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Companies Big Four Considerations in Licensing
You will have more success licensing your product if you understand the factors companies look at when considering licensing your product. You should consider discussing all four factors when presenting your product to a company.
- Customers will want the product, and the product has a big “wow” factor.
- How well does the invention fit into their product line.
- Margins, how much money will the company make on each product sold.
- Impact on the company’s bottom line.
Customers will want the product and the product has a big “wow” factor.
The first criteria is where inventors live. They typically have all the reasons why their product delivers what the customers want. I want dwell on this topic inventors know exactly why their products will sell.
How well does an invention fit into the company’s product line
My first product marketing job was for a dental company. We had a reasonably complete product line, but we didn’t have a dental. We jumped at the first chance we had to add a light to our line. There many story lines. A company could be a missing a product in their line like we were, they might a weak product in their line that is hurting their overall sales, or the market might be shifting away from the technology and the company needs to adjust their products. Product lines are an enormous consideration for companies. They have customers for their product line, distribution for their product line, and know what marketing tactics to use for their product line. Companies are resistant to taking on products outside of their product line area, as all of a sudden they will need a different strategic approach for the new product, and they just won’t be comfortable taking the product on.
Margins, how much money will the invention produce
Margins are a percentage of the cost to make a product divided by the revenue the company receives x 100%. For example if a product costs $5.00 to make, and revenue the company realizes is $10.00, $5.00 / 10.00 equals 0.50, x 100% and the margin is 50%.
Companies always want a margin of a least 50%. The revenue the company receives is rarely the retail price. Discounts to retailers, sales outlets, co-op advertising programs, and many other possible discounts all cut into the revenue companies receive. You need to have a good grasp of what the % of the retail price the company receives to address this issue with the company. This is just one reason I recommend an inventor have contact with industry insiders. Finding Industry Insiders To Help – One Stop Invention Shop.
You want to show the company you are presenting to that you realize the importance of margins. You have two big considerations for margins. The price customers will pay and the cost of manufacturing the product. I’ve talked in previous posts about using focus groups to determine market pricing. Focus Groups to Determine Market Pricing – One Stop Invention Shop.
But what about the cost of manufacturing? A fact of life is that most manufacturers have received many requests from inventors for manufacturing quotes, requests that have not resulted in business for them. So they don’t bend over backwards to give a favorable quote. And if they do, the quote is typically based on small production runs. A better tactic than just requesting a quote is to tell the manufacture you are presenting your product to a major industry player for licensing, and want to show them a quote for 10,000 units to demonstrate the product will have a strong margin. I would also tell them what the projected retail price will be.
You will enhance your position with the potential licensee if you can state that your studies of retail price + manufacturing cost indicate the invention will have a margin of over 55 to 60%.
Impact on the company’s bottom line
Companies for the most part will not be that interested in doing all the work required for introducing a new product unless it adds a minimum of 10 to 15% to their overall sales numbers. You invention needs to impact the company’s sales numbers in a major way. The way you can show this most effectively is by highlighting sales numbers of products already in the market. You might get numbers out of trade magazines, by checking public companies sales numbers, or by interviewing companies in the distribution channels about sales in that market category.
The impact on the bottom line is a major consideration when you choosing companies as licensing targets.
Last thoughts
I’ve tried through my licensing related posts over the past year that there are many steps an inventor can improve their chances of licensing. Knowing the market, getting help from market insiders and understanding how companies evaluate inventions are some key steps. I’m a big believer that inventors first moves should be to locate industry trade magazines and trade as a first step in understanding a market. Trade Shows and Inventors – One Stop Invention Shop. Inventors who focus solely on their product are going to miss out on many opportunities to license your product. I know I sound just like a teacher in high school, but Do Your Homework.