One of the questions that I have frequently encountered has been to describe the pricing mechanism, specifically related to the royalty model. The royalty model is based on cumulative net receipts over the contract term for a particular product incorporating VSTA. Each time your cumulative net receipts surpass a specific percentage threshold, your subsequent royalty rate falls as well.
To better illustrate this point, here are two examples of the royalty model:
ISV with $6 million in product sales per year:
In this scenario, the ISV quickly eats through the higher percentages, and within the first year, is paying a 1% Royalty Rate.
Specifically, this ISV will pay a total of $130,000 in the first year, as seen below:
3% on the first $2,000,000 = $60,000
2% on next $3,000,000 = $60,000
1% on last $1,000,000 = $10,000
Total year 1: $130,000
In Year 2 (and subsquent years of the contract) the royalty rate is 1%, regardless of product sales. So, in this case, assuming no change in product sales, the royalty due will be $60,000.
ISV with $2.5 million in product sales per year:
In this scenario, the ISV takes a little longer to move down the royalty ladder, but will be paying the lowest percentage by the beginning of year 3.
Specifically, this ISV will pay a total of $70,000 in the first year, as seen below:
3% on first $2,000,000 = $60,000
2% on next $500,000 = $10,000
Total year 1: $70,000
In Year 2, the ISVs starting royalty rate will be 2%. Royalties for the year will be $50,000 ($2,500,000 @ 2%).
In Year 3, the ISVs starting royalty rate will be 1% (the cumulative product shipped will be $5,000,000). Royalties for the year will fall to $25,000 ($2,500,000 @1%).
Posted
Aug 08 2006, 11:49 AM
by
dschneid@summsoft.com