When you license a product to a product broker or manufacturer they’re going to advertise it, market it, manufacture it and put their money into the project. So you don’t need to raise money or run a company. That’s a pretty big plus, especially for beginners or inventors who are short on capital.
Why license my product, patent, invention or idea?
Another great benefit of licensing is that the manufactures you’ll be contacting already have a network of retailers that they can plug your new product into. If you start a company on your own, not only do you need to raise money to start the company, you have to start from scratch and make new relationships with retailers so you can get your product into their stores.
This can be a problem since most retailers don’t want to deal with one-product companies. Retailers want to deal with companies that have ten, twenty or even hundreds of products. Many retailers don’t take one-product companies seriously and are very concerned that you’ll have enough cash flow to deliver on a consistent basis and on time.
When you license your product, the manufacturer will already have those important relationships with retailers, so all they have to do is plug your product in.
Regarding money or capital
Then of course there’s the money issue. When you start your own company and manufacture a product on your own, you will most likely need hundreds of thousands of dollars to manufacture market and distribute your product even if your product only cost pennies to manufacture. You need big money to market, advertise, distribute, manufacture and pay employees or contractors.
When you license your product to a product broker or manufacturer, they will have financial resources you could never have. Also, they may have ten, twenty or even thirty years experience in the industry of your invention. That’s a good combination, and that’s the power of licensing and teaming up.
With licensing, your licensee invests all their money and takes all the financial risk. If for some reason they don’t perform, you get your invention back and you can then license it to someone else. Licensing means none or less financial risk than when manufacturing and marketing a product on your own.
When you license the product, the manufacturer handles everything that’s required to run the business, so you’ll have the free time to go about your daily life. Hopefully you’ll spend some of that free time working on licensing your second product so you can have a second royalty check coming in.
What’s a common royalty rate?
A common royalty rate for consumer products is quite often 3-10%. Now you may be asking what is that 3-10% of?
It’s 3-10% of the wholesale price, not the retail price. So if a product sells at Wal-Mart for $20 and Wal-Mart buys the product for $10 from the manufacturer, then you would receive 3-10% of $10 for each unit that is sold.
So if you think your product is going to retail for $20 and wholesale for $10, you can calculate your royalty based on the number of units you think the manufacturer can sell each year.
It’s going to be advantageous to license products that can do large volume as opposed to small volume. The beautiful thing about licensing is that a major manufacturer can invest far more money than you ever could in a project and sometimes sell millions of units. These royalties can really add up if you team up with the right manufacturer. So if you have ten ideas and you’re trying to figure out which one to work on. Go with the high volume one rather than the low volume one. More than likely it’ll mean the same about of time invested in closing a deal, but reap much higher financial rewards.
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