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PRODUCT LICENSING

What Is Product Licensing?

 

product licensing is a streamlined way to turn an idea into a product that’s ready for sale. here’s how to license a product:

  • Come up with a great idea.
  • Protect your intellectual property through the United States Patent and Trademark Office (USPTO).
  • License a company to manufacture and distribute your product.
  • Collect royalties.

product licensing is one of the easiest ways for inventors to bring their ideas to life. inventors simply rent, or license, their ideas to a company, which manufactures and distributes the product quickly and easily. this process tends to be faster, more affordable, and more lucrative than other options, such as starting a new company to sell an invention. you can increase the chances of making product licensing part of your business plan if you cultivate a culture of creativity. research growing markets and find avenues to develop products where there’s established demand.

product licensing offers an ideal balance of risk and reward. this process can enable inventors to earn 20 times their initial investment. it also enables large companies such as proctor & gamble to reduce their internal research and development costs while partnering with outside entrepreneurs.

Reasons To Consider Licensing A Product

  • You don’t have the resources or the business plan to start a new company or to dedicate time to research and development.
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  • You don’t know how to get your product into a retail market, or your company isn’t large enough to work with major retailers.
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  • You have many ideas for inventions but not enough time or savings to produce them.

Reasons To Consider Not Licensing A Product

  • You want to start a business to have total control over your product manufacturing, distribution, and sales.
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  • You think you have a good chance of being selected for a crowdsourcing platform such as Edison Nation.
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  • You found a company like OXO or Ikea that wants to buy your intellectual property outright. If you can make a reasonable deal, it could be in your best interest to sell instead of license.

Common Mistakes

Not every product is ideal for licensing. Fewer than 10 percent of inventors successfully license their products. A licensing deal can require extensive negotiating and effort. Also, you may have to invest some of your own money up front to complete your product and make it worthy of licensing. Try pitching your product to retailers to gauge interest before seeking out licensees.

To license a product, you’ll have been persistent and tenacious. You’ll have to know your market like the back of your hand, since you’ll be working hard to sell it to licensees. You’ll also have to understand market demand and know how much risk your product brings. Be prepared to pitch your product and licensing deal professionally, with a multimedia presentation and prototypes if possible.

Always do your research to learn as much as possible before pitching to a licensee. One that already has manufacturing and distribution in place for your category of product could be a good fit. If you know enough, you may be able to tell the company how it can make and distribute your product efficiently.

When you license an invention, you’ll have little control over it. Do your research to make sure the manufacturer is reputable. Also ensure the distribution plan is strong before agreeing to a licensing deal.

Many inventors seek out a patent before licensing a product, as this gives you the rights to your invention. Many licensees won’t work with you if you don’t have this level of protection. Take care not to file too early, though. First, find out if you need one. Then complete your idea as much as possible before filing, since you may have to refile if the final version changes the idea too much.

Product licensing requires extensive negotiation. Be ready to compromise. Remember that there is no standard agreement for licensing. If you want to work with a company, try to find an internal champion who will want to sell colleagues on your product and make the deal happen.

Many inventors receive numerous negative responses before signing a deal. Pitch to several licensees to increase your chances of finding a worthwhile business partner, even if you have one ideal partner in mind.

Like any business contract, licensing deals can be complicated. Have an attorney review or create a licensing agreement to make sure the terms, time frame, and royalties make good business sense. You should also have an attorney review any confidentiality agreements before signing.

Frequently Asked Questions

Earning 5 percent of gross wholesale sales is typical for inventors. This equals about half of what the licensee earns. But the manufacturer has to manage much more risk and do much more work than the inventor does. Some inventors also earn an advance license fee, or a lump sum paid up front. Others earn equity stake in the licensee’s business.

The terms of the agreement specify when you’ll begin to earn royalties. Most licensing agreements need product development, manufacturing, packaging, and shipping before generating sales. Therefore, more than a year can pass before you earn royalties. If retailers have waiting periods, you may have to wait for two years before receiving royalties.

A great selling product priced at $15 could generate $20,000 to $30,000 in royalties a year. However, about 95 percent of the 8,000 new kitchen implements introduced each year fail. Most generate royalties of just $1,000 a year.

Yes, and many inventors have multiple licensed products on the market at any given time. Since the royalties can be low, licensing several products may be necessary for making your time and resource investment worthwhile.

Yes, they may be nullified if retailers don’t have enough interest, or licensees choose not to go ahead with research and development. As the licensor, you may be able to obtain a nominal fee if the deal doesn’t go through as planned.

Getting a license to use the logo of a well-known brand or sports team can make a product much more saleable. Encouraging a big-name brand to sign a licensing agreement can be hard, though. Connect with the International Licensing Industry Merchandisers’ Association to learn more and find potential partners. You may need a patent, a distribution plan, a history of selling similar products, or a lucrative royalty offer. Most inventors also have a strong knowledge of their markets or substantial funding in place. Most products in this category sell for premium prices, as they take royalty payments into account. The brand-name recognition usually justifies the higher price.

Yes, most manufacturers start by preparing a company profile with current products made, sales volume, and desired markets. Then reach out to licensing consultants, licensing exhibitions, trade offices and agencies, universities, research and development companies, trade associations, and trade publications to solicit products for licensing. Assess any opportunities you find and negotiate a licensing agreement when you’re ready to move forward with the process.

These are licensed products given away for free.

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