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How a Stock Agency's 10% Royalty Rate Reduction Slams a Photographer's Revenue by Far More Than 10%
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Many photographers believe that a drop of 10 royalty percentage points results in a 10% drop in royalty revenue. Mistake.
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Let's use Alamy's recent announcement of a 10 point royalty reduction as an example.
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Alamy's 10 point Royalty Rate ReductionDirect SalesDistributor Sales
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Previous Royalty Rate to Phototographers60%40%
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New Royalty Rate to Photographers (10 percentage point reduction)50%30%
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Commission Paid by Alamy to Distributors on their Sales (unchanged)NA40%
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Example: $1000 gross saleDirect SalesDistributor Sales
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Gross Revenue Received by Agency$1,000.00$1,000.00
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Distributor Commission$0.00$400.00
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Net Sale After Distributor Commission$1,000.00$600.00
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Effect on Alamy's Share of Sales RevenueDirect SalesDistributor Sales
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Alamy Old Share of the Revenue$400.00$200.00
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Alamy's New Share of the Revenue$500.00$300.00
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By Dropping Photographer's Royalty by 10 points, Alamy Increased Revenue25%50%
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Effect on Photographers' share of Sales RevenueDirect SalesDistributor Sales
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Photographer's Old Share of the Revenue$600.00$400.00
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Photographer's New Share of the Revenue$500.00$300.00
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Alamy's 10 point drop in Photographers Royalties Reduced Photographers' Revenue*17%25%
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Can this royalty reduction ultimately increase revenues to photographers?
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Alamy has implied that this reduction in photographers' royalties will be invested into improvements that will result in increased gross sales revenues, and by extension, increased revenues for photographers. To increase gross sales revenues, Alamy must either increase its prices to customers (doubtful) or grow its sales, or both. Let's do the numbers.
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How much would Alamy need to increase sales in order to provide photographers with the same revenue received under the old royalty rate?Direct SalesDistributor Sales
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After reducing royalties by 10 points, Alamy must increase sales by these percentages in order to provide the same revenue to photographers. Note: This is the minimum, providing 0% benefit to photographers. To provide any benefit to photographers, Alamy would need to beat these percentages20%33%
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Do you believe that given current market conditions and trends, Alamy will successfully increase worldwide direct sales by a minimum of 20% and worldwide distributor sales by a minimum of 33% ? If they don't hit these minimum targets, photographers will experience drastic reduction in royalty revenues from Alamy. If they hit these minimum targets, photographers will be revenue neutral.
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If Alamy successfully grows its sales so as to meet the growth percentages indicated in the above section, what is the benefit to Alamy?Direct SalesDistributor Sales
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If Alamy achieves sufficient sales growth to provide photographers with the same revenue received by photographers under the old percentage (0% benefit to photographers), the net revenue to Alamy after paying photographers/distributors will have grown by 50%100%
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Although Alamy is unlikely to increase its prices to customers, it is helpful to consider an example. Using the $1000 example sale referenced above, let's see how much Alamy would need to increase its prices in order to provide photographers with the same royalty revenue received before the 10 point royalty reduction.
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Direct SalesDistributor Sales
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Example: gross revenue on a sale$1,000.00$1,000.00
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The royalty revenue to the Photographer at the old royalty rate was$600.00$400.00
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To provide that same revenue to the photographer under the new royalty rate, Alamy would need to increase that $1000 sales price to$1,200.00$1,333.33
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This increase in pricing to customers would be20%33%
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Alamy's Share of the $1000 sale before dropping photographer's royalties and before increasing sales was $400.00$200.00
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The amount received by Alamy under the new scheme, after increasing sales sufficiently to provide photographers with the same revenue as photographers received previously$600.00$400.00
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Amount of the increased revenue to Alamy$200.00$200.00
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By decreasing photographers' royalty rate and by then increasing sales sufficiently to provide photographers with the same royalty revenue as received under the old royalty rate (a 0% benefit to photographers), revenues retained by Alamy increase by 50%100%
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*17% is a rounded percentage. Precise percentage is 16.6666666666667%