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We built a consumer facing web app and have been growing our user base by iterating on the product for a little over a year. A large media company has inquired about licensing our technology to power a similar function on their site, but in a different vertical (so it wouldn't compete with our own property). I'm looking for advice on how to price the licensing fees for this "white label" licensing deal.

The only method I have so far is estimating the cost to develop this functionality from scratch, then adding a premium for execution risk (the technology is proven) and time value (it is already developed). So the licensing fee = (fully loaded headcount cost * estimated development time * premium).

Any other ways to estimate the licensing fee? Financial metrics (multiples on revenue, conversion rates and customer LTV, etc.) are hard to use because it's a different vertical from ours.

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The other way to estimate this is to figure out how much revenue you would make if you went after the vertical. You are essentially giving them a license to service a market you don't want to service. So figure out the 3 to 5 year revenue stream if you got into that vertical. I know it's not your vertical but you should do some research to get a sense.

Your method is also reasonable but will discount the revenue stream too much since it only deals with the opportunity cost to the large company of doing internal development.

Once you have the revenue numbers, then you can compare that to the opportunity costs of developing the software from scratch. The license fee will fall somewhere in the middle.

The other thing to consider is a license fee + royalty based on some measurable metrics. That might ease the burden of closing the deal.

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great inputs - thanks Jari and Joseph. – rtc Jan 5 '10 at 21:54
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Here are some thoughts for you (this comes from the position of having sold white labeled services in the past as part of our core business model):

  • Think about how they will make money from it, and charge based on a similar model. E.g. if they are selling it as a service, charge as a service. If they are charging one-time fees, do the same. If they are selling ads on it, then ongoing monthly service costs fit their model as well. Essentially, this turns into making it easy to buy

  • Typically a private-labeled agreement involves some kind of reselling of the service. If they are going to make their mark up, then you need to sell it as a discount

  • We sold our software as one-time license sales, and our resellers received between 30% and 70% off list price. This worked very well for them.

  • One of our clients, sold compression technologies to ISP's, and their model was essentially to sell a server to the ISP, charging $1/subscriber/month.

  • We had a service we provided for free to our resellers, that another company wanted to utilize for their reseller service base. We determined that using our software would reduce their churn by at least 10%, and used that to determine an appropriate monthly price for the licensing rights.

Hope these help!

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great inputs - thanks Jari and Joseph. – rtc Jan 5 '10 at 21:53

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