Manufacturing or Product Licensing? The Route to Selling Your Invention

Invenion Licensing or Manufacturing Product Development Path

The ultimate goal of any invention or new product design is to make some money. Sure, there can be a certain amount of satisfaction that comes from introducing a new idea that makes the world a little bit sunnier of a place, but bringing those ideas to life is costly. Every realistic inventor needs to be concerned with how their invention is going to bring in a return on investment. and that means coming up with a strategy for marketing your idea.

There are two basic marketing paths available to an inventor with a commercially viable product idea. One is to form a company and take on the task of manufacturing and distributing the product yourself. The other option is to license your idea out to an already established firm that will handle the manufacturing and distribution, in exchange paying you a royalty on the profits generated.

Neither option is inherently better or worse than the other. The strategy that works best for you will largely be determined by your access to capital and your attitude towards risk. So how do you decide which path is better for your project?

Product Licensing and Manufacturing: What’s the Difference?

During the early phases of product development, there is no real difference between the licensing and manufacturing paths. Idea generation and even up to early testing and prototyping will be the same whether or not you decide to license, because in either case, you will have to take this burden on yourself. The paths diverge once the invention gets to the state where it can be pitched to firms who might want to license it.

Licensing an invention involves taking a well-formed (though not necessarily fully developed) idea and granting a company with an established manufacturing and distribution network the rights to produce and sell that invention for a period of time. This is different from straight-out selling the rights to the invention, and is more like a lease — the inventor maintains ownership of the intellectual property. In exchange for these distribution rights, the company pays the inventor a percentage of the revenue from the product sales. A royalty of 1% is quite typical.

Now, 1% might seem pretty low, particularly considering that the inventor could presumably keep 100% of the profits were they to sell the product themselves, and that’s a pretty big difference. But a royalty of 1% or 2% seems a lot more reasonable when you consider the reduced costs the inventor, from product development through to realization. In addition, these companies frequently engineering design and 3D modeling support for products.

Once a firm has licensed an invention, the costs for the continued development, marketing, production, and sale will all be handled by the licensing company and not by the inventor. This means two things. One, it means that the inventor can start seeing a profit from their invention without having to invest a whole lot of their own money into it first. And second, that if the product fails to perform as hoped, the inventor isn’t carrying nearly as much personal risk.

These two factors — lower capital investment, and lower risk — are the reason that a 1% royalty might be appealing to an inventor who could otherwise keep all the profits to themselves.

If you’re going to manufacture the product yourself, you may be able to find investors to help shoulder some of the development costs. But the amount of investor support you will get will vary, and you may need to put forward some considerable personal investment before being able to generate much serious investor interest. Bringing an invention the market is a costly process.

Picking The Best Strategy

The biggest question to ask yourself when considering whether you want to license your invention or go it alone is this: how much of your own time and money do you want to invest in seeing the realization of your product? If the thought of long hours and big upfront investments don’t excite you, then you should definitely consider licensing. If you aren’t put off by the thought of devoting yourself fully to the development of your product and you have access to the necessary capital, then you should seriously consider manufacturing yourself, as the possible rewards are much higher.

Licensing is not an easy way out, though. You’ll still need to be devoted enough to the project to bring it to a state that companies will want to pay you a royalty for the distribution rights. It can be quite a challenge to convince a company to go out on a limb for your invention — after all, in addition to the considerable financial risk of running a new product, the company will also have to figure in the cost of the royalties they’ll be paying you. In order to justify that extra cost, your product will have to represent a significant advantage over the competition. It may not be enough that your product is viable, you’ll have to show how your product is exceptional.

The main things you’ll want to consider when considering how to market your invention are:

  • How commercially viable is your product?
  • How much money do you have to invest?
  • How much time and energy are you willing to put towards developing this product?

This first consideration is the most important thing to consider before embarking seriously on any product development campaign. If there is no realistic chance of your invention competing in the marketplace, then you won’t be able to license the invention, and any money invested in production probably won’t produce returns. As noted above, your invention will have to go the extra mile for a company to be willing to undertake the extra costs of licensing it from you.

This means that there can be a higher standard-of-entry for licensing your invention than for undertaking the manufacturing yourself, while the financial risks are lower. So it can actually sometimes be worthwhile to approach companies about licensing your invention if for no other reason than to evaluate its commercial viability. Even if you plan to manufacture yourself, if other firms are interested in licensing your product then you know it has a good chance of succeeding in the market.

If you’ve established the viability of your invention, the next most important thing to consider is whether you have access to enough money to see your invention through the product development process yourself. Product development can easily run into the hundreds of thousands of dollars (depending on the type of invention you are working on) from design and research to patenting and finally production and distribution. If you are unable or unwilling to put forward that kind of capital, then licensing is probably the appropriate solution for you.

It’s worth keeping in mind though that when you commit to producing the product yourself, you can take things step by step and go at your own pace. You don’t have to bear all of the costs at once — product development can be spread out as long as you need it to.

Questions of funding aside, you also need to seriously consider how much of your time and energy you’re willing to devote to your invention. If you’re not prepared to make the development of this idea a major part of your life, then you should consider licensing. Pursuing manufacturing yourself will mean setting up a company, which is a very time-consuming and labor-intensive adventure. Running a startup is a pretty big undertaking. While it can be extremely rewarding and satisfying, if you aren’t looking forward to the long hours and late nights, then you might be better off licensing.

Final Considerations

Whichever strategy you choose in marketing your invention, be prepared to pay some initial investment out of pocket. You’re going to be your product’s number one investor. You’ll have to go a lot less deep into the red when licensing your invention, but the tradeoff is much lower potential profits.

Something else to remember is that the choice to license your invention is not permanent or irrevocable. Your product will only be licensed for a finite period of time, and there’s nothing stopping you from pursuing manufacturing yourself down the road even if you do license your product now.

If you plan to make a go of it as a serial inventor, and are more interested in earning your keep with your creative ideas than as a business person, licensing could be the way to go. In order to succeed at manufacturing and distributing your invention yourself, you’ll need to have both an aptitude and a willingness to get involved in the nitty-gritty realities of operating a business and marketing your product. If that doesn’t sound like your cup of tea, then you’re probably better off licensing.

At the end of the day, how you decide to market your invention is a decision you have to make based on your own skills and resources, as well as what you hope to get out of the project. Maybe the invention is more a sideline thing for your otherwise busy life, or maybe you’re religiously devoted to bringing this idea to completion.

Whatever strategy works best for you, Cad Crowd is ready to help. We offer both manufacturing services, product licensing, and CAD services. Take a look or get a quote today.