be organized with your royalty reports and track which products sell, how much you make, and how much you spent, and you will be able to pinpoint the winners for the next round.

4. Ask for a guarantee

I have never done this, but I have heard of other designers doing it. Basically, if the project falls through because of forces outside the project, there is insurance to cover your time. This can be a way of protecting yourself and for the client to think twice before pulling the plug on a project. Alternatively given that in the design process, you will most likely be showing more than one option to choose from, ask that once they choose one, they commit to manufacturing it to the best possible effort. Basically, you want to push them to fill their end of the bargain.

👁‍🗨 Conclusion

While royalties might sound like a lucrative way of making money and making you feel like Mr.Wonderful, it is high-risk with a lot of upfront investment. In my opinion, the royalty system has been used to take advantage of many creatives, but we have been guilty of it as well, we blindly accept to work for free and let our creative brain obsess about the project in front more than our rational calculative business side. Don’t shy away from royalties, just remember is a marriage, and you want someone who values you, and the clients that will matter in your career will want someone who values themselves.

If any of this was helpful please let me know! If you have had different experiences or have a different perspective please share it with me so I can improve my point of view and grow. Thanks for reading and following me for more Design related articles.

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