In my last post, I described the strange lives of inventors. Now I’ll go back to a more conventional topic of interest to inventors: licensing:
Today’s topic: Key to Successful Licensing – Compromise
Almost every inventor dreams of licensing his or her product and to see it sell in retail stores all over America (and perhaps elsewhere). Anyone who chooses to manufacture, package, distribute and market their own product understands the headaches and huge financial burdens that come with “going it alone.” In my opinion, the more you go it alone, the more you wished you had licensed and left all those headaches to others in exchange for a small royalty on all sales.
Yet as mentioned in a previous blog, many initially promising licensing deals often fall apart not because of the potential licensee, but because the inventor sabotages the deal with unreasonable or unrealistic demands.
Therefore, compromise is a key to successful licensing. There are two areas where the inventor needs to be willing to compromise or be flexible in negotiating a licensing deal:
- Financial expectations – principally, royalty rates
- Product design and control
Let me be clear, by compromise, I don’t mean to suggest that the inventor should feel they must acquiesce to every proposal by the licensee. But, it is very important to understand the big picture from the perspective of the licensee.
Royalty rates or percentages are very important – the higher the rate, the more the inventor will make off every sale of their product. Royalty rates of 5% are widely described as “reasonable” in many articles. But royalty rates vary for every product and every situation. A company that has a very large distribution network that offers a 3% royalty could yield a much better pay out for an inventor than a smaller, niche player offering a 5% rate, for example.
If the company offers only 3% and the inventor thinks it should be 5%, he or she should simply ask why the company couldn’t offer a higher rate. Often the company will have valid reasons for the lower rate. The inventor might compromise by accepting a 3% rate on the first 100,000 units sold; then proposing a 4% rate on the next 200,000 units; and 5% on all annual sales over 300,000 total units. In this way, the inventor is making a clever counter-offer: if the product is more successful than expected the company will make more money and it is reasonable that the inventor should share in the success, as well.
Product Design and Control
Another challenging area for inventors is the look, feel, and quality of the final product. Simply put, inventors want to create and market a top-notch product to the public. But product success requires that compromises be made – profit margins are extremely important. Also, the licensee will have a different vision for what the product should be and what will work for them.
The inventor must be prepared to consider allowing lower cost materials to be used. Also, the licensee may see some product features loved by the inventor as non-essential to consumer success. The inventor will always have a vote in such issues, but if the inventor insists on the product perfectly matching his or her vision, the licensing deal will likely unravel.
My best counsel is to recognize that the licensee is going to essentially make your “baby” their product: using their tools, their materials, their processes and packaging. This allows them to make it work in the marketplace and to pay you a royalty on every sale. Not such a bad deal when you think about it.