This post is excerpted for the book How to Turn Your Invention Into Cash by Don Debelak. https://www.amazon.com/Turn-Your-Invention-into-Cash-ebook/dp/B07N8JSQJW
Licensing is when a company takes over your new product idea and pays you a royalty on the sales from your idea. The licensee can be a manufacturer, marketer or a product development company. Since licensees take on all the risk of a product, they are cautious about what products they will license. Most companies will only license an idea if they are fairly certain it will be successful so it is up to you to convince them it will succed.
While the earning potential is lower than both the outsource entrepreneurial approach and starting your own company, many inventors choose this strategy because once you license the idea you have no more responsibility to the project.
Finding Licensing Targets
Key Characteristics of a Licensing Target
- They are a company with less than 15 % market share. Companies with large market shares don’t want to cannibalize their own products with a licensed product, and they typically won’t take on a licensed product where they need to pay a royalty.
- Companies who lag the industry in new product development, often because they lack product development departments. The companies are looking for new ideas.
- Companies that have licensed products before.
- Companies where the marketing and sales departments have major management influence. You almost never license a product by convincing the product development group you have a good product, after all you are their competitor. You license a product by having a good response from marketing and sales
- If your product is inexpensive to introduce, often a company with limited resources will want to introduce it. Be sure you license to a company with the resources to promote your product.
You need two types of contacts. The first are people who will convince a potential licensee that your product is ideal for the market. These would be key users, key people in the distribution channel, or key retailers. The second type of contact is someone who can push your product inside the company toward a license agreement. This could be a company executive, a regional or national sales manager, a marketing person, or sometimes the R&D director.
Of the two, your most important contact is someone inside the company. This person can help you fine-tune your proposal, tell you whom you have to convince, and then after your presentation, offer you insights into what you need to do to get the deal done. To meet these contacts, you need to get out and attend trade shows, industry events, and association meetings.
Making these contacts improves your chances of licensing a product at least 100 percent. Without a helpful contact, you may never make it past the company’s product submission policy to make a presentation.
Often the first person to help you license a product is the local sales person or rep. They have a lot to gain by helping you as they will look like real go-getters to their company. You can often find them just by choosing potential target companies, calling them up for literature and asking who the local salesperson is. Then meet with them for coffee or lunch and see if they like your idea.
Preparing a Licensing Presentation
When you find interested companies, you will be asked to come to the company’s office for a presentation. This presentation should not last more than 15 minutes and you should allow for questions after the presentation. If at all possible, you should include a demonstration. This is the most effective way of selling your idea. If you cannot provide a demonstration, try to incorporate a five-minute video showing people using your product. During the remainder of your presentation, you need to show the company why the product will be successful and that your product matches the company’s goals and current market strategies. Key points in the presentation should be:
- A little introduction by your company inside contact on why they like the product
- Your experience in the market, or in the technology of making the product.
- A brief history. Provide a short summary of why came up with the idea, what made you take your particular product design, and why you think it will sell. Include a list of any industry related people you’ve worked with, such as sales representatives, retail store owners, distribution people, inventors who have succeeded in the market, or key end-users.
- A competitive products chart. Analyze the products that are already on the market, what they costs and what their strong and weak points are. Include your product in the chart. Also try to get some of the more popular products either the actual product or brochure, printed web pages or ads for the competitive products.
- Market research you’ve done comparing your product to the competitive products.
- Current sales efforts. If you have done anything to sell you product successfully, list those efforts here.
- Why you chose this company to present your product. Talk about synergy of existing products and the fact the company is capable of launching a major campaign to promote the new product.
The best way to launch a presentation is have a great prototype package and show both your product and competitive products. If the cost isn’t too great have the major products on hand.
Approach Your Candidates and Sign the Deal
You should propose your own licensing deal as that is the way you will get an agreement that protects you best. You can look up licensing agreements on a search engine and find many licensing agreements to review and find one you like. As an intermediate step, to get a final commitment from the company you might want to sign a Memorandum of Understanding or MOU. This non-binding agreement shows serious intent on the part of the potential licensee and also the agreement typically has mutual confidentiality clauses which offer you protection. MOU agreements are also available on the Internet. This site has template for an MOU that you might find helpful http://templates.openoffice.org/en/template/sample-memorandum-understanding-between.