The difficulties of licensing a product
The difficulties of licensing a product
Five reasons to think twice over trying to license your product
A recent influx of enquiries from people who wish to achieve a licensing arrangement with a manufacturing partner based on, let’s say, debatable commercial and marketing grounds, has caused us to dig out this article originally published in 2004 and update it. Pretty much all of it still holds true to us, yet the number of people that approach us vastly underprepared and often ill-advised doesn’t seem to be decreasing anytime soon.
Needless to say, these individuals are passionate and evangelists for their ideas and as you would expect vehemently assert their idea would sell very well if only it were available on the market. However, they don’t have the time or financial resources to “venture” the product, i.e., to manufacture it (or have it contract-manufactured) or try to sell it themselves.
What we are about to say of course can always be trumped by any Steve Jobs, Richard Branson or Bill Gates cited counter argument, but we at least hope that you will take the gist of what we are saying away with you.
The problems of licensing a product
Even though Brandrefinery have been successful in cultivating and securing product licensing negotiations for our clients, it may surprise you that realistically speaking, the best advice we could probably provide is to forget the idea — and get on with your life.
Should your financial and professional resources be stretched; your seemingly only alternative is to try to “license” the product idea, i.e., to find an existing product-line manufacturer already selling other products into your target market — and try to convince them that they should add your product to their product line — and share their profits on that product with you (typically by paying you a “royalty” on their sales of that product).
But your odds of licensing that idea are very small — estimated at no better than 1 in 1,000 (The Entrepreneur Network, Zimmer, 2004) .
- Your idea is probably not new. Just because you haven’t seen it in the market says little. There are many more products available from specialty catalogues than you’ll see in your local stores. (Many of these specialty catalogues now have websites, where you can find their offerings with diligent searching — but many still do not.) It’s possible (even likely) that your idea has already been tried and failed (because of market or technology reasons that still hold true). And even if it hasn’t been tried, it’s possible (even likely) that important product features of your idea have been already patented by someone else — and the only way you can find that out is through a professional patent search (which will cost you upwards of £700.00)
- Generally speaking, manufacturers are not looking for new products. They have a 3-5 year queue of new products and product improvements already in development. They’ve thoroughly researched the profit potential of each of these — and are well along in developing them. When you submit your new idea to them, your idea is in competition with what they’re already working on. They’ll displace or defer one of their projects only if yours shows significantly greater profit potential — and if you can’t quantify and substantiate that profit potential (as thoroughly and accurately as an industry insider), then the profit potential of your idea has to be much greater (and obviously much greater) to tempt them to research that profit potential themselves.
- It may not be possible to manufacture your product at the cost necessary for it to retail at a price customers will pay. A new consumer product typically must be manufacturable at no more than 1/6 of its retail price to adequately compensate the product’s distribution channel (e.g., the manufacturer must sell at 2 times their manufactured cost to cover their operating costs and profit, the wholesaler must sell at 1.5 times their cost and the retailer at 2 times their cost — 2 x 1.5 x 2 = 6). There are many good product ideas that simply can’t be manufactured for the needed cost — in fact finding a way to manufacture a product at the needed cost is frequently the much more difficult problem than simply designing the functionality.
- Adequate intellectual property protection may not be available. Understand that a patent does not protect the function you intended — it protects only your particular design or method — and only those features of your design or method that have not already been patented (or made known) by someone else. If it is not possible to get a broad patent (i.e., one that protects all economical ways of providing your intended user benefits), it’s unlikely anyone will license your idea. Why should they share their profits with you on a product which — if the product sells as well you hope — they know that their competitors will soon be selling the same or similar product without having to share their profits.
- The required front-end investment is just too large or too uncertain. A smaller company can’t afford the investment that a larger company can. But even a larger company may not have interest if the engineering costs can’t be accurately pinned down — the risks are just too great. And virtually no company will try to develop a new market (new to them) for a new product from the outside — that’s far too risky.
So there you have it, a company that provides support to achieve Product Licensing telling people to think extremely seriously about doing it. That’s because we recognise that only a very, very few, will actually have a genuine original idea and the required personal skills and core professional competencies to successfully complete their product licensing mission. To those few, we will always be there to talk, but to the rest of you – ask yourself – would the money be better spent on that holiday to Mauritius?
Brandrefinery are a UK product launch agency, that works with both start-up and established brands to ignite and build brand awareness. For more information see www.brandrefinery.co.uk.
Article has been adapted for use and excerpts taken from:http://tenonline.org/art/0402.html