Common Sense Inventing - Educational articles to help Inventors make informed decisions

Licensing vs. Manufacturing

Which do you think is the better route for you as an inventor – licensing or manufacturing?
The answer is complex because it begs more questions.

You need to decide which route to take early in the process. To do this, you have to take an honest look at your idea and yourself. Do you have the ability, resources and business savvy to manufacture and build a company around your product? Or are you better suited to license it?

Building a business around a product reaps you a larger share of the profits, as well as greater control over sales and marketing strategies. But you’ll also have the lion’s share of the risk, including inventory expenses, personnel hiring, quality control, returns, late shipments, contract breaches, knockoffs, patent-infringement issues, long hours and a large monetary investment. And it all could end in financial ruin if your product doesn’t sell. Or it could be an enormous success beyond your dreams.

Another thing to ponder: Are you willing to work your current job while getting the business off the ground or quit your job and put it all on the line? Likewise, if you have investors, you’ll have to decide what equity the investors get in the company for their funds. This now means you have shareholders to answer to since they want to ensure they will get a return on their investment. Investors expect to have a say in how the business is run.

Licensing means you’ll receive a smaller proportion of the profits, normally 2 percent to 8 percent, depending on the company’s policies and what you bring to the table. What do I mean, what you bring to the table? Things such as, do you have a finished product they can run with? Do you have an issued patent? Are they going to have to start from scratch and have a large upfront investment? A lot of factors go into what a company will offer you based on what you bring to the table. Yes, they get the lion’s share of the profit, but you have the least amount of risk and monetary investment.

Licensing requires you to find a company willing to license your product and fund it. Or you pay someone else to do the legwork for you. They will most likely charge a fee and want a percentage of the deal they get you.
Depending on your resourcefulness you’ll more than likely have to pay for a patent search, patent, prototype, presentation and legal fees. You’ll have to do this if go the manufacturing route, to in order to protect your product.

If you hire a licensing agent, whose duties include making calls to companies and negotiating contracts, you’ll have to pay her or him a percentage of the license and upfront fee in most cases. If you go to an Invention submission company to find a company to license your product be prepared for them to offer all sorts of services for a fee. Because in my opinion they make most of their money selling services versus getting products to market.

If you do get a licensing deal keep in mind companies often change the product’s design to fit their vision of what’s marketable. Your baby may not look like what you envisioned once it reaches the store shelf.
You will have to wait 30 days after each quarter to see if your royalty will be what you hoped. All the while you may be wondering if the company is pushing your product as hard as you would if you ran the company.

Despite all the caveats with licensing, I have personally favored this route. It works for me because I have numerous products in sell-sheet form, ranging from kitchen, toys, tools, pet, eyewear, lawn and garden and more. And I realized I do not want to start a business around every one of them. Each of these categories has its own set of rules and structure for getting to market. Just learning how to navigate each industry is a challenge on its own.
For someone else building a business around their idea is a dream come true and the best option for them. You have to go with what works best for you and your situation.

Manufacturing it yourself and licensing each has its rewards and pitfalls. Regardless the route you take, be as informed as possible, set realistic expectations and minimize your risks. You may be able to fool yourself about your product’s chances. But in the end, the consumer and market will be the final judge.

Visit www.rogerbrown.net

Contacting companies for the first time can be scary and uncertain for Inventors. You want to do it right and get the company interested in your product and see it on store shelves. My invention submissions have resulted in licensing deals in toys, tools, eyeglass products, kitchen utensils, and even a device used in the nuclear industry. I did it spending less than $100 on each and some as little as $8. I utilized an NDA and Sell Sheet only, no patent or PPA. My major investment has been my time.

I have been a serial Inventor, a licensing agent and reviewed thousands of Inventor’s products. In short, I see and hear all sides of the inventing process. What I’ve discovered is sometimes inventors can be their own worst enemies. Here’s a list of do’s and don’ts when it comes to submitting pitches or new products to companies that can help you make a better first impression:

1. Don’t send hand-written submissions. Even if you don’t own a computer most libraries have one you can use for free. If a library isn’t an option, go to a FedEx Office (formerly Kinko’s). If you send your submission via snail mail, include a self-addressed stamped envelope. Don’t assume your target company will pay postage.

