Invention Development in Canada - how to market, sell or license your invention, patent or idea:
"How do I market my product", is one of the questions most commonly asked by inventors. Several books have been written on the subject, and we would urge every inventor to consult as many resources possible before proceeding with any business venture. As an aid to the public, we have prepared the following document entitled "Marketing Your Invention" which summarize some of the publicly available information on the topic of invention marketing.
Please Note: We are a law firm. As such we can assist our clients with the legal aspects of protecting their invention. WE DO NOT PROVIDE ANY FORM OF PRODUCT MARKETING OR PROMOTION SERVICES, AND WE DO NOT RENDER ANY ADVISE ON HOW TO MARKET OR PROMOTE YOUR PRODUCT.
How Can You Sell Your Idea?:
Despite the fact that marketing is the most important step in the success of any invention, few patent lawyers will discuss the topic. Of course, being an avid inventor myself, marketing is a subject near and dear to my heart. Over the years I have spoken with successful inventors and scanned the literature to find out as much as I could about this important subject. Here then is a brief synopsis of what I have found out about invention marketing. A word of caution however: I am not a marketing consultant and have no formal training in marketing or business consulting. Therefore, you should not rely on the contents of this article to plan your marketing or business strategy. There are plenty of marketing experts out there who would be able to help you. There are also several books on the subject. If you need marketing or business management advice, I suggest you seek out an expert in the field.
Two Ways To Market Your Idea or Invention
There are two ways you can market an invention. You can either go into business for yourself (i.e. start a manufacturing or distribution business) or you can sell or license the invention to an established company. The first method can be surprisingly successful. In fact, just think of a big company you are familiar with: chances are, that company was started by one or two guys (or gals) who had an idea for a new product. Netscape, Apple Computers, and Xerox - all of these companies were started by an inventor with a product. Of course, many inventors don't want to take the financial risks associated with starting a new business, so their plan is to sell their invention to a big company. Well, there have been some famous examples of inventors who made considerable sums selling (or rather licensing) their inventions - Jerome Lemelson comes immediately to mind. Selling an invention to a company, particularly a big company, is not easy - it takes a lot of hard work. However, before you take any steps to market your invention, I strongly recommend you take a few preliminary steps. Taking these steps can save you a lot of time, a lot of money and a lot of grief.
Preliminary Patent Search
A preliminary patent search is generally a good first step. Don't be fooled into thinking that because you have never seen your invention on the market that you must be the first person to invent it - a lot of products never make it to the marketplace. A patent search may reveal some highly relevant patents which may cause you to either re-think the entire project or "go back to the drawing board" in order to improve on your product. A preliminary patent search is well worth the investment.
I cannot say this enough....Do not publicly disclose your invention until after a patent application has been filed. Filing an application is a good idea if you intend to sell your invention to a company. Here are a few other reasons for filing a patent application:
- Many Companies will not even talk to you until you have filed a patent application.
- Many investors will insist on filing a patent application as a condition of their investing in the project (they would be foolish if they did not).
- Filing a patent application preserves your rights and can help you defend against competitors who might attempt to copy the invention.
- Filing a patent application allows you to disclose details about the invention to companies with confidence and without having them sign a confidentiality agreement. Many companies are not willing to sign confidentiality agreements with independent inventors.
- Finally, without a patent application, you have little protection against people who might, either deliberately or inadvertently, disclose the invention to the public. A premature public disclosure may put the product in the "public domain" ruining any chance that you might sell the invention to a company.
If filing a full patent application is not immediately possible because the funds are not available, then it is strongly suggested that at least a provisional patent application be filed. A provisional patent application can generally be filed for less than the cost of a full patent application.
