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Great Idea But No Money
Inventors often have more ideas than money. The result is that inventors have a tough time figuring out just how to proceed. One option most inventors don’t often consider is selling on commission. An inventor gets orders for his or her product and then has a manufacturer make the product. But instead of a license agreement, the inventor just becomes the sales rep and takes a commission. The inventor may have to surrender control of the idea, especially if the development costs are high, but they often still have a great deal of input and they can usually negotiate a long term commission agreement. This is often an easier deal for the manufacturer to accept and in the end the inventor makes more money at a 10% commission rather than a three to five percent royalty. The whole secret of success is land a big order, then manufacturers will be interested in talking to you, provided the product fits within their manufacturing capability. The benefit to the inventor is that he or she is selling the product with the backing of an established company. That backing both enhances the inventor’s credibility and provides the funding needed to launch the product.
The Basic Points for the Sales Pitch
You are selling only two points when going for sales on commission. The first is that you have an order or commitment from a significant customer. The second is that the manufacturer has available capacity and will only need to make minimal changes to its manufacturing process. A bonus for the sale is if you can also show that there is an easy-to-penetrate distribution channel to sell to customers other than the one who will give you a commitment.
You won’t always know which manufacturers have the right equipment in place and need to add production to fill up your plants. As a result you may need to call on quite a few manufacturers before you find one that has the right equipment and the available capacity for your product.
- Quick market entry. Having the product backed by an established company gives the product credibility and when you succeed, the manufacturer should provide the funding you need to expand sales.
- Offers an option for products with limited patent protection. Some product ideas can’t get significant patent protection because of earlier patents. This problem typically kills a licensing agreement but it doesn’t mean as much for selling on commission, where the company is just looking to add extra sales revenue.
- Inventors don’t need financial backing. Inventors typically don’t have to put up any money. The inventor’s only expenses are defining the product, possibly making a model or prototype, and the cost of making his or her early market connections.
The key to lining up a selling-on-commission agreement is to know who the key players in the distribution network are, and preferably to have their support for your product idea before you approach a manufacturer. That’s the only way the manufacturer will be convinced that you can actually sell your product. Use trade magazines and attend trade shows to find the distributors and manufacturers representatives in your area. (Click here to read about how to find distributors.) Then talk to those contacts to see if they believe your idea will sell. You should be able to get a selling-on-commission agreement if you get these contacts to endorse your product idea, or better yet, if they let you know they will buy the product if and when it becomes available.
Pros and Cons
- Requires very little investment by the inventor.
- Can be the quickest route to full market penetration.
- May produce reasonably quick income.
- The inventor continues to have input into his or her product’s success.
- Provides instant credibility to customers.
- Inventors don’t always have control of their product.
- Doesn’t establish an inventor’s company or brand.
- Requires sales and marketing enthusiasm and expertise.
- Works best with products with large customers or a narrow distribution channel.
Items to Watch
- The manufacturer will expect quick results from you. Be sure to line up customers first before approaching the manufacturer to sell on commission.
- The manufacturer won’t automatically print brochures, attend trade shows, or pay for a marketing program. Be sure to propose a marketing program and get the manufacturer’s approval before signing a commission agreement.
- You may go three to four months before sales are made. You can ask the manufacturer for an advance against commissions to cover those costs, but the manufacturer won’t be obligated to offer an advance unless it is part of your agreement.
- The manufacturer might offer you its standard sales representative agreement, which pays a commission only on the products you sell personally. Insist on a commission on all your products, including an override (or commission payment) of several percent on any of your products sold by other salespeople or independent representatives.
- The manufacturer will want to produce the product as cheaply as possible and may compromise some of the product’s features. You’ll need to monitor closely the manufacturer’s design to prevent this.
- The manufacturer will be reluctant to make immediate changes in the product once it starts production. Be sure to show a model or prototype to potential customers and get their approval before the manufacturer finalizes tooling and the manufacturing process.
- Identify the market. Your job is to identify the key customer groups who will buy your product, the distribution channel that can be used to sell to that market, and the key players in that distribution channel. Then you need to uncover the industry’s price structure, which includes discounts to wholesalers and retailers, packaging required, key buying periods, and important trade shows.
- Own the market. The manufacturer or distributor who hires you on commission is really buying your ability to sell the product. You will improve your chances to land a deal with each additional person you know who is either in the distribution network or a major customer. Other tactics you can use to generate support include call reports, which you write after you interview key buyers; letters of endorsements from those same buyers; and provisional orders, which are orders people give you with a provision that they can cancel if the product doesn’t meet your promised specifications.
- Produce results. The manufacturer or distributor will be watching your sales results to be sure you can back up your potential sales claims before investing significant amounts of money. You should have one or two customers presold before approaching a manufacturer. That way, you can produce immediate results.
- Land the monster account: Nothing succeeds like having a big account in hand to land a selling-on-commission deal. If you pre-sell a customer like Home Depot, you will have offers rolling in.
- Orders first, production second: You want the credibility of the manufacturer, and the manufacturer wants the extra business. But the manufacturer doesn’t want to spend a ton of money on the product before it knows whether or not the product will sell. One solution to this concern is to have the manufacturer agree to let you represent it while obtaining orders. The manufacturer will go into production after you produce enough orders. This is a win-win situation for everyone. You will get the credibility of the manufacturer to help sell the product, and the manufacturer minimizes its risk.