Understand and leverage these 4 main deal-making factors for your potential partners
Companies always want a margin of at least 50 percent. You need to have a good grasp of the percentage of the retail price the company receives to address this issue.
BY DON DEBELAK
You will have more success licensing your product if you understand the factors companies consider when deciding whether to license your product:
- If customers want the product, and the product has a big “wow” factor.
- How well the invention fits into the company’s product line.
- Margins (how much money will the company make on each product sold).
- Impact on the company’s bottom line.
Wow factor: The first criteria is where inventors live. They typically have all the reasons their product delivers what the customers want. I won’t dwell on this topic, because inventors should know exactly why their products will sell.
Fit for the company’s bottom line: A company could be missing a product in its line, it might have a weak product that is hurting overall sales, or the market might be shifting away from the technology and the company needs to adjust its products.
Product lines are an enormous consideration for companies. They have customers for their product line, distribution for their product line, and know what marketing tactics to use for their product line.
Companies are resistant to taking on products outside their product line area, because suddenly they will need a different strategic approach for the new product and won’t be comfortable taking on the product.
Margins: This describes a percentage of the cost to make a product, divided by the revenue the company receives, times 100 percent.
If a product costs $5 to make, and revenue the company realizes is $10, then $5 divided by $10 equals 0.50—which, multiplied by 100 percent, comes to a margin of 50 percent.
Companies always want a margin of at least 50 percent. The revenue the company receives is rarely the retail price. Discounts to retailers, sales outlets, co-op advertising programs and many other possible discounts all cut into the revenue companies receive.
You need to have a good grasp of the percentage of the retail price the company receives to address this issue. This is one reason I recommend an inventor have contact with industry insiders. (See “Finding Insiders to Help” at onestopinventionshop.net.)
Show the company you are presenting to that you realize the importance of margins. There are two big considerations: the price customers will pay, and the cost of manufacturing the product.
I’ve talked in previous posts about using focus groups to determine market pricing, also at my website.
But what about the cost of manufacturing?
Tell the manufacturer you are presenting your product to a major industry player for licensing and want to show that player a quote for 10,000 units to demonstrate the product will have a strong margin. I would also mention what the projected retail price will be.
Impact on bottom line: For the most part, companies are not interested in doing all the work required for introducing a new product unless it adds a minimum of 10 percent to 15 percent to their overall sales. The way you can show your potential impact most effectively is by highlighting sales numbers of products already in the market, by checking trade magazines, public companies’ sales numbers, or interviewing companies in the distribution channels about sales in that market category.