Preparing an Information Package
Before you can sell your invention, you are going to have to sell yourself. Therefore, projecting a professional image is important. Since you will be meeting a lot of people on the road to successfully marketing your invention, get business cards and letter head made. Invest in a fax machine and answering machine (or service). Also, you will have to prepare a good looking, informative and concise information package describing you, your invention and the potential market your invention reaches. The information kit should contain relevant information about your invention including what it is, how it works, why its better than other related products, what its potential sales might be, and why it will sell. Include colour photographs, pictures, graphs, charts, tables and any other visual aid to help explain your product. If you commissioned any marketing studies, include them. If your background qualifies you to talk about the invention (i.e. you invented a new bicycle and you work as a bicycle technician), then include information about your background.
Prototype It is a lot easier to sell a product if potential buyers can see, touch and feel the product. A working prototype can help people appreciate your invention; therefore, build a prototype if it is possible. Not only can a prototype help you sell your invention to others, it can help you solve design problems associated with your invention. Solutions to these design problems may be made part of your patent application. Of course, some products are difficult to prototype, in which case a non-working mock-up may have to do. In any event, create the best looking prototype or mock-up you can. The better looking it is, the more likely you are to impress people with it.
Obtain Financing - It usually boils down to money. Building prototypes, contacting manufacturers, creating information kits, filing patent applications, conducting patent searches - all of these activities require funds. Finding that initial start up funding is often difficult; however, there are a few tried and true methods:
a) Budget - The first thing you need to do is draw up a budget to figure out how much the project is going to cost, at least initially. This may include conducting a preliminary patent search, making a prototype or mock-up, getting a few business cards made, and making up an information kit. Expect to spend several thousand dollars more in order to get a patent application on file (they range in price from about $2,500 to $6,000). You will also need additional funds to market your invention, depending on which marketing method you use. Expect to spend several thousand dollars if you plan to sell your invention to a company. You will probably have to raise hundreds of thousands of dollars if you wish to manufacture the product yourself. While you are marketing your invention, don't forget that you will also require another $3,000 to $6,000 (or more) in order to process your patent application during the "patent pending" stage.
b) Self Financing - You will almost certainly have to spend some of your own money, at least initially. This is to be expected - as the old saying goes "nothing ventured, nothing gained". This initial investment is highly speculative. A few patent lawyers, myself included, are prepared to accept credit card payments or even post dated cheques; however, if you cannot afford to spend at least some of your own money on the project, then you should re-think the whole thing.
c) Partnerships - If you have a few friends, business associates or family members who may want to invest in your project, then a partnership may be one way of raising funds. Let me illustrate using a hypothetical example. Let us assume you budget to spend $9,000 to cover the costs of constructing a prototype, preparing promotional materials and filing a patent application. Let us also assume you have three investors who want to invest in the project (making a total of four partners). Each partner agrees to receive a 25% share of the profits the venture. The three investors contribute $3,000 each to the project. You, the inventor, contribute your invention and your time. A written partnership agreement is drawn up and signed by all four partners and the partnership is registered with the government. Partnership arrangements are fine if you only have a few partners and only a relatively small amount of money is being raised. If several investors are involved, then the arrangement may become too awkward.
d) Incorporated Company - If more than two or three people are going to invest in the project, or if you want to present a more formal arrangement to your potential investors, then incorporating a company may be the way to go. An incorporated company is a separate legal entity, and as such, it can carry on business while limiting the liability of its shareholders. An incorporated company is also a more formal method of carrying on the project (it looks more professional). Consider the following example: You wish to raise $100,000 to fund the venture (or any other amount). You incorporate a company which issues 200,001 shares. You take 100,001 shares of the company (a controlling interest). In exchange for these shares, you transfer ownership of the invention, together with all your accumulated time and effort, to the company. The company then sells off the remaining 100,000 shares to several investors at a price of $1.00 per share. (Note: In most cases a private company can have a maximum of 50 different shareholders). Of course, the number of shares and the price of the shares can be modified to suit the particular needs of the project.
e) Business Loans - You probably think that it is difficult for a start up business to obtain a business loan from a bank. You are right. However, there are a number of different private sector and government sponsored business loan programs which may be available to you.
