Licensing Your Product Invention: Why Are Royalties So Low?
There are good reasons to invent and patent a product besides making money – like saving lives, for example. Our client Troy Faletra invented the ThrowRaft after his boat sank and he had to swim for 16 hours toward shore to survive. It inspired him to create a throwable, inflatable product for anyone who found themselves stranded and faced with swimming a long distance to safety.
But let’s face it – the majority of product inventors hope their invention will make money, and there’s nothing wrong with that.
However, it can be challenging to build and run a company around an invented product.
When You Start a Company to Sell Your Invention
Entrepreneurship is a huge undertaking, and it’s not for everyone.
When you start a business to sell your patented invention, you’ll likely have to deal with manufacturing, warehousing, distribution and marketing, as well as hiring and managing employees, invoicing, collections, tracking inventory, dealing with government regulations and more. Whew!
The Easier Way to Make Money from Your Invention
Licensing is an easier, more streamlined way for an inventor to make money from their patented invention.
With licensing, a company pays the owner of an invention for the right to make and sell the invention.
Typically, the company licensing the invention (the “licensee”) already has the necessary systems in place to get a product to market (like manufacturing, distribution, marketing, etc.) and they take total responsibility for making the product profitable.
The money received by the invention’s owner (the “licensor”) is known as “royalties.”
Royalty Shock
Many inventors seeking a licensing deal for the first time are shocked when they learn how much they can expect to receive in royalties.
Licensing royalties for product inventions typically range from 3% to 7% of the product’s sales.
They look like such tiny numbers in print, don’t they?
Some inventors initially react with outrage, feeling like they’re being ripped off. They imagine how much more of the profit they could keep if they sold their product themselves. They might even do some research and learn what it would cost to manufacture the product themselves.
The inventor’s thought process might go like this:
My product could easily sell for a retail price of $100. I learned that I can manufacture it for just ten bucks per unit. That means I’ll pocket $90 for every unit sold.
That’s a heck of a lot better than settling for a meager 3-7% of sales!
Even on the higher end at 7%, I’d only be pocketing $6.30 per unit sold in royalties with a licensing deal. No, thanks. I’d rather take home $90!
But Wait – There’s Something You Should Know
Here’s what many inventors don’t realize.
If they had to get their product on the market themselves, they would have to fork over a lot of money for everything from manufacturing costs, to marketing and advertising, paying employees, and everything else that comes along with running a business and getting a product onto store shelves.
After paying all the necessary expenses to get started, the inventor most certainly would not be taking home $90 per unit. They might even take a loss in the beginning, until sales ramped up enough to produce a profit – and that might not happen at all. There are no guarantees that a product will sell briskly, and keep selling well into the future.
The Licensee Takes All the Risks – and You Take None
A licensee is taking a huge risk when they sign a licensing deal with you. They’re hoping your product sells well, but what if it doesn’t?
The licensee puts money and other resources behind getting your product on the market. If your product turns out to be a flop, everything they invested in you goes down the toilet.
Additionally, when a company licenses your patented invention, it takes on the responsibility of defending your patent if someone comes along and infringes it. The licensee is the one that goes after the copycats in court – not you.
Now, are royalties of 3-7% starting to sound a little more appealing?
Worth It?
A licensing agreement can eliminate worries related to your invention, and give you the freedom to move ahead with whatever comes next, all while your royalty payments roll in.
Many happy licensors will tell you it’s worth it.
Before You Pursue a Licensing Deal
Before you share any details of your invention with a potential licensee (or anyone else, for that matter), it’s crucially important that you apply for a patent. A patent will lock in your rights to your idea.
The United States Patent and Trademark Office works on a first-to-file basis, not first-to-invent. In plain English, this means that the Patent Office will give a patent to the first person who files a patent application for an invention – not necessarily the first person who invented the invention.
It doesn’t matter to the Patent Office who had the idea first. It all comes down to a race to the Patent Office to get the application filed.
It’s too easy for someone to take your idea, file their own patent application, and essentially steal your intellectual property. That’s why you have to keep it 100% confidential and only discuss it with your patent attorney
You may have heard that you can safely share your idea with potential licensees and others by having them sign an NDA, or Non-Disclosure Agreement. This is not true. An NDA won’t necessarily protect your idea from being stolen. You can read more about it here.
Get your questions about patents answered for free from The Patent Professor®, a top-rated patent law firm offering 100% confidential consultations.
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