Realizing the value of Intellectual Property (IP) depends on the right pricing models. In this page, the different pricing model options, a brief description of each, typical challenges for product and services firms, and solution approaches are discussed
Unique Pricing Models for IP-based Products & Services
| Pricing Model | Brief Description | Examples (Digital/Tech Context) |
| Upfront License Fee (Lump Sum) | One-time payment for rights to use IP, often in perpetuity or for a fixed term. | A startup pays a lump sum to use a patented image compression algorithm in its app. |
| Running Royalty (Per-unit/Per-device) | Payment for each product manufactured or sold using the IP. | Smartphone makers pay Qualcomm royalties per device for 5G patents. |
| Hybrid (Upfront + Royalty) | Combination of an initial fee plus ongoing royalties. | Dolby charges an upfront fee for audio tech licensing + royalties per device sold. |
| Subscription (Time-based) | Recurring monthly/annual fee for continued use of IP-enabled product/service. | Microsoft 365 subscription; Netflix streaming subscription. |
| Usage-based (Pay-per-use / Pay-per-call) | Charges based on actual usage such as number of API calls, transactions, or scans. | OpenAI API pricing per token; cloud storage billed per GB/month. |
| Transaction Fee | Fee per transaction processed using the patented method. | PayPal transaction fee; patented e-commerce checkout process. |
| Outcome-based / Performance-linked | Payment tied to measurable outcomes or performance improvements. | AI fraud detection patent licensed for a % of savings achieved. |
| Tiered Pricing | Different pricing levels depending on usage volume or revenue thresholds. | AWS cloud services charge lower rates at higher usage volumes. |
| OEM Licensing | Licensing IP to an Original Equipment Manufacturer to embed in products. | GPU architecture licensed to PC manufacturers. |
| White-label Licensing | Licensing IP-backed product so another company can rebrand it. | An LMS (Learning Management System) licensed to schools under their branding. |
| Milestone Payments | Payments tied to achievement of development or regulatory milestones. | Pharma firm pays biotech company upon passing clinical trial stages. |
| Revenue Share | Licensing partner shares part of revenue generated using IP. | Music streaming platforms sharing ad/subscription revenue with copyright owners. |
| Profit Share | Similar to revenue share but based on net profits after costs. | Joint venture in digital therapeutics sharing profits from sales. |
| Cross-licensing | Exchange of IP rights between two parties, sometimes balancing with net payments. | Samsung and Apple cross-licensing patents to avoid litigation. |
| FRAND Licensing (for SEPs) | “Fair, Reasonable, and Non-Discriminatory” pricing required for standard essential patents. | 5G SEPs licensed under FRAND terms to smartphone makers. |
| Ad-supported + Premium (Freemium) | Basic access free (with ads/limitations), premium features paid. | Spotify free tier with ads vs. paid premium subscription. |
| Pay-per-download / Pay-per-item | Users pay once for each download or item. | E-book or movie download from Amazon. |
| Bundling | IP-enabled product/service packaged with others for a combined price. | Smartphones bundled with pre-installed patented software. |
| Technology Transfer Fee | Fee for transferring IP know-how, training, and documentation. | University tech transfer office licensing AI model to a startup. |
| Franchise-like Agreements | Granting regional/exclusive rights for IP use. | Digital agricultural platform licenses patented IoT + analytics to local partners. |
Typical Challenges for Products and Services firms
| Pricing Model | Typical Challenges for Product Companies | Typical Challenges for Services Companies |
| Upfront License Fee (Lump Sum) | • Hard to convince customers to pay large sums upfront.• Risk of undervaluing IP in negotiations.• Once paid, no recurring revenue stream. | • Buyers may resist high upfront fees for services that are intangible.• Difficult to prove ROI before usage.• Limits long-term relationship building. |
| Running Royalty (Per-unit/Per-device) | • Tracking and auditing sales is complex (risk of under-reporting).• Conflict over what counts as a “unit.”• Customers push for lower per-unit costs at scale. | • Not always a natural fit for services.• Hard to define a measurable “unit of service.”• Clients may prefer predictable fees over variable royalties. |
| Hybrid (Upfront + Royalty) | • Negotiations become complex (balancing upfront vs. running fee).• Some customers dislike “double dipping.”• Risk of market rejection if pricing perceived as too heavy. | • Adds friction in service contracting.• Upfront fee may deter adoption; royalty part adds unpredictability.• Requires strong trust and monitoring. |
| Subscription (Time-based) | • Risk of churn if product loses relevance.• Continuous updates/support expected.• Requires large user base to sustain profitability. | • Clients demand measurable value every billing cycle.• Pressure to justify renewals.• Market saturation leads to subscription fatigue. |
| Usage-based (Pay-per-use / API calls) | • Hard to forecast revenues (usage may fluctuate).• Customers may “game” usage or cap demand.• Expensive infrastructure scaling without guaranteed profit. | • Requires accurate tracking and transparent reporting.• Clients worry about bill shocks.• May discourage heavy usage (counter to adoption goals). |
| Transaction Fee | • Dependence on high transaction volume.• Vulnerable to disintermediation (users bypass platform).• Competitive pressure to reduce fees. | • Clients may resist per-transaction charges for services (viewed as nickel-and-diming).• Regulatory scrutiny (esp. fintech, payments). |
