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Seller's Market

Don't want to leave the selling of your product up to a licensee? Do it yourself on commission.

Inventors often have great ideas they can't afford to introduce effectively. The traditional way around this is to license your invention to a manufacturer. But there's another method that offers many advantages over licensing: arranging with a manufacturer or a distributor/wholesaler to sell your product on commission.

Selling on commission is an ideal approach if you see a market opportunity but don't have the expertise to develop the product. Essentially, the other company handles product design and engineering, and pays the person who knows the product best-you-to sell it.

Selling on commission allows you to enter the market, get established and generate income quickly. You can proceed with your invention even with limited patent protection and continue to have input into your product's development.

The beauty of selling on commission is that you typically don't have to put up any money. The manufacturer pays for the patent application, start-up costs and operating capital required to launch the product. Your only expenses are defining the product, possibly making a model or prototype, and making your early market connections.

While selling on commission provides the contacts you need to branch out and start your own company, the product will always belong to the company you are selling it through. If you don't want the hassle of running your own company, this is an ideal tactic. If your product is a winner, you'll be able to introduce new products through the manufacturer. And if you want to break out on your own . . . well, more about that later.

Let's Make a Deal
You'll have an easier time making a commission arrangement if you have a sales and marketing background, but it's not essential. Here are some steps to improve your chances of success.

First, be sure you're approaching the right manufacturer. Selling on commission works best when the manufacturer has to make only minimal changes to its processes to produce the product. Manufacturers want a quick profit; they don't want to invest a lot of money.

Because the manufacturer or distributor who hires you on commission is really buying your ability to sell the product, you must know who the key players in the distribution network are and have their support before you approach a manufacturer. Read trade magazines and attend trade shows to learn who the best contacts are. If possible, get letters of support to show to manufacturers, stating the person believes your idea has merit and would consider selling it when the product becomes available. Better still, have at least one or two key customers presold so you can produce immediate results.

You get better results with a manufacturer if you propose your arrangement in steps. This gives them a chance to warm up slowly. Start by approaching them to see if they would make your product for you as a contract manufacturer. At a later meeting, tell them how the product's potential is larger than you expected and how you can't afford to proceed on your own.

The most successful products are typically based on customer desires. When you talk about your product to manufacturers, always start with a customer focus, detailing how you have surveyed customers and how your product meets their needs.

A manufacturer probably won't make an investment without some positive response from customers who have seen a prototype. However, you can often persuade the manufacturer to pick up some, if not all, of the expense of producing a prototype, especially if the manufacturer already makes similar products.

One caution: By selling on commission, you run the risk of the manufacturer trying to steal your idea. But you can usually prevent this by simply applying for a provisional patent just before contacting potential manufacturers. That allows you to state that your patent is pending. You can then agree to assign the patent to the manufacturer if they agree to pay the full patent application and issue fees.

WHAT TO EXPECT
  • The manufacturer won't automatically print brochures, attend trade shows or pay for a marketing program. Be sure to propose a marketing program and get the manufacturer's approval before signing a contractor agreement.
  • You will be paid commissions only after customers pay for their products-and you may go three to four months before sales are made. You can ask the manufacturer for an advance against commissions to cover those costs, but the manufacturer isn't obligated to offer an advance unless it is part of your agreement.
  • The manufacturer might offer you its standard sales representative agreement, which pays a commission only on the products you sell. Insist on a commission on all your products, including an override (or commission payment) of several percent on any of your products sold by other salespeople or independent representatives.
  • The manufacturer will want to produce the product as cheaply as possible and may compromise some of its features. You'll need to monitor closely the manufacturer's design to prevent this.
  • The manufacturer will be reluctant to make changes in the product once it starts production on it. Be sure to show a model or prototype to your potential customers and get their approval before the manufacturer finalizes tooling and the manufacturing process.
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This article was originally published in the February 2003 print edition of Entrepreneur's StartUps with the headline: Seller's Market.

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