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Hi, I have a unique technology. I have some companies that wish to get an API from us and use our technology for their benefit to make games and educational products.
What is the best way to price such a deal?
Does a setup fee and say 30% of reveneus from product make sense?
Or is there a commmon price % for OEM deals that is normal?
Dory,
No one will pay 30% of license revenue, that's off the charts. When you propose a % of license revenue the numbers range more along the 3% to 4% range.
Also, in this model you want to understand your customers cost basis, they already may have other OEM’s embedded, so if they sell unit one for 10USD and area already paying 5% to another OEM, then for your calculation purposes your number will start at 9.50USD.
So you have to ensure you have a complete understanding of their sales and revenue model. It is perfectly acceptable in OEM negotiations to review potential customer’s sales pipelines, forecasts, previous sales numbers, etc.
Remember that the down-side to a percentage of revenue is that your OEM customer(s) will not always blow the roof off of sales they will have poor sales.
From an OEM product perspective, you hopefully have something that your target customers "need" in their "base" product. And, it's either to expensive for them to develop themselves, highly specialized, or it will take to long and would effect their selling and go to market strategies for their own products.
Your OEM product should also be a "need" vs. a "nice to have". In other words, do 100% of the end customers require the base functionality or is it really an add-on feature, where only a sub-set of the end customers require, need or care about the functionality delivered through your software.
All of these become determinants in the amount of leverage you have in negotiating your price.
Many OEM's who have a product that is in the “need” category deliver pricing where they never lose, for example a percentage of revenue with a floor - so 3% of license revenue and a minimum of 50K per month, so their minimum is 600K per year with an upside based on the end customers sales - also as an aside you have to contract for this carefully, if your product is sold on a per user basis, or can the end users products be re-licensed through re-sellers or even stood up in a data-center (in a SaaS model for example) where many users can now consume a single license - you will want to be very careful that you don't find yourself in a situation where you provide a license to one OEM customer and then wind up with a support burden of 1000's of end users that are using and stressing your functions, it might be nice for feedback and organically improving the software, but it will drain your support costs.
Think about a base fee, 10K,20K,30K to get started – this way on each sale you can count on revenue right away (what I call Keep the Lights on Money), and then a percentage of sales, start at 5% with a negotiating fall back down to 3% and create a floor so that you guarantee your license revenue. Ask for your customers sales forecast upfront, then use it as a model to give them a “let’s make a deal & put your money where your mouth is offer” based on their forecast let them choose a percentage of license revenue or for a flat monthly fee they can sell as many copies as they want (you will still want to include a reasonable “upto” number, say 10,000 units) or they can go with the percentage of revenue. The idea is to see if they have confidence in their own sales forecasts. If they believe they can sell then that model will benefit most.
Good Luck,
Peter
May 2009