February 28, 2025
Character business, or character licensing, begins when the passion of an IP holder to introduce their character to the world unites with the desire of a brand manager to showcase their product or service to a wider audience.
Character creations are born from imagination and creativity, but the process of turning them into a business is another story.
This requires a deep understanding of proper contracts and financial agreements.
Today, I will explain the key terms and concepts step-by-step so that you can easily understand royalties, the most important element in character licensing agreements!
Shall we take some time to clearly and simply review the key points, so that everyone from those just entering the character business to those already with experience can go over them? 😊
Royalty refers to the compensation paid for using a specific character's assets (IP). In the character business, it refers to the amount paid by brand partners or licensors to IP holders in exchange for using a character's image or story.
Shall we take an example?
A brand generated sales by producing products or utilizing promotions featuring a character.
Since the character's influence clearly plays a role in that sales, you end up paying a cost in exchange for the character's value or impact.
That very cost is called 'royalty'.
Royalty is usually calculated as a percentage of sales volume or revenue, or as a fixed amount according to the contract.
Let's take a look at the details below!
There are specific concepts of royalty called Minimum Guarantee (MG) and Running Royalty (RR).
These two terms frequently appear in character licensing agreements.
Minimum Guarantee (MG)
It is a condition in which the character user (brand partner) pays the IP holder a minimum guaranteed amount as a condition for utilizing the license.
In other words, it is an amount paid unconditionally when a license agreement is signed, regardless of how much the character is actually sold.
Running Royalty (RR)
It is a method of paying a portion of the revenue generated whenever a product is actually sold to the IP holder.
The more products are sold, the larger the amount the IP holder receives.
The royalty rate may vary depending on the items contracted, and the rate may also vary depending on the influence of the character.
The Minimum Guarantee is the minimum guaranteed amount paid to the IP holder upon signing the contract, and even if actual sales are less than this amount, the IP holder can receive the MG in full.
On the other hand, running royalty is an additional amount generated based on sales performance, and is paid on the excess amount if sales revenue exceeds the minimum guarantee.
Therefore, the minimum guarantee is designed to ensure stable revenue and generate additional income through running royalties if sales increase.
The royalty calculation method varies depending on the contract terms, but generally it is calculated as [ Sales Price X Running Royalty X Sales Volume ].
For example, let's assume that the running royalty in a character license agreement is set at 5%.
If the selling price per item is 50,000 won, the royalty received for each item sold is 2,500 won (50,000 x 5%).
If 200 units are sold, the total royalty becomes 500,000 won (2,500 x 200).
Then, how is the Minimum Guarantee (MG) determined?
Generally, the minimum guarantee is calculated as [ Consumer Price X Running Royalty X Initial Production Quantity ].
For example, if the initial production quantity is 500 units, the minimum guarantee becomes 1,250,000 won (50,000 x 5% x 500).
In the character business, there are methods other than paying an amount proportional to sales volume or revenue.
One of them is the fixed license fee (or fixed fee).
A fixed license fee is, quite literally, a method where you pay a fixed amount all at once.
If running royalties vary based on sales performance, a fixed license fee is a method where you pay a fixed amount all at once to use the character, regardless of sales.
It can also be seen as a concept opposite to running loyalty.
This method is also frequently used in cases involving specific events, content, or advertisements where the character usage period or conditions are clearly defined.
One-line summary
Royalty is a very important part of character licensing, and various concepts are intertwined.
Royalty: The amount received by the IP holder in exchange for the use of a character.
Minimum Guarantee: The minimum guaranteed amount received by the IP holder at the beginning of the contract.
Running Royalty: Additional revenue generated from product sales
Fixed License Fee: A fixed amount paid all at once, regardless of sales performance.
A successful character business begins with the right contracts and an understanding of royalties.
It is very important that the IP holder's characters are recognized for their appropriate value and that brand partners share mutual benefits through fair contracts.
It is essential for character IP holders to understand and consider how their work is evaluated in the market and how to receive appropriate compensation.
Conversely, brand partners must review whether appropriate royalties have been set to drive successful marketing and product sales by utilizing the character.
The concepts I am introducing today—royalty, minimum guarantee, running royalty, and fixed license fee—are terms that always appear in actual character licensing agreements.
I believe that if the concept is accurately understood and utilized effectively, the character business can proceed more smoothly and successfully.
Please refer to today's information to make wise choices and decisions when entering into contracts or collaborating in the future!
Inner Booth will always be cheering for you to achieve even greater success in the character business! 🌟
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