| Outcome-based / Performance-linked | • Difficult to isolate IP’s contribution to outcome.• Risk of non-payment if outcomes disputed.• Long sales cycles to prove value. | • Measurement challenges (what is success?).• Clients may resist sharing financial data.• Misaligned incentives if metrics not carefully defined. |
| Milestone Payments | • Revenue delayed until milestones achieved.• Risk of milestones being redefined or delayed.• Dependency on external regulatory approvals (pharma, medtech). | • Milestones in services harder to define.• May tie up cash flow.• Clients may set overly aggressive milestones. |
| Revenue Share | • Dependent on partner’s honesty and transparent reporting.• Risk if partner underperforms or manipulates revenue. | • Service value diluted if client revenue model is weak.• Revenue recognition/accounting complexity.• Hard to enforce auditing rights. |
| Profit Share | • Even harder than revenue share due to cost allocation disputes.• Potential for partner to inflate costs and reduce reported profits. | • Requires deep trust and visibility into client operations.• Clients reluctant to open books.• Cash flows unpredictable. |
| Cross-licensing | • Value mismatch (one side feels undervalued).• May block smaller players who don’t own equivalent IP.• Complex negotiations. | • Not typical for services companies.• If attempted, hard to define equivalence of service-related IP. |
| FRAND Licensing (for SEPs) | • Regulatory pressure to keep royalties “reasonable.”• Disputes on what is “fair” and “non-discriminatory.”• Risk of litigation (common in telecom). | • Rare in services.• If applied (standards in digital platforms), same fairness disputes arise. |
| Ad-supported + Premium (Freemium) | • Ad revenue volatile; requires huge user base.• Premium conversion rates often low.• IP piracy risk increases with free tier. | • Clients may expect free forever.• Hard to move free users to paid services.• Service perceived as lower value if free. |
| Pay-per-download / Pay-per-item | • Revenue not recurring; limited lifetime value.• High risk of piracy and resale. | • Harder fit for services; customers expect bundled or ongoing access rather than one-off pay. |
| Bundling | • Customers may not value bundled items equally.• Risk of cannibalizing higher-margin products.• Complex pricing communication. | • Clients may see bundling as upselling, not value add.• Hard to allocate revenue across bundled service components. |
| Technology Transfer Fee | • Difficult to price know-how (intangible).• Risk of losing control once knowledge is transferred.• One-time revenue only. | • Clients may resist paying for training/documentation.• Service company risks creating future competitors. |
| Franchise-like Agreements | • Enforcement challenges across regions.• Risk of IP misuse or dilution.• Quality control of franchisees impacts brand. | • Services must ensure franchisees deliver consistent experience.• Hard to monitor compliance in global markets. |
Decision Scenario: Video Landline Phone
Aura Ltd, a traditional landline manufacturer, is launching the “Aura S10 Video Landline” to innovate in a declining market. Their business model is a classic per-minute system, charging ₹1/minute for audio and a premium ₹5/minute for video calls, targeting older demographics and small businesses. The technological heart of this device is a proprietary design and algorithm for the videophone feature from ABC Ltd. This IP provides the high-quality video capability that is central to the Aura S10’s value proposition.
Questions:
- If you were ABC Ltd, what would be the pricing model that you will propose and why?
- If you were Aura Ltd, what would be the pricing model that you will seek and why?
Decision Scenario: Acoustic Echo Cancellation
For its latest mobile phone model, SM Inc (a smartphone manufacturer) engages SV Ltd (a software vendor) who provides the software for the complete multimedia subsystem in the phone. The multimedia subsystem involves several IP components, their integration into the system and fine-tuning of the parameters for effective performance of the multimedia usecases. One of the components is Acoustic Echo Cancellation (AEC). While SV Ltd had all the other IP components, it did not have the IP for AEC and found CancelEcko Ltd who had the IP for AEC. So SV Ltd engaged with CancelEcko for the AEC module and its fine tuning. CancelEcko was keen on getting Royalty for its IP.
Questions:
- How should SV Ltd structure the contract with SM Inc for the Multimedia subsystem and specifically for the AEC module portion.
- Fine tuning of the parameters of AEC module will have to be done several times. CancelEcko insisted on only one fine-tuning exercise per phone model. How to price the multiple rounds of fine-tuning requested by SM Inc?
Of course. Here is a similar caselet involving a digital platform product, following the structure of your examples.
Decision Scenario: The AI-Powered Learning Platform
SkillUp, an emerging e-learning platform, connects freelance instructors with students. Their current business model is a simple commission structure, where SkillUp takes a 25% commission on every course sold by an instructor. To differentiate itself from larger competitors, SkillUp decides to integrate a unique feature: an advanced AI-powered engagement toolkit licensed from a specialized firm, EngageAI. This toolkit allows instructors to automatically generate interactive quizzes, provides real-time analytics on student engagement, and predicts which students are at risk of dropping out. This feature is SkillUp’s core value proposition, enabling instructors to command higher prices for their more effective courses.
Question:
If you were EngageAI, what pricing model would you propose to SkillUp for your AI engagement toolkit? Justify your proposal, considering SkillUp’s commission-based revenue model and the direct value your tool adds to the platform’s appeal and its instructors’ earning potential.
Dr. Selvaraj Vadivelu 