2. Do put your contact information on each piece of paper you send. That includes samples and prototypes.

3. Don’t waste a product reviewer’s time detailing how you came up with your idea. Focus on the benefits of your product/technology and why it will make the company money. Companies don’t care if your second cousin twice removed worked on your project for two years once he got out of prison.

4. Don’t use the phrase, “My idea is worth millions.” Let the company decide that.

5. Don’t use the phrase, “There is nothing else out there like my idea.” Most of the time you will be wrong.

6. Don’t say you have researched your product idea thoroughly when all you did was walk into a Walmart and didn’t see it on the shelves.

7. Don’t use the phrase, “Everyone will buy one.” This gets back to being realistic about the size of your market. Know who the target customers are. (See Rule #6)

8. Don’t send a prototype to a company unless they asked you to and are expecting it. Companies do not want to keep track of or be responsible for items they did not request in the first place.

9. Do be realistic about your expectations. Understand licensing royalties usually are about 2% to 5%. Greed can kill an otherwise profitable deal.

10. Do read and re-read everything a company sends you to make sure you understand everything in the documents. Don’t assume everything is fine and sign it. I send people my two-page non-disclosure agreement to read and sign prior to sending me anything for review. I have to include in my email an explanation to make sure they fill in their address on the top of the first page, because so many people don’t do it. This is in the first two paragraphs of the first page. So, if they are missing that what else are they missing in a longer document?

11. Don’t write a novel to explain your invention. Be concise and factual. No one wants to read a novel to get your idea. Be able to explain your invention over the phone or in person in 30 seconds or less. Practice your pitch until you can say it in your sleep. Look at the short blurb on the back of a book. It gives you an overall idea of the 300 page book. Your pitch needs to be that short.

12. Make sure you know your product. You should be the expert on your product. Never assume companies will just “Get It.”

13. Don’t send your submission to a company on Monday and call Tuesday to ask when they will be sending you a contract.

14. Do your research before submitting anything to a company. Make sure your submission actually fits their target market. Don’t submit a lawnmower idea to a soap company.(this happens more than you think)

15. Don’t send your invention submission in care of the general bulk mail of a company. Get a specific person’s name in charge of that department – new product development, marketing, inventor submissions, inventor relations, etc. Don’t send “To Whom it may concern.” The most likely place it will find is the trash basket.

16. If you call a company asking for the person in charge of invention submissions, make sure you are ready if you’re put through. This is not the time to forget pen and paper or fumble your pitch. If you get voice mail, leave a short intelligent message with your call-back number.

17. Make sure you know the time zone difference of the location you are calling.

18. Don’t send a company any package that has special storage requirements, contains a live animal or flammable liquids. Real example: An Inventor sent his new food-sealing device with samples of food sealed inside. It was not opened until a week later, by security due to the smell of the leaking packages.

19. Don’t send a company anything you can’t afford to lose. Accidents happen and things can get misplaced. If it’s a one-of-a-kind item, you may want to send a DVD or link to a video showing the product in action. If you post it on Youtube and you have not filed for any patent protection make sure it is set on Private and not Public.

20. When sending email attachments to companies, do make sure it is in a program they have installed on their computers. Not everyone has Filemaker Pro or Microsoft Office 2010. Ask if the company has a size limit on attachments. Moreover, some software automatically kicks out any email with an attachment that is not on a safe email list.

The more you do upfront to make sure you are prepared the better your chances of success.

Do You Really Look At Your Product When You Come Up With It? I ask this question because I see more and more invention ideas that clearly the Inventor did not consider their product and its environment. Once you come up with your product and you believe it is marketable that is not the time to stop working on your product.

Here are some examples of what I mean:

If you have designed a new type of silverware shouldn’t one of the aspects in its design be how will the consumer clean it? If it will not go in the basket of most dishwashers do you think most consumers will be willing to hand wash them if they own a dishwasher?