Now that we have dealt with some of the preliminary issues, let us look at the two methods used by inventors to commercialize their inventions.
Selling or Licensing the Invention or Idea to a Manufacturer
Selling or licensing an invention to a company is straight forward, but is by no means easy - it requires a lot of hard work and the expenditure of some money. The actual steps in the process are as follows:
a) Protecting The Invention - I am going to say it again - file a patent application before disclosing the invention. If you have not filed a patent application, then you must be careful to keep the invention secret. As you can imagine, it can be quite difficult to promote the sale of an invention while trying to keep it secret. Requiring potential purchasers or inventors to sign confidentiality agreements before revealing details of the invention is quite awkward. Indeed, many companies refuse to sign confidentiality agreements from inventors. Also, many inventors find that companies are much more receptive if the inventor has already taken steps to protect the invention.
b) Compiling a List of Potential Buyers - Finding a company that is willing to buy the invention is the most challenging aspect of the process. It begins by generating a list of companies that may be interested in the invention. Fortunately, compiling of list of prospective buyers can be done relatively easily. Firstly, identify the type of company that would be interested in the invention. For example, if your invention is a new tooth brush, then any company that manufactures tooth brushes would be an obvious prospect. Also, companies that manufacture products in the same general product line (combs, brushes, razors, toothpaste, dental floss) could also be prospects. Now that you know what type of companies might be interested in your invention, how do you find them? You use a business directory. Business directories list companies by the products they manufacture (or services they provide) and include basic information about these companies such as their address, phone and fax number, the name of their president (CEO or owner), the number of employees they have and their estimated annual sales. Copies of these business directories may be found in the business section of the local reference library (just ask the librarian). Various business directories are also available on the Internet.
c) Contacting Potential Buyers - Your list of potential buyers (i.e. prospects) may include literally hundreds of companies. Of course, many of those companies may not be interested in receiving your information package; therefore, your next step is to filter out those companies. You can simply call up each company on the list and ask them if they would be interested in receiving a solicitation for a new invention. If they are willing, then you get the contact information about who in the company to send your information to. The goal here is to accurately separate out those companies whom may be interested in taking on a new product from those companies that would not be interested.
d) Presenting the Invention to Prospects - After you have thinned out your list, your next step is to submit your information to each of the companies on the list. This may involve calling the people identified to be the "contact" for new product ideas and telling them that you are sending them an information package about your product. Your package should include a cover letter and a brief (preferably one page) synopsis of your product (including a picture). Also include any drawings, photographs, prototypes, written descriptions and any other information which may help to explain why your invention is a good product. The information must be clear, concise and it must appear as professional as possible. Do not try to overwhelm the recipient - you want to impress them, not burden them. NOTE: If the invention has not been protected by filing a patent application, then the inventor must have the company sign an appropriate confidentiality agreement before any information about the invention is released.
e) Follow Up - Do not expect the prospect to come to a quick decision concerning the invention. It may take a prospect many months (even a year or more) to make up its mind on a project. You have to be patient. It is important to periodically follow up with the company; however, do not "pester" the prospect. Your goal is to provide the prospect with as much information as they need to help them make a decision. Remember, the people considering your invention are probably quite busy with several other projects - annoying them may do little to speed the project up and may cause them to drop the project altogether.
f) Negotiations - If you find a company that is interested in picking up the project, then be ready to negotiate the terms of the sale. The key here is to be reasonable. You may think you have a multi-million dollar idea, but if you expect a company is going to pay you a million dollars up front for your invention you are bound to be disappointed. From my experience, nothing kills off a potential licensing deal faster than an unreasonable inventor. Realistically, the most you are likely to get is a good return on your investment. Asking for a smaller signing fee together with a modest royalty is far more likely to generate a signed agreement than holding out for a big payoff.
How Much Can I Sell My Invention or Idea For?
