From the February 2003 issue of Startups

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.

Building Momentum

Once you have a commission sales agreement in place, here's how to make the most of the relationship:

  • Act big: One of the reasons to go with a manufacturer or distributor is to use their size to build credibility. Have your business card state the company's name; always mention the company's name when you call; and be sure to have first-class brochures, marketing materials and trade show booths that clearly call out the company's name.
  • Set up distribution: There will usually be plenty of sales opportunities for a product other than the big accounts you use to land your agreement. Your goal is to continue to increase the product's sales, which you can do by hiring manufacturers' sales agents to cover the country by adding distribution in new markets. You have to pay the new representatives a commission, but you will still receive your override commission.
  • Hire other salespeople: Your long-term goal is to keep producing new products. You can't do that if you have to handle all the sales on your own. Work with the company to hire new salespeople, accepting the fact that your only pay is your override. This boosts sales and allows you to branch out into new products.

Building a Business
Once you have a sales relationship, you can continue introducing products through that manufacturer or strike out on your own. If the latter is appealing, take these steps to prepare:

  • Hone your skills: Your long-term success in commission sales depends either on your expertise at introducing a product or on your creativity in continually coming up with new product ideas. Both of these skills are ideal building blocks for going into business for yourself. You may not be able to reclaim your original product, but you can move on to introduce a new product of your own or even products from other inventors.
  • Create an industry presence: Become known in your industry by being on industry committees, volunteering for associations and serving on committees. You can also write articles for trade magazines, give speeches or presentations, and volunteer to help with training meetings.
  • Take control: There is an inevitable clash when you sell your product on a commission basis for a company. You want to develop a network of contacts that helps you increase sales, makes you important to manufacturers, and sets the stage for future sales growth. The manufacturer, on the other hand, feels vulnerable if it doesn't have direct contact with customers and the distribution channel. The best strategy is to introduce buyers and distribution channel contacts to the manufacturer when starting out, then cut back the manufacturer's involvement as sales develop.
FIRST, CONTACT
To find the key players in your industry, check out Gale's Encyclopedia of Publications and Broadcast Media, Gale's Source of Associations, and various trade show directories available at larger libraries. You can also contact the writers of articles in trade magazines and ask them who the key players are in a business. Often these authors are industry people who will provide you with names and may even tell you who the best candidates are to buy your product.

Adapted from Think Big: Nine Ways to Make Millions From Your Ideas (Entrepreneur Press). Don Debelak is president of DSD Marketing, an inventor assistance firm. He has helped introduce more than 100 products in his 20 years of new-product experience.