The Number 1 rule of licensing – licensees don’t license IP…they license MONEY. A licensing partner must feel your IP will generate a high enough return to make it worth the risk they take to license it and bring it into the market.
One of the first questions I’m asked when presenting a new IP to a potential licensing partner is what are the costs and will it make money? This is always the case if the IP is a new product or technology.
It’s hard to pull out the crystal ball, but try to find out how much similar products or technologies are generating in sales (talk to distributors, retail stores, etc.). A quick search of the internet is a good starting point. Start with industry revenues, and those articles will lead you to specific companies and products. From there, find the ones most similar to your IP. Use that information to guide you in making sales projections for your IP.
You need to show the pricing and profit structures – is it high volume/low price or low-volume/high price. Here’s an inside tip for creating sales projections. Use a smaller volume projection if the price is higher, or higher volume if cost is lower.
If the profit margins are low, than the royalty rates will be low. For example, basic or commodity type products, such as electronics and apparel, usually have low margins and need lower royalty rates. Conversely, a new innovative product with high profit margins can get a higher royalty rate.
New product inventions with great profit margins are a big incentive in motivating a potential licensee to consider the licensing opportunity. For example, if you show the licensee your IP will generate $20 million in sales over the next 5 years, and at a 15% profit, you’re offering the licensee $3,000,000 in profit. Now you’ve got a basis for a big licensing deal (and to prove the value of your IP).
Keep in mind that profit margins can vary by distribution channels. A multi-product and multi-distribution channel license could have different royalty rates for each distribution channel depending on the profit margins. More likely, it would be a single royalty rate across all distribution channels.
When presenting your IP, some key questions you’ll need to answer include:
- What’s the supply and demand situation – lots of similar products or few.
- Is this a must-have verses want-to-have.
- Is your IP well-known or brand new and requires lots of advertising (which means higher costs/lower profits).
- Is your IP used by customers to make and sell their product or services (such as construction equipment), or is it an impulse buy at the cash register (beef jerky and cheap).
A clear understanding of how your IP makes profits is key to successfully licensing your IP. Consider hiring a good accountant or CPA. It will be well worth the investment in demonstrating the financial viability of your IP. Remember, if a licensing partner can’t make money with your IP, there’s no incentive to license it.
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