The royalty payment is a sharing of the success of the product commercialized.
Typical sharing is 25% of the operating profit that goes to the Licensor and 75% is kept by the Licensee.
You can read more about this by doing an Internet search for the "25% Rule." The reason behind that sharing is that typically the Licensee brings more
to the commercialization of the technology such as a complement of assets that the Licensor does not possess.
This could include other assets such as trademark, customer base, market channels, other technology etc. and the Licensor should be compensated for the use of those assets.
Finally, each of the contract terms has economic value and an impact on the royalty payment. While they are not easily quantifiable, estimates are required to adjust the market comparable
royalty rate you select from our data. See Kemmerer, Jonathan E. and Lu, Jack, Profitability and Royalty Rates Across Industries:
Some Preliminary Evidence (May 31, 2008). KPMG Global Valuation Institute, November 2012, Available at
and Robert Goldscheider, John Jarosz and Carla Mulhern, Use Of The 25 Per Cent Rule in Valuing IP, 37 les Nouvelles 123 (Dec. 2002)