Many inventors ask me this question. The fact is I do not know the answer. Obviously, the less you ask for, the more likely you are to make a sale. But how much should the first offer be? Here are some of the methods I have seen to calculate what the royalties should be:
- An initial fee to cover your "out of pocket" expenses together with a small royalty calculated on the sales of the invention (say 1% to 5% of the manufacturers net sales). You may wish to charge a royalty equal to a flat fee per unit sold (say $1 dollar per unit).
- The 5% method. Just ask for a royalty of 5% of the net sales of the invention. I don't know why, but a 5% royalty figure seems to be a "rule of thumb" when it comes to license agreements. Expect the other side to come back with a lower royalty rate.
- Another method is to add up all of the money you have spent on the project (including legal fees, postage, prototyping costs, etc.) and add to that an amount to compensate you for the time you have spent on the project. Multiply this by the return on the investment you would like to receive, and amortize that figure by the time period of the license agreement. For example, lets assume you spent $14,000 on the project and 700 hours of your time (this may or may not be a realistic example). You decide to pay yourself for your time at a rate of $30.00 per hour ($21,000) for a total investment of $35,000. You want to make back 6 times your investment ($210,000) over a ten year period. Therefore, a royalty of at least $21,000 per year (for ten years) will yield a rate of return of between 50% to about 20% (depending on how you calculate it), which is more than you would get from many other types of investment. Of course, such a high rate of return is warranted given the speculative nature of the investment.
What Happens if Someone Steals Your Invention?
Occasionally, you hear stories about inventors who submit their inventions to a company only to have that company turn them down and then "steal" their invention. This does happen, which is all the more reason you should file for patent protection at an early stage. If it does happen, then do not lament - today's infringer may be tomorrow's licensee. Contact the company and inform them of your patent (or patent application). Offer them a fair license and grant them exclusive rights if they accept. If the infringer still refuses to sign a license agreement, then offer to license the invention to the infringer's competitor. You can even point out to the competitor that the invention must be worth while because their competitor has already put it on the market.
How Likely Are You to Sell Your Idea or Invention?
As I said earlier, selling an invention to a company is a lot of hard work. The fact is, most people are not willing to work that hard and, therefore, most people do not succeed. If you are not willing to put in the time to do all the follow up necessary to market your invention, then you are almost certain to fail. Jerome Lemelson, who literally made hundreds of millions of dollars licensing his inventions to companies, filed over 500 patent applications. With that kind of effort, it is no wonder he succeeded as well as he did.
Now that we have discussed some of the aspects of selling your invention to a company, lets briefly discuss how to get the invention on the market by becoming a manufacturer/distributor.
Manufacturing/Distributing The Product Yourself - The first decision you have to make is whether to manufacture the product yourself, or whether to contract out the manufacture to an independent manufacturer. An established manufacturer may have the resources and expertise to more efficiently manufacture the product at an affordable price. Also, contracting out the manufacture of the product allows you more time to spend on the most important aspect of marketing the invention - distributing and selling the finished product. Lists of potential manufacturers are available (see "Finding a Manufacturer" below).
Steps to Getting Your Product Manufactured and Distributed
1. Setting up a Corporate Presence - Manufacturing and distributing a new product involves several financial and legal risks. Space has to be rented, suppliers have to be retained, employees have to be paid, loans have to be taken out. To minimize this risk, nearly every manufacturing or distribution business is carried out as an incorporated business. The business carries on thorough the incorporated company. The company signs the leases, hires the employees, hires the manufacturers and distributes the product. In this way the company assumes the legal liabilities of the venture and the rights (and assets) of the inventor and investors are protected.
The company will also have to have a suitable place of business, which could mean anything from a small unit in an industrial mall to a large manufacturing facility. In any he facility should provide for storing inventory, packaging, meeting buyers/suppliers, making calls and faxes and conducting office work.
