Wednesday, 24 March 2021



So you have a genius idea for a new product that you believe will make you rich. But how do you bring your idea to life?

Your options fall into three categories: Start a company, and then make and sell the product; license your idea to a business with the ability to manufacture and distribute your product; or submit your idea to a crowdsourcing platform. Each has its pros and cons, but the most successful and easiest option is to get your idea licensed. This offers the most potential return on investment and has the greatest chance for success.

Source (Read more here)

Licensing involves obtaining permission from a company (licensor) to manufacture and sell one or more of its products within a defined market area. The company that obtains these rights (the licensee) usually agrees to pay a royalty fee to the original owner.

What does a typical licensing agreement cover?

Subject Matter of the Agreement—may be (1) patent, (2) copyright, (3) trademark, (4) industrial design, (5) trade secret (know-how, technology, experience, etc.)
Granting of Rights—defines what licensor is transferring to licensee
Licensor's Obligation—sets out how transfer is to take place in terms of assistance, support, training and co-operation
Licensee's Obligation—sets out financial requirements, guarantees of licensee, secrecy, costs, etc.
License Fee—fee paid to licensor on signing agreement
Royalty—ongoing share of proceeds paid to licensor for the rights. May be a lump sum, or percentage of proceeds or amount per unit sold, etc., usually a minimum royalty is required.
Term—how long the agreement is to last
Designated Area and Exclusivity—define manufacturing and marketing area of license
Termination—describes rights of both licensor and licensee to terminate agreement
Guarantees—licensor will normally not guarantee the results of using the rights granted. The licensee may be required to provide warranties, public liabilities, etc.

What is the procedure if you or your company has a product to license to others?

As a licensor, you will be expected to provide the legal agreement that will ensure both parties are fully aware of their respective rights and responsibilities, over and above simply determining royalties. Good legal advice is usually required to negotiate such things as:

exclusive rights to the invention;
territories allocated;
what exactly is being licensed (technology transfer, engineering specs, use of trademark);
who pays for obtaining patents in licensed territories;
are future improvements to the product included under the license;
what resources are available if the licensee is late on payments;
can either party transfer rights under the agreement to another party;
who bears liability resulting from injuries sustained from the product; and
what are termination provisions of the agreement.

Determining an acceptable royalty rate for a product is difficult, as there is no quick-fix percentage that can be applied as a general measure. Although rates ranging from 3% to 8% of net sales are common, each licensing agreement is unique and the only consensus that matters with respect to royalty rates is the one that occurs between the licensor and the licensee as a result of negotiations.

Several factors that may influence the potential royalty rate of a licensed product include:

if the product is already patented;
is the product "market ready"; and
does the licensor have a track record of successful products.

Source (Read more here)

Some companies prefer to buy the intellectual property outright in one lump sum—as with Ikea, for example. This is more of a gamble for the licensee, but saves the administrative hassle of calculating and cutting royalty checks, as well as the risk and cost of potential contract re-negotiation or disputes with the licensor (you). But with this risk comes the reward of saving all the royalties they would have paid out if the product proved particularly successful. Some companies like OXO consider both the royalty and cash-buyout options.

I am going to focus however on the most common approach—royalties-only.

Young designers often gasp when hearing that a good royalty rate might be 5% of wholesale cost (around 2% of retail price)—"but it is MY idea!" Seasoned designers understand that a designed product (not to mention one that is not engineered, sourced, and fully developed and tested) is but a small part of the business equation. While important, good product design needs so much more to be a lasting commercial success. At the heart of the numbers is the issue of risk. Designers, in most cases, have very little to lose beyond their time and relatively small development costs. In the business world, the bigger risk-takers earn the bigger the rewards

I advocate designers getting into the game of novel functionality, rather than just form (or secondarily producing form that can be well protected through design patents). If designers can produce robust intellectual property, they have access to a greater pay out, Enforcement of patents, however, is problematic, as litigation is, as my attorney puts it, "the sport of kings." Luckily for more traditional product design, as opposed to information technology and electronica, disruption by patent trolls is less problematic.

Royalty rates vary per industry, but a good rule of thumb is between 2-3% on the low end, and 7-10% on the high end. I have licensed consumer products for as low as 3% and as high as 7%, with 5% being the most common and a generally fair number.  But 5% of what? Usually this percentage is on wholesale cost, often "net sales" for the manufacturer. This is not the price tag in the store, but is often less than half of this—40% is pretty typical with larger retailers. (So, $10 retail price tag is sold at a wholesale price of $4; the retailer has a "60% margin").

You should probably not expect more than 3-4 years of strong royalty checks for a given product before sales begin to slide. If a product is successful, you are assured of sales dilution from knock-offs or derivations that quickly follow. The other time element to consider is the wait for your first royalty check after signing a licensing agreement. Plan on 1-1/2 to 2 years, if at all.

Source (Read more here)

Tim HJ Rogers MBA CITP
Adapt Consulting Company
Consult CoCreate Deliver
Mob +447797762051


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