Most inventors dream of licensing their new product, but to many of them, that licensing deal remains elusive. Why is that? Well, licensing is hard, especially when you don’t understand what motivates companies to license products.
When a company licenses a product, they buy a certain amount of rights to your product (as determined in your licensing agreement) in exchange for royalty payments. They handle all of the manufacturing and sales of your product. You need a patent to license a product since licensees are in fact licensing the intellectual property rights of your product and without a patent, you have no intellectual property rights. To fully convince a company to license your product, you may need prototypes, market research or even actual sales results.
There are many reasons why companies license products, but the three main reasons are to stay competitive, to break into new markets or complete their product line.
In order to stay competitive, companies need to continually innovate. Innovating is expensive though, and not all companies have the funds for a great research and development department. For these companies, licensing becomes the only economical option to keep on innovating and not falling behind the competition.
So how do you find a company looking to license products to stay competitive? Marketing-leading companies aren’t nearly as likely to license a product from you. You should look for companies that are trying to keep up with, catch or even overcome the market leaders. Licensed product sales are not as profitable as sales for products developed within the company (because of royalty payments), so licensing needs to offer additional benefits other than just producing sales to make a licensing agreement very appealing for a company. So the company that would benefit most from your idea is the company most likely to license it.
You should be able to determine which companies would benefit most by licensing your product by looking at market shares, reading industry news and by looking at new product releases. Look for up-and-coming companies, or companies struggling to keep their market share.
When a company is looking to use licensing to break into new markets, they often look for a product related to their other products but in a slightly different market. For instance, a company that sells sporting goods to consumers may want to license a new safety product that schools and youth sport leagues would really want. They don’t sell to that market now, but by having a hot product that schools and youth sport leagues want, they could probably sell their other equipment to them too. Most distributors and retailers only buy from a few vendors so when a company licenses a hot new product for a new market, retailers and distributors will pick up that vendor, probably drop another one, and start buying either most or all of the new vendor’s product line.
If your product is only slightly better than the competition, it won’t be considered a hot new product. Your product will be a good licensing candidate for breaking into new markets if people see your product and say, “Wow!”
It is not always easy to know which companies are looking to break into new markets. You can sometimes tell when a company is trying to break into a new market by looking at what products it is introducing. If those products are related to the market they are currently in, but are really geared for a slightly different market, they are probably looking to get into that market. In other cases, a company may just be thinking and investigating. This is where it really helps to have contacts at different companies or industry insiders. Attend trade shows and industry meetings. Get to know people and start asking questions.
Since most distributors and retailers only like to buy from a few vendors, one of the most important considerations for choosing a new vendor is the completeness of its product line. For instance, a chain of grocery stores decides to carry some basic household items. If one vendor has better products, but not all the products they want to carry, they will probably go with a vendor who has all the products they want, even if they think their products aren’t as good. So for vendors (either to distributors or retailers), having a complete product line is a must. But developing new products is expensive and most companies don’t feel like it is worthwhile to develop complimentary products, so they instead look to license them.
When looking to license a product to complete a product line, just look at companies selling to your target market. Are their holes in their product line? If so, does your product fill one of those holes? If they already have a similar product, you will be hard pressed to convince them to license yours. Companies make less money when they license products, so they prefer to stick with their own if they already have them. Your product will really need to be leaps and bounds ahead of their product for them to drop theirs and start selling yours.
To find good potential companies for licensing, you will need to read trade magazines, go to trade shows, attend association and industry meetings and join industry associations. When you attend meeting and trade shows, talk to as many people as you can. At trade shows, good times to talk with people are lull times, early and late in the day and at the hotel restaurant or bar in the evenings. People will be more open to talking during these times since they won’t be so busy. Sales reps are also good contacts since they will know which companies need one of the three benefits listed above.
You need to have a good idea of the industry to know which companies would benefit most from your idea. Also, making all these contacts will help you know who are the right people to contact in each company.
Marketing and sales people are always the best starting point when approaching a company about licensing. They care the most about having a new product for market excitement, having a full product line and getting more market penetrations. R & D and new business development people often look at licensed products as competition for their own ideas. Concentrate on turning a regional or national sales manager or a marketing person into an advocate for your product and you will raise your chances of licensing the product.
When licensing your product, you will make less per sale than selling it yourself, but in some cases licensing will greatly increase your sales. The licensee will sell the product under its own name, greatly increasing credibility if the licensee is an established market player. These increased volumes can cause you to make more money in the long run. Licensing is usually better for products with a limited shelf life because the licensee will allow you to quickly move into the market. If you have a product that will be hot today, but old news tomorrow, you may miss your window of opportunity if you try to introduce the product yourself. But if you are looking to start a company and introduce other products yourself, you may want to try to sell the product yourself, establishing your brand and allowing you to introduce other products under that same brand. Even if you aren’t looking to start a company, licensing might not work out for you. But there are other options, like Private Label agreements, that will allow you to use another company’s market presence and recognition to increase your sales and allow you to not worry about the marketing of your product.