2. Finding a Manufacturer - Manufacturers can be found by consulting business directories. These directories list local, national and international manufacturers by their name, geographic location, and by the products they manufacture. Information about the manufacturers such as their address, fax number, the names of their executives, the number of their employees and there estimated annual sales, can also be found from these directories. See the above discussion on finding Prospects for a list of suitable business directories.
You will have to contact the manufacturer and discusses the product (or components) to be manufactured. Various engineering/manufacturing aspects are discussed and a price is negotiated. Terms relating to delivery, quality control, packaging and the like are also discussed. A formal manufacturing agreement should be signed.
3. The Sales Department - Lining up potential buyers is by far the most important step in the whole process. As the distributor, you must be prepared to contact potential buyers directly. If you have limited selling experience, then it is vital you find a suitable "sales executive" to handle this most important job. Oftentimes, the "sales executive" becomes a partner or key shareholder in the business. The importance of the sales function cannot be underestimated. Indeed, it should be the first thing you nail down before commencing the rest of the project.
4. Promoting the Product - Now that you have your sales "department", how do you go about promoting the product? There have been literally hundreds of books written about this subject. A brief walk through the business section of any book store will yield you several useful publications. By all means, read them. Here is a brief synopsis of some of the methods discussed in these publications:
a) Marketing to Retailers - If the product is a consumer item, then the buyers will be the retailers who sell the product (Sears, Canadian Tire, Walmart, etc.). It's not easy to sell to large retailers - there terms are often quite tough (you guarantee price, quality and supply, they pay only if they sell the product etc.). In addition to large retail chains, there are thousands of smaller retailers whom may be approached to carry the product. Selling to retailers involves a lot of face to face meetings and hand shakes. A sales person with experience in this area is a real necessity.
b) Direct Marketing - If you intend to sell your product directly to a company, then finding potential customers involves creating a list from a trade or business directory (see above discussions on finding manufacturers). Your sales people contact the companies on the list and arrange for a sales meeting. The sales people then put on a "dog and pony" show for the potential buyer using a variety of promotional material such as brochures, slide shows, samples, etc.. In many cases, you can simply forward a sales kit to potential buyers. In addition to sales brochures and product information, the kit may contain samples and a CD ROM with a video of your sales pitch. As with any sales function, periodic follow up is important.
c) Trade Show - Displaying and selling the product at a trade show is one method a lot of companies use to promote their products. Each industry has one or more trade shows where manufacturers show case their products. Buyers, such as retailers or other larger companies, often attend these trade shows in order to find out what's available. You can obtain lists of up coming trade shows from your local reference library (go to the business section and ask the librarian). Also check out the various trade associations for a list of their up coming trade shows. Again, a list of trade associations is available at your local reference library.
There have been plenty of books written about promoting your product at a trade show, and there are even several professionals who specialize in advising people on how to put on a good presentation at a sales show. Basically, it boils down to selecting a suitable trade show, arranging a good booth, and then staffing the booth with knowledgeable sales people. Have lots of brochures and other marketing material available and make sure your sales people get contact information from interested buyers.
d) Media - Distributing an appropriate press release to news organizations, newspapers and magazines is one method of attracting media attention to your new product. The press release should contain contact information as well as basic information about the product and the company that manufactures it.
e) The Web - Many companies use the web to sell and market their products. Of course, plenty of books have been written on the subject (by all means, read them). Selling on the web has the advantage of potentially reaching a larger (world wide) marketplace. In addition to being a valuable marketing tool, in some cases, selling your product through the web may be a viable option.
Marketing Your Invention - The Bottom Line
Marketing your invention is possible - in fact, it's the first thing you should think about. Selling your invention to a company involves less financial risk then manufacturing and distributing the product yourself - however, the rewards are perhaps not as great. Regardless of which method you choose to market your invention, just remember, how successful you are depends entirely on your abilities as a business person. Even the most expensive legal advice in the world cannot turn a poorly marketed product into a success. You, and only you, can turn your invention into a successful business venture. Copyright - Elias C. Borges, 2005, all rights reserved. www.borgesrolle.com
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