Licensing vs. Manufacturing: What's Best for Your Product? | Legal > Contracts Law from AllBusiness.com
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Licensing vs. Manufacturing: What's Best for Your Product?

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Profit -- it's the elusive symbol of success that nearly every inventor and entrepreneur dreams of and strives for. Most would agree that this accomplishment is typically reached by the successful placement of your product in the marketplace. But to achieve this goal there exists two distinct paths: licensing and manufacturing.

Neither process is superior or inferior to the other, but each demands a distinct and separate set of skills and abilities. Play to your strengths! Choose the path that works best for you.

The first step for both is actually the same: studying the marketplace. The old adage "knowledge is power" is hugely relevant here. It is crucial that you gather information on every aspect of your potential product's market, including the answers to these questions:

  • Who are my major competitors?
  • Who are the smaller producers?
  • What are my potential sales?
  • How large is the market?
  • Who are the primary consumers?
  • What is the benefit of my product in relation to my competition?

In essence, you are forming a business plan through the information accumulated. The more "data" you are able to amass, the more thorough and accurate your business plan is likely to be. Being uninformed or misinformed will result in faulty assumptions and difficulty licensing or manufacturing your product. Studying the marketplace must be done before all other tasks! If you are licensing, this business plan will provide the blueprints for submitting your product to a company; if you are manufacturing, this business plan will help you determine your net profit at the end of the day.

Licensing

The next step in licensing is "proving" your product. Your work in this initial stage should be directed at answering and supporting the question "Why should my company license and invest in you and your product?" You are attempting to convince a company to pay you a royalty on the wholesale of your product. Before they do so they will want to make sure your product is both worthy and capable of success. "Proving" the worth and potential success of your product can be achieved by creating a prototype or concept drawing of your product. If the technology used by your product already exists in the market (and there is no need to prove that it does indeed "work"), you should create a sell sheet of your idea. This sell sheet should detail your fresh approach, new strategy, or whatever differentiates your product from those that already exist. The important thing to remember is that you are selling the benefit of your idea, not your prototype.

You will need some form of intellectual property protection for your idea, although filing for a patent need not consume your time and resources. I am not an attorney and cannot give legal advice but here is what has worked for me: File a provisional patent; it will give you temporary protection without huge expenditures, and you can even file it yourself. Nolo.com is a valuable online resource that offers information on how to file a patent without the aid of a legal team. My company uses the software Patent Pending Now, which includes an electronic version of David Pressman's bestselling book, Patent Pending in 24 Hours. The software costs $69.99 to download or $89.99 for a mailed CD-ROM.

Be sure to cultivate an air of legitimacy with a professional Web site, business cards, letterhead, and a dedicated business phone line (a cell phone number should suffice). In addition, be certain you understand the essence of the manufacturing steps required to produce your product, so that you may speak intelligently about it to potential licensees and be able to handle any problems with the implementation should they arise.

All of these steps could be accomplished in under 30 days if you work smartly and efficiently.

Estimated cost: under $500

Manufacturing

Manufacturing involves taking your prototype and turning it into a real production product. This could include tooling, die making, etc. It is likely you will need to attend a trade show to present your product and introduce it to your potential market.

You will need to set up an office, possibly with several employees, and invest in inventory. You will also need to draw up an advertising and marketing plan to publicize your product and entice customers to buy it. This series of steps could take up to one year.

Estimated startup cost: $250,000 (even for a low-cost product)

So How Do I Decide Which Route to Take?

Essentially, licensing your product requires significantly less time and money; however, the potential payoff involved is also much smaller. If you license, you have the freedom to live and work anywhere. Licensing demands creativity, resourcefulness, an understanding of manufacturing, and, above all, an excellent ability to SELL.

Manufacturing a product demands a greater investment of time and money, but it can produce much higher dollar returns and can be accomplished on your own terms. Compared to licensing, manufacturing is definitely a more high-risk proposition, but it can be very successful if done correctly. The process demands that an individual possess all the skills necessary to run a small company: an understanding of manufacturing, finance, sales, and inventory control.

Regardless of which path you choose, it's important to find an experienced mentor to help guide you through the process. Rely on more knowledgeable people in the industry to provide you with invaluable insight; their advice will save you time and money, and may even help shed light on which process is right for you and your product.

It's important to keep some perspective when trying to decide whether to license or manufacture. Neither will be easy, but if you maximize your strongest skills and abilities, keep your faith in yourself and the potential of your product, and dedicate yourself to success, bringing a product to market is possible. The rewards, personal and professional, are phenomenal.


Stephen Key is a successful inventor who has been licensing his original ideas for over 20 years. Several of his products have been endorsed by celebrities such as Michael Jordan and Alex Trebek, and are sold in retailing giants such as Wal-Mart, Walgreens, and Disney stores and theme parks. Stephen also runs a musical accessory business in which he is a Disney licensee, selling his products worldwide.

Stephen and his business partner Andrew Krauss run InventRight, a company dedicated to educating struggling inventors on how to sell their ideas and arming them with the skills necessary to succeed. Recognized as an outstanding leader in the field of innovation, Stephen was selected to serve as a consultant for the first season of the hit ABC reality show American Inventor.

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