New flash: Ideas don’t get licensed, prototypes do. Ideas don’t get licensed, fully developed prototypes do. So how do you get your new product idea licensed. Well, you better develop it into a viable prototype. Oh but you patented your idea. So what! Patents don’t get licensed, full developed prototypes do!
So here is the skinny when it comes to licensing. Getting your product on the shelves in a retail store is by far the hardest part of any product venture. And managing the logistics and technicalities of selling to companies such as Kmart and Sears is definitely not what one would define as “fun.” Larger retailers generally don’t buy from individuals. On the flip side, if you license a product to a company already doing those things, you can take a shortcut, and work your way into major retailers without as many hiccups.
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.
Speaking of royalties, you better handle on them. The norm is to have both an advance royalty, which is a flat fee paid upfront, and ongoing royalties, which are paid as a percentage of every sale you make. The advance royalty is basically a guarantee that the licensor will get some money even if your product doesn’t sell. Then, if and when your product sells, the licensor will get a percentage of the sale–on average, about 5 percent of the wholesale price of each product sold.
Make sense? Great, glad you understood every bit of all that. But the key point here, which unfortunately most miss, prototypes get licensed, not ideas. We hope this little lesson in licensing is making that clearer for you to see.