Two Critical Licensing Questions for Inventors —
By Jeffrey Dobkin
At my presentations at inventors seminars the question always comes up: how do I know the company I license my product to is going to do anything with it?
It’s true, you can’t ask a company that is considering licensing your invention how many pieces they think they will sell. As with any new product no one really knows if it will sell, or how many. You can predict anything… but the future – there you can only guess.
There are two questions I always tell my students to ask any potential licensing firm. The first is: “What are your sales goals?” Every firm should have a sales goal, or number of units they are planing to sell. It wouldn’t be any kind of sales plan without this guess.
It will be this figure the licensing firm will loosely base their first production run on. Ordering parts and pieces for the production, and scheduling labor. Designing the timing of the marketing campaign, placing press releases and ad campaigns. Making sure the media hits when the products are ready and on the retailer’s shelves.
From their answer you’ll be able to see their investment in both time and money, and how serious they are about selling your new product.
Do the math:
If your product sells at a retail list price of twenty bucks, and your licensee says their firm is planning to sell 2,000 in the first year, the total sales at retail are $40,000. But if you work the numbers backward, the retailers get half, so your licensee sales are $20,000 to dealers – because dealers buy units at $10 each. If wholesalers are included in the picture (wholesale distributors sell to dealers,) your licensee will sell product to the wholesalers for $7 each, total sales from your licensee are now $14,000. If you make 5% of sales for your cut – which is pretty good, your income is $700. If it costs $4 to manufacture and this cost is deducted off the selling price (net) your commission of 5% comes off of their net sales figure – which is $$6,000 – is $300.
The Big Question —
But the more important question – the critical question – is “What is your marketing budget for this product for the first year?” How much are they going to spend on selling your product? This is a realistic question every company owner or product developer should know. How much money is in their budget to market this product. Yes, they may not know how many they’re going to sell, but they all should have a budget of what they are initially going to spend. If you ask only one question to a potential licensee before you sign any deal, this is the one question to ask: In their answer you’ll be able to see how serious they are in making your product a success
As a marketing guy I can tell you any firm that’s serious about marketing a product will have a serious budget for marketing. If they don’t, they’re not really serious about selling it, are they? It’s not realistic to say, “Well, we’d like to sell 20,000 of these (or 50,000; or 150,000) but we have no budget to work with to acquire these sales!” It would just be a pipe dream then, wouldn’t it? You can do those pipe dreams yourself. You need to get an answer of what they are going to spend to get your product off the ground. While no one may know how many they’re going to sell, they all should know what they are going to spend in marketing.
After serving on the Board of Directors for 14 years, Jeffrey Dobkin is the President of the American Society of Inventors, a 501c3 non-profit organization dedicated to helping inventors in the Philadelphia area free of charge.