Will your product fit on a standard store shelf? Will it stick out into the aisle?

How many will they be able to get on a shelf?

Is it so tall it will require to be displayed on a top shelf?

If you package them 12 to a case, but they can only get two on a shelf at a time is it worth it to the store to sell it?

Is your product so big and bulky the only way it can be displayed would be on an endcap display? Endcaps are considered prime money makers in stores. So your item has to give them a good return for investing that much space for it.

Does your product need batteries or plug into a wall socket when all the other products in that category are hand powered? If it does, will this extra expense give the consumer something back in return for this added cost?

Does your product require huge counter space in the household and if it does is it something the consumer might only use twice a year? So, is the counter space taken worth what your product does?

Will your product need to be sold via a J-hook in the store aisle so consumers will see it as an impulse buy?

Will your product have a learning curve requiring a commercial be made in order to get the consumer aware of its benefits?

These are just some of the questions Inventors need to ask themselves about their product before they start shopping it around to companies. You need to think as an Inventor, a retailer and a consumer when you are coming up with your ideas. You need to satisfy all three groups for your product to be successful.

I thought this thread would be a great way to get you to think even further outside the box and stretch your skills. Lets say that a company contacts you because they heard you are good at coming up with new products and they have a short deadline.

You are male and they make purses and woman’s hygiene products or you are female and they want product ideas on mustache trimmers and weedeaters (I know some women use weedeaters, but it is a very small percentage. The same could be said for men and purses. Work with me on this).

The question is where do you start, since these are traditionally areas you may not have any foundation to pull from to get your ideas?
It is a great way to stretch your imagination when you think outside your comfort zone. Plus, looking at an area you know nothing about sometimes gives you a perspective others familiar with that area don’t see.

Don’t try and lie your way through a company’s submission process. It will catch up to you and will destroy any chance of a working relationship with them. What is the point I am making? Easy, this is how a number of Inventors approach their product presentation to a company. They will say it does everything but fly to the moon if it will get them across the goal line. What they don’t realize is at some point you WILL have to be able to back it up. Or be exposed for lying.

Below are some things I have seen Inventors state that when pressed turned out to not be true. How do you think the company feels when they find this out and do you think they would be willing to take a chance on you? Should they? You are better off just giving accurate facts and adding this is where you are trying/working to get the product to in order to increase its marketability. Or you just don’t have the capability to get it to the next level and hope with their help they see the value the product can have with a little more effort.

You can’t tell a company or customer – your product is waterproof when it is really water resistant or not even close.

You can’t tell a company – you can run your product on a battery for 8 hours when the average is really around 4 hours and that is in controlled conditions.

You can’t tell a company – everyone loves it and will buy one. No matter how perfect you make something not everyone is going to love it or need it. And in most cases you are talking about family and friends.

You can’t tell a company – we did an extensive survey and the favorability is through the roof. When all you did was survey your friends and family. And half of those are not even in your target market.

You can’t tell a company – I have a factory finished product when you are still working the bugs out of it and don’t really know if it will perform as you expect it to.

You can’t tell a company – you have an issued patent, when you don’t. Especially when they state that part of their policy is to only look at patented ideas and you just wanted to get your foot in the door and hope they will make an exception in your case.

You can’t tell a company – you have taken your product to trade shows and everyone loved it, but it still doesn’t work. And you got plenty of interest but no purchase orders. (Would you buy that scenario if you were the company?)

You can’t tell a company – you do quality work, can meet purchase order numbers and have a product you want them to distribute and then turn around and say it is not market ready just yet, you just wanted to gauge their interest.

You can’t tell a company – your design is ready to make and put on the market when you are still redesigning the shape, size, weight and components of the product. Wait until it is ready to present or at least don’t portray it as a finished product because it is not.

If you want a company to spend thousands of dollars on your idea/product you need to approach them honestly so they know where they are starting from and where hurdles may be they have to address. Companies are in business to make money. If you bring an idea/product to them that they see can be profitable with some effort of their part most will take up that challenge. If you lie to them from the start they are not going to be willing to take a change on you.