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The key to being successful in licensing your IP is to prove its marketability . This means proving that it works and customers will buy it or use it.
There are some ways you can verify marketability (and build value) for a newly developed IP.
One of the most overlooked ways is providing relevant market data. The key here is “relevant”. The bigger the problem the more “valuable” the solution. Support it with market statistics, customer testimonials, competitive products, focus groups, and other information to reinforce the IP value.
Test marketing your IP on a local, regional, or national basis, is one of the best ways of building value. For a new product invention, this means selling it through one or more retail channels to prove customer demand. If you have a proprietary service (know-how), you could test market with a potential licensee. If it’s a new entertainment property, develop some animation and show it online. If it’s a book, self publish and start promoting sales. Anything you can do to show that there is a marketable interest in your intellectual property will enhance its value.
One of the most important part of proving marketability is understanding the numbers – the cost to produce and deliver and the price and the profit margins. The better you understand these numbers, the stronger position you will be in to license your IP. If figuring out the numbers is not your strength, you can bring somebody on to your team who can help you figure out what the numbers are. Enlist the aid of an accountant, or someone who understands finance, or has experience working with similar types of products or services.
Knowing the numbers is important to figuring out how much or how high of a royalty rate to negotiate. For example, if you are negotiating for a royalty rate of 5% you need to know if the profit margins can sustain that. For example, if the profit margin is only 7%, a 5% royalty will probably not work for your licensing partner. In most cases, the licensee will do their own internal review to figure out the costs and how much of a royalty they are willing to pay.
The more homework you can do, the more marketable your intellectual property will be. Remember, companies don’t license IP, they license money. The more valuable a licensee perceives your IP, the more likely they will want to license it. Marketability is what you’re doing when you take steps to show, test and generate some level of sales from your IP. The more you test your IP to confirm the market demand, the more attractive it will be to licensing partners.