Royalty is a payment made by a third-party to a product owner in exchange for usage of the product or patent. It is important to note that a royalty payment is not a price as it is based not on how much the licensee believes it could get out of a product, but on the terms laid out in a royalty agreement.

In general, royalty payments work like this: a product or patent owner (the licensor) and an individual or company (the licensee) enter into a licensing agreement, with the licensee paying a fee for the privilege of the usage. The rate of the royalty is typically determined in advance and is based on factors such as the exclusivity of rights for the product, the technology being used, and the availability of alternatives. In some cases, royalty payments may represent an ongoing stream of income, such as with music and film copyrights.

Licensing agreements are intended to be beneficial for both the licensor and the licensee, providing finances and income to the licensor while giving the licensee access to the product they need. As a form of investment, royalties can provide a relatively steady income without the risks associated with traditional stocks, though the return on investment may not be as high. Royalty agreements are a mutual benefit, allowing the licensor and the licensee to mutually benefit from the agreement.

In conclusion, royalty is a payment made by a third-party to an owner of a product or patent in exchange for the usage of said product or patent, as laid out in a royalty agreement. Licensing agreements are beneficial for both parties, and royalties can provide a steady income. When setting a royalty rate, both the licensor and the licensee should consider the exclusivity of rights and available alternatives in order to ensure a mutually beneficial agreement.