Original Win

The Entrepreneurs: Steve Vetorino, 45, founder of Applied Innovative Technologies Inc. in Fort Lupton, Colorado, and inventor of the NightStar; electrical engineer Jim Platt, 39, who helped Vetorino create the design and prototypes; and Todd Brown, 46, president of AIT, who provided business expertise for the product

Product Description: The NightStar flashlight uses magnetic-force charging instead of batteries to power the light. Users gently shake the flashlight for a charge that lasts up to 30 minutes. Today, the $39.95 product (as well as a compact version that's $29