Why Licensing is the Best Way to Get Your Product on Store Shelves
So you have a genius idea for a new product that you believe will make you rich. But how do you bring your idea to life?
Your options fall into three categories: Start a company, and then make and sell the product; license your idea to a business with the ability to manufacture and distribute your product; or submit your idea to a crowdsourcing platform. Each has its pros and cons, but the most successful and easiest option is to get your idea licensed. This offers the most potential return on investment and has the greatest chance for success.
We recently licensed a product (the Hot Dog Slic'R) to a company already selling to Walmart. Within three months they sold it to Walmart, where it is now hanging next to the hot dog buns, selling like crazy. That kind of success would have taken years of intense effort to do on our own, but we did it without breaking a sweat. It's one of five licensed products we'll have in Walmart next year.
Starting your own company can sound attractive, but it's difficult, a big time investment and requires a lot of work to get your startup running efficiently and effectively. It can't be done casually and takes lots of resources. Your chances of success, especially if you're a neophyte, are statistically not the best. However, if you have a ton of passion for your product and are willing to live and breathe your idea, the possibility of making your idea a huge success can be great.
Submitting to a crowdsourcing platform (such as Edison Nation) is very low cost, but you have to be chosen through the platform's selection process, and your success is pretty much out of your control. Another thing to keep in mind: the submission company is going to take a big chunk of the income (if any) generated by the idea. It's the best option for people who don't have the time or money to invest up front, or have more ideas than they can afford to invest in.
For many people and products, licensing offers the best balance of characteristics. Why? You can get a more-than-desirable return on your investment in both time and money (more than 20 times is possible), while doing relatively little work, and mostly the fun stuff. Licensing offers a balance of risk and reward, because it allows you to leverage the success of an already established company for distribution.
Getting your product on the shelves in a retail store is by far the hardest part of any product venture. And managing the logistics and technicalities of selling to companies such as Walmart and Target is definitely not what one would define as "fun." Larger retailers generally don't buy from individuals. On the flip side, if you license a product to a company already doing those things, you can take a shortcut, and work your way into major retailers without as many hiccups.
How does licensing work? You come up with a great idea, not just a pretty good one, and turn the idea into a product. In most cases you file for patent protection, and then you find a company willing to make the product and pay you a royalty. A typical royalty is 5 percent of gross wholesale sales, the price to the retailer from the manufacturer. Many inventors, at first, feel like this number is low, but it's actually a good deal for the inventor. Based on market data, a well-run manufacturer makes around 10 percent profit bottom line. That's only twice the return the inventor is making at 5 percent, even though they have all the ongoing expenses and investments, massively more risk and infinitely more effort. Meanwhile, the chance of success is much higher since the hardest part -- getting into distribution -- is already handled.
What are the downsides?
1. You may not be able to license your product. A lot of stars have to align within a potential licensee to get a "yes" and it takes lots of effort and perseverance to find the right one.
2. You typically lose most, or all, control of the invention. The licensee gets to call the shots and you may not agree with all of their decisions. Your idea may fail due to poor strategy or execution, so it's really important to work with a company with a great track record as your licensee.
3. Compared to crowdsourcing, licensing is more expensive as you'll likely need to invest in your invention to make it license worthy.
All in all, licensing gives you the best bang for your buck if you can make it happen with the right company. It keeps you free to pursue other ideas, keep your day job and relax more. It gives you the quickest path to great distribution and provides a very comparable return to manufacturing with far less effort and risk.