You could go the hard way and set up a company with manufacturing capabilities, a business plan, and the works, but that can be expensive and requires significant amounts of time and resources. An alternative, yet still lucrative route is forming a product licensing agreement with a larger company.
A popular option for owners of intellectual property IP , product licensing to interested companies allows inventors to bring their ideas to market while forgoing the unwieldy aspects of starting a business. By allowing an established market player to bring their idea to market, a licensor can greatly benefit both parties. To help inventors in understanding this process, this article will explore what is product licensing, how it works, and how to use it with your invention.
Product licensing involves an agreement between a licensor the owner of an Intellectual Property, or IP and a licensee typically an established company.
The licensor may or may not own the rights to their invention via a patent or through other means, but is still the holder of the idea. Why would a company want to license products? Well, it could be simply because the licensor has developed a great idea. But, more than that, it is expensive to expand product offerings, use excess manufacturing capacity, and create new products while simultaneously managing an ongoing and profitable manufacturing company.
By partnering with licensors, companies can acquire proven products and bring them to market much faster, making profits for them and the inventor without incurring additional development overhead expenses. From the perspective of the inventor, licensing their products makes sense because, despite losing some profit to the licensee, they still often make a 20 times return on investment in terms of time and money. Licensing is also a much lower risk option, as distribution is taken care of and inventors can leverage the established company's name, market sector, and customer base to generate sales.
If you are an inventor and wish to approach a large company with your invention, you may find that they have very specific policies on how they will consider unsolicited proposals. Your first response from them will usually be to spell out the terms and conditions of their corporate policy on submissions. Click on one of the two buttons to access the content you wish to view. COVID Remote personalized support Our physical offices are closed, but our advisers remain at your disposal to help you plan the resumption of your activities.
Factsheet Product licensing Share on:. Why would a company look for products it can produce under license? What are the advantages of licensing? What are the disadvantages of licensing? How does a company search and find products that may be available for licensing? What is the procedure if you or your company has a product to license to others? You get access to the experience and know-how of the company that developed the product.
This company may be much larger than yours, with development capabilities that you cannot afford. You get to break into a new market with this new product, but with the benefit of the experience gained in another market. It makes competition easier if you're a small company with limited resources. You minimize your costs and risks:. The license agreement is normally for a considerable period of time and there may be an annual minimum royalty required. How does licensing work? You come up with a great idea, not just a pretty good one, and turn the idea into a product.
In most cases you file for patent protection, and then you find a company willing to make the product and pay you a royalty. A typical royalty is 5 percent of gross wholesale sales, the price to the retailer from the manufacturer. Many inventors, at first, feel like this number is low, but it's actually a good deal for the inventor. Based on market data, a well-run manufacturer makes around 10 percent profit bottom line. That's only twice the return the inventor is making at 5 percent, even though they have all the ongoing expenses and investments, massively more risk and infinitely more effort.
Meanwhile, the chance of success is much higher since the hardest part -- getting into distribution -- is already handled. You may not be able to license your product. A lot of stars have to align within a potential licensee to get a "yes" and it takes lots of effort and perseverance to find the right one.
You typically lose most, or all, control of the invention. The licensee gets to call the shots and you may not agree with all of their decisions. Your idea may fail due to poor strategy or execution, so it's really important to work with a company with a great track record as your licensee.
Compared to crowdsourcing, licensing is more expensive as you'll likely need to invest in your invention to make it license worthy. All in all, licensing gives you the best bang for your buck if you can make it happen with the right company.
It keeps you free to pursue other ideas, keep your day job and relax more. In The Walt Disney Company was the largest licensor by sales volume. While the average consumer might assume that Disney produces all the products offered for sale under the Disney brand at retailers around the world, a great number of those products are produced by licensees.
So while Disney is busy animating the next blockbuster, they can leverage the expertise of other companies to make the apparel, bedding, and toys that will launch with the movie. Because everyone involved is using the same IP characters from the movie, for example , and all are held to the highest standards, consumers never know that anyone but Disney created their beloved t-shirt, duvet cover, or doll.
The fashion industry also has an extensive history of product and merchandise licensing. While Mr. Kors or Ms. Accessories such as hats, ties, and the like are regularly made by licensees, as are home products, footwear, fragrance, eyewear, and many others. Other major players in the product licensing world are media and gaming properties, professional and collegiate sports teams, and food and beverage companies.
Each have their own reasons for using the product licensing business model, but all reach new customers and increase their product offering beyond their in-house capabilities by doing so.
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