Royalty Escalators

Escalators clauses are frequently found in royalty contracts. An escalator clause states that the royalty rate increases or decrease once specified levels of a specified metric. Frequently used metrics are quantity sold, revenue, royalties earned and retail price.

The examples below illustrate three types of escalators from our royalty software.

1. Quantity escalator has royalties increase at specified levels of quantities sold.

royaltyescalator01

2. The retail price escalator shown below has a royalty rates that decreases for higher priced products.

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3. In the example below the royalty rate is based on life to date revenue (receipts) for sales in the specified format (paperback, hardcover, etc.)

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Escalators may be based on sales for all products covered by a royalty contract. They may  be limited to sales of a specific format; such as print or eBook,  sales of a specific product or sales covered by a specific royalty rule. They may also be based on products covered by 2 or more contracts; i.e. a group of contracts.

A common oversight is including all sales in escalator tallies. For book publishers this means excluding eBook sales and free books from escalator quantity totals. You can tell the royalty software to include sales for a specific rule; such as eBook sales, by selecting DO NOT include sales or activates that fall under this right in the escalator tally.

royalty software escaltor exclusion

Escalator Strategies

Licensees have two reasons for using escalators in royalty contracts.

First, escalators reduce your royalty expense until a specified metric is achieved. For book publishers a lower royalty rate at the beginning allows the publisher to recover his investment faster. After his costs are recovered the publisher pays a higher royalty to the author. Typically, a print book has three escalator levels based on quantity sold. An eBook may have an escalator based on life to date revenue.

Second, its used as a tool to close a deal with a licensor. By offering the possibility of a higher royalty rate the licensor; an author for a book publisher, may be induced to sign a contract with the licensee. Would you rather sign an agreement with a publisher that offers a flat 10% royalty or one with a publisher that offers a 10% royalty on the fist 5,000 copies, 12.5% on the next 5,000 and a 15% royalty if the quantity sold exceeds 10,000 copies? For many authors the upper escalator break level will never be reached.

In writing contracts it is very important to specify what is the escalator is based on an what is excluded from escalators. A book publisher’s contract will often specify that the escalator is based on print sales and that it excludes 1) books sold at less than unit cost; including remainder copies and 2) free promotional copies. Some contracts specify that sales at discounts greater than a specified discount level; 70% for example, are excluded.

Royalty Software Implications

When evaluating royalty software you want to be sure that it supports the rules that you will use now and in the future. This includes support for your escalator metrics; quantity, revenue, invoiced price and retail price. You want to insure that the escalators support your qualifiers; contract, rule, format and product (ISBN). A product qualifier includes only sales from a specified ISBN in the escalator. A format qualifier would include only sales from products of a specified format; such as print or digital.

We find that the option to print summary of the escalator rules is an important royalty software functionality. This allows the user to see a printed summary of their eBook rules by title. Another feature to look for is the option to exclude sales of a specific type from the escalator tallies. For book publishers the biggest escalator problem is including remainder sales and free promotional copies in the quantity tally. A publisher does not want to include quantities from which it derives no revenue or minimal revenue as this can boost the royalty owed to the author.