Time to read: 3 min
You’ve got a great product idea, but you also have a full-time job you love and no desire to start a company. Do you just shelve it? Nope! Instead, consider licensing your product to earn extra income from the royalties. Here’s how you can make it happen.
What Licensing is and How it Works
Licensing is when you design a product and let someone else produce and sell it, in exchange for royalties. In a sense, you’re renting an idea, in the words of Stephen Key, one of the creators of Teddy Ruxpin, in a 2007 interview with Tim Ferriss of The Four-Hour Workweek.
The most common way product licensing funds work is that a company pays the designer royalties alone. In rare cases, the designer will make a small up-front fee, plus royalties, if the company licensing the product idea is fairly sure the product will sell well. Ikea buys the intellectual property up-front, and OXO does both, according to Bruce M. Tharp’s article, “Product Licensing 101: So Let’s Talk Money,” published on Core77’s blog.
Tharp says a good licensing rate is 5% of the wholesale cost, or 2% of the retail price, and Entreprenur.com corroborates 2-5% as the average royalty percentage. You ultimately end up making money according to this formula: Quantity sold x price x royalty percentage x shelf life.
While you might not make as much money licensing an idea as you might if you started a successful small business, licensing also comes free of the costs and risks associated with starting a business. It can be a great way to earn extra money, in addition to your full-time job, or it could be something you do to work fewer hours. After all, licensed products include the Super Soaker, which made its creator Lonnie Thompson plenty of money, according to Tharp’s first article in his Product Licensing 101 series, “Product Licensing in an Era of Open Innovation.”
How to License Your Product
Designers can take advantage of the popularity of the current hospitable business climate toward open innovation, in which companies welcome ideas from outside individuals. In fact, according to Tharp, since 2008, over half of Procter & Gamble’s new products have come from outside the company.
Tharp says you don’t necessarily need to patent your design, especially in a mature product category but you could consider filing a Provisional Patent Application for your idea or consulting a patent attorney. There’s no need to have a prototype or sample product, because you’re just pitching an idea, but you can include drawings or images in your pitch.
When you’re ready to present information to potential licensees, be sure to provide written details and a slide deck, with market research data, competitive analysis, patent status, production cost estimates, and testimonials. You can include any product specs, drawings, and prototypes you have.
You’ll probably want to pitch to several companies, after you’ve researched your options, to make sure they have the manufacturing and distribution capability you need. Be sure to follow their protocol before you submit your idea and start with the licensing office, if there is one.
Once you have an agreement with a company to license your idea, Key suggests asking for a minimum guarantee clause that says the manufacturer needs to sell a specified number of units every quarter or every year, or you can license your idea to another manufacturer.
Main Takeways
The new trend toward open innovation in today’s business world is favorable toward designers who want to make extra money licensing their product ideas. Licensing your ideas is low-risk, time efficient, and can ultimately be very lucrative.
