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.
I would say How big is the problem you are solving for them?
What is the value of solving that problem?
If it increased their sales by 10,000/year, @ £100/sale, with revenue increase of £1,000,000
If you work out your value matrix you're offering 10:1, 5:1 or even as low as 3:1 for startups & low volume or one off sale.
The higher the volume of sales you're making, the higher the Value matrix you can offer.
3:1 value you're offering - charge £333,000 for £1,000,000 revenue. They won't be able to say no!
Low volume sales - 3:1 value you're offering - charge £333,000
Mid Volume sales - 5:1 value you're offering - charge £200,000
High Volume sales - 10:1 value you're offering - charge £100,000
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.
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):
Hope these help!