Inventors Margins1

By Chris McKay

When I first heard 5-6% was a normal royalty in the toy business I was appalled. How could 5% be fair, the idea was everything? Once I had gone through the process of bringing a product to market I thought, “Yeah, that’s about right”. In the beginning the idea is everything but protecting it, designing it, manufacturing it, packaging it, selling it and promoting it is what makes it successful. Without all of this it is just an idea in someone’s head or scratched on a piece of paper.

Let’s say a product retails for $10. The retailer will want at least “Keystone” which is to double their cost, so they want it for $5. If it’s a catalog or a chain with expensive real estate they may want 55 – 65 points. Which means they want to buy it for $4.50 or as low as $3.50. You should expect quantities to go up with the higher margins demanded but that is not always true. Sometimes you have to look at the visibility your product is getting and accept it as a marketing expense. When our watches are in SkyMall or on QVC we’re working on smaller margins but the visibility is great.

But assuming you’re working on Keystone and getting $5; you have your manufacturing costs, which should not be more than $2, plus duty and freight if it’s coming from overseas, overhead, marketing, insurance, sales commissions, web site, tooling, etc which should not be more than $2 for each item, leaving you $1 in profit or 20% of your wholesale price. These numbers work financially, but if your costs increase or your margins on sales decreases you can quickly eliminate any profit. Look what happens if you are able to get only $4 for your product, the profit is wiped out. So a 5% royalty on wholesale sales, or $.25 without any risk is something to consider.