Some inventors ask me, “Do I really need to do the math?” The answer is an emphatic yes! Why would you sign a licensing agreement without knowing how much money you’d make at different royalty rates? The information you gather before meeting and negotiating with a potential licensee will influence what you ask for and give you a realistic idea of how much you’re going to make. However, I toss the sheet I do my computations on after I’m done, because I don’t want to be motivated solely by money.
What facts do you need to gather before doing the math? You need to determine the number of stores that will sell your product. I’ve discovered that Wikipedia is a great tool to use to get this information. You don’t have to come outright and ask your potential licensee how many stores sell their product, but rather, what stores sell their product (such as WalMart, Home Depot, etc.) Wikipedia lists how many WalMarts and Home Depots there are across the country, and you can pretty much find this information for any large retailer. Assume that each store will sell one unit a week (any less, and your product is likely to be dropped). Second, make an assumption about the wholesale price of your product. How much is it going to cost? Once you know these two facts, you can adjust royalty rates (anywhere between three and seven percent, I’d say) to determine how much you would make in a year. For example:
Let’s say your product is sold in WalMart. There are 4300 WalMarts across the country, according to Wikipedia. If the wholesale price of your product is $5, your royalty rate is 3%, and one unit is sold in each store each week, you’d make $645 a week and $33,540 a year! See the attached table for more examples.
If you do the math and realize you’re not going to be making the type of income you want, should you give that potential licensee an exclusive? Probably not. Or you could decide to not give them any rights at all. It’s up to you. But please, play with the numbers! The next blog will talk more about helpful it is to understand what you’ll be making.
Stephen Key is a successful award-winning inventor who has licensed over 20 products in the past 30 years. He is a board member of Accudial Pharmaceuticals, Inc. and has a new book "One Simple Idea: Turn your dreams into a licensing goldmine while letting others do the work," from McGraw-Hill. Along with business partner Andrew Krauss, Stephen runs inventRight, a company dedicated to education. Teaching inventors and entrepreneurs the skills needed to successfully license their ideas. You can listen to the weekly radio show on inventing.
One Simple Idea is available in book stores and online book retailers nationwide. When you buy the book you get access to our our database of over 1400 companies looking for ideas as well as other bonus materials. Visit www.inventright.com to learn more.
