When bringing a product to market, every inventor has a very important decision to make: start a company to introduce the product themselves or team up with a big player already in the market. Both approaches work, but depending on your invention, skills and goals, one approach might work might much better than the other. In this article we will discuss when it is better to team up with a bigger company.
Inventors – Partnering with a Bigger Company
Inventor Story: Henn Tan
You probably use Henn Tan’s first invention all the time: a ThumbDrive. But Tan learned some hard lessons with his ThumbDrive and he is not planning on repeating his mistakes with his newest product, the FluCard, a storage device with built in Wi-Fi that he hopes will replace SD cards in digital cameras.
Tan introduced his ThumbDrive in March 2000, and other companies took notice. By December, IBM had its own USB flash drive available and other companies soon followed. But since Tan tried to introduce his product on his own, he wasn’t able to capture the market, even with a nine month head start. He didn’t have the resources to manufacture and market the product in such a way to control the market and stay ahead of competitors. Instead he watch bigger companies continually take huge chunks out of his market share. Because of his patents, Tan still collects royalties, but these royalties are much less than he could have made.
Now with his FluCard, he doesn’t plan on watching the market slip away from him again. This time, Tan has teamed up with Toshiba to capitalize on this huge opportunity.
His FluCard allows you to wireless connect to digital cameras to download or backup pictures. Tan had his idea while on a family vacation in China. Well into the trip, they lost their camera, and subsequently all their pictures, making Tan wish he had an easier way to backup pictures.
Tan and Toshiba aren’t the only ones that think that FluCards has the potential to replace the SD cards–there has also been significant interest from major camera makers who hope to make the FluCard the industry standard.
Not all market opportunities are the same. Some opportunities allow you to move slowly in the market while others, especially in the technology market, require you to move quickly or watch your opportunity slip by you. Whenever the market requires you to move fast, or when your market opportunity is only short (for instance selling a product for a specific event), you are probably better off teaming up with a larger company to capitalize on the opportunity.
Here are some tips to knowing if you need to move fast in a market:
- Products are always changing and/or new products are being introduced all the time.
- Your product is tied to a specific event or date.
- Competition is fierce and competitors quickly introduce competing or copy-cat products.
- Your product can be produced quickly with only minor start-up costs.
Types of Agreements with a Bigger Company
There are many ways to cooperate with a bigger company.
A license agreement is where a company agrees to pay you a royalty, usually 5 to 6%, in return for the right to manufacturer and sell the product.
Pros: inventors can profit from the idea with little risk and work.
Cons: inventors lose control of the idea and licensing is the most difficult of the partnership arrangements to set up.
A marketing agreement is where a company agrees to buy the product from the inventor and sell it, usually marking up the inventor’s price 35 to 50%. The inventor then keeps his or her own brand name on the product. Inventor may need to promote the product. The inventor is responsible for producing the product.
Pros: inventors keep control of the product and can typically make a profit of about 10% of sales.
Cons: more continued responsibility than licensing.
Private Label Agreement
A private label agreement with another manufacturer or distributor where a company agrees to sell the product under their name. Companies usually mark the inventors price up 50%. The inventor is still responsible for production.
Pros: companies will do more of the marketing and promotion.
Cons: inventors won’t have as much control as with a marketing agreement; inventors will make about 20% less than with a marketing agreement.
Exclusive Sales Agreement
Exclusive sales agreements with retailers and/or distributors.
Pros: these deals are often the most profitable per sale for inventors as the product doesn’t get marked up as much by a marketing or private label agreement.
Cons: these companies don’t typically have as much sales potential as a manufacturer.
Most inventors shy away from any arrangement because they don’t have enough money to produce the product in the quantities the partner might want. But that shouldn’t be a concern as many times a manufacturer can be found that will both make the product and fund the investment in return for a several year manufacturing agreement. For most manufacturers, their toughest challenge is finding new highly marketable products that can fill their production line. Manufactures generally break even when their sales volumes are 65 to 70% of capacity, but their profits can rise to 20% before tax when they near capacity. So they have a tremendous incentive to help an inventor with a marketing agreement in hand that can fill their plants. Find manufacturers that could make your product, are running at 50 to 65% capacity, show them you have a strong likelihood of landing an marketing agreement, and I’ve found at least 25% of them will offer all the funding support they can to your product.
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