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October 24, 2014

Software Development Profit Sharing/Royalty Rates Options

Purpose of Determining Software Development Royalty Rates

This research is compiled because as a great Anchorage, Alaska Web Design Company, we needed to understand what are the customary software development royalty rates. There are profit sharing options, splitting development costs between the idea/money man and the development team, or providing reduced software development costs for royalties.

Some suggest:

  • - Software developer provides services for reduced rates to earn software development royalties (risky)
  • - Software developer should get paid full rate & still earn royalties
  • - Software developer retains ownership of the code
  • - Idea men/clients get royalties on sales to motivate them to sell.

The rationale is that giving the client ownership is that they may have little incentive to sell the product when it's done. Clients win by getting you to work for discounted software development rates. If the client is poor at marketing, software developers lose unless they decide to sell the application.

Software developers could give clients exclusive rights to sell the product contingent upon future sales figures.  For instance, they need to sell 10 copies a year to retain exclusive rights.

Negotiating Software Development Royalty Rates

Developing software and expecting royalty rates can be tricky when working at a discount. Software developers are taking on risks beyond their control. For example, the marketing partner may not be able to execute or the market may not be receptive to the product.

A good option is to work for full rate (or close to it), and set up a software development royalty structure that kicks in after a minimum number of sales (enough for them to recoup their costs). This will minimize software developers' up-front risk and provide some back-end cash if the product becomes a huge success.

Royalty percentages depend on the size of the software developer's investment (in time) vs their investment (in time and money). For many deals, 10-15% are typical. 

Discounted Development Rates for Royalty/Profit Sharing

 In "Essentials of Licensing Intellectual Property," the following software & Web development royalty rates by industry are:

  • Computer Software: 10.5% (average), 6.8% (median)
  • Internet: 11.7% (average), 7.5% (median)

Most royalty agreements are for licensing an existing marketable technology. When software developers are  being paid to develop technology, they should expect a lower than average royalty rate. Also, if a client pays developers to modify existing applications that the developer owns, he may need to adjust the rate. This may depend upon the quality/complexity of the initial application and the nature of the changes. For example, if the software developer is repurposing software and "bolting on" additonal functionality and applying a "fresh coat of paint" (new skin, CSS styles, label changes), then the royalty structure should be adjusted upward. The exception is when the client purchases the initial source code. In this case, the software developer should negotiate for a lower software development royalty rate.

More About Average Software Royalty Rates for Developers

Also of interest, follow these links for more information we've learned about Software Development Royalty Rates...

How Long to Expect Royalty Rates / Profit Sharing from Software Development

Consider Software Development Costs for Royalty Rates / Profit Sharing

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