Updated: May 29, 2022
It’s a highly speculative bet to create a product and build a business around it. You have to be so emotionally and financially committed, that anything less than 110% is not enough. If it’s your first time in the game, your chances are even slimmer. There are so many compelling reasons why you should never launch a product – by yourself, that is.
Introducing: Product Licensing. Why spend tens of thousands and multiple years, when you can kick back and let the pro’s handle it for a fraction of the effort?
~This is part one of a 3-part series on product licensing. ~
What is product licensing?
Product licensing is the practice of renting your ideas to established businesses, in return for a commission on sales – Yes, this concept does exist! But 'why do that, when I can start my own company and benefit from 100% of the revenue? ' Well, the process of developing a product, securing intellectual property, forming a company and trying to compete in a global market is a seriously hard endeavour. How many new businesses fail within the first year again? Most… Taking this route, you can avoid so many of the complex and expensive hurdles associated with product development.
How does it work?
The concept of product licensing is simple at its core: You develop an idea and loan it to a business. Ideally, this will be an established player with expertise in your market and a sizable distribution network. If you can entice the manufacturer with your invention, negotiating a deal and securing royalties is a realistic outcome.
One of the most alluring parts about licensing a product, is the significant reduction of work required compared to bringing a product to market yourself. You’re effectively selling them an idea, and the extent to which this idea is developed and validated can be minimal. It can be an enduring process to pitch to tons of brands and face constant rejection - but the opportunity is there, and it is real.
What's in it for me?
The percentage and contract terms can vary widely but generally speaking, a common royalty is around 5% of wholesale price. Considering wholesale is typically 50% of retail price, this is a small fraction. But when you take into account the volumes at which some large retailers will move product, you can still pocket some juicy returns. To whet your appetite, imagine the following scenario:
You design a magic potato peeler:
Your licensee has a deal with a national supermarket, and they sell 20,000 units per year.
£0.38 * 20,000 = £7,600 p/y. Not bad, but not too exciting.
But guess what, it continues selling for the next 6 years, averaging the same sales.
£7600 * 6 = £45,600. That's a pretty good return, on small amount of effort. And once you have secured a deal, the royalties are beautifully passive.
Furthermore, this example is a low-ticket item. As the retail cost of the item increases, the royalties will follow.
Why would they want to work with me?
From an outsiders perspective, these large multinational brands can feel intimidating - which is true. But while they may have dedicated teams for generating new ideas - they are often so introspective that they fail to think outside their proverbial box. Additionally, they have quotas for the number of new products to launch each quarter/year. They're practically desperate for fresh ideas!
Ultimately, all you need is a novel concept, a strong pitch and (sometimes) idea protection, in order to persuade the suits at the board office. You don’t need to be a hot-shot product developer either, many international brands are working with average Joe’s like us, everyday!
Advantages of licensing
Strap in, because we have a lot of advantages to reel through.
Simplicity Depending on the complexity and novelty of your invention, you can get by with very little. It is totally plausible to file for a provisional patent and then present nothing more than a 3D rendering and a short script. That’s it. You don’t need to develop fully-functional prototypes, secure patents and sell your grandma to buy injection molding tooling - or spend years doing it. It is a true shortcut to realising your product.
For context, a provisional patent application is nothing more than filling out a quick form and paying a nominal sum (more of patents later).
Risk The lack of development work and cost equates to a phenomenal reduction in risk, across all aspects of the business: time, cost and effort. You must have seen Dragon’s Den (UK) or Shark Tank (US), where poor ‘inventors’ have refinanced their house, lost their marriage and spent 8 years to create their 'soon-to-be, Best-Seller'… If only someone told them about product licensing! You can create a valid pitch for your concept, with no more than a few hundred bucks and a couple months work. What have you got to lose?
Massive now, Passive later In the licensing game, 90% of your work will be done up front. It can be a slow grind and a lot of effort to secure a deal. You may cycle through many companies facing lots of rejection before you finally land on the right partner. But if you reach that point, you can sip margaritas and watch the cheques come in. Depending on the success of the product, this could equate to a steady income for the following 2-10 years+… From one idea!
Distribution A major benefit of licensing your idea to a sizeable company, is that you instantly benefit from their distribution network. Whether that’s in all stores across your region, or through multiple partnerships across several continents! This potential to reach your audience is virtually impossible to do as a new, micro startup. You may only receive 5* of wholesale price, but when your licensee is shifting hundreds of thousands of units a year, that can multiply to a healthy return.
Time-to-market When your licensing partner has a network of reliable manufacturers and their supply chain locked-down, they are often in a much better position to get the product on shelves quickly. In today’s market, trends move much faster than times past – so minimising this period is an important factor when it comes to launching something.
Experience Great things are seldom created by one person. Even if you think your idea is perfect - chances are, it can always be improved. Working with a top leader in your industry allows your idea to benefit from the wealth of experience and knowledge that it brings. This is a fantastic opportunity to really push your product to be greater.
Disadvantages of Product licensing
Business ownership Perhaps it’s been your dream to form a business around your idea(s). As such, the licensing route will somewhat steal that dream from the equation. You will be handing over the honeypot to a third party. But while you may not create an encompassing business, you will still have a micro business in the management of this idea and IP. You will have to manage and protect the licensing terms, or search for new licensees if your contract expires. In the end, you still own the idea.
Revenue If you offload the heavy-lifting to a licensee, they are going to expect a pretty substantial slice of the profit pie. That’s for certain. Whereas launching yourself, you can bank 100% of the revenue. Now whether this equates to a better P&L and the end of the year, depends on your business acumen. How many retailers or distributors can you convince to stock your stuff? If your licensee has 100 distributors across multiple countries, you may struggle to compete. But ultimately, the small margins will inhibit you from benefiting from the full potential of the idea. If the product is a hit, you may start regretting your partnership.
If this discussion on product licensing got you excited, stay tuned for the next edition where we will run through more common questions, intellectual property and the ingredients for creating a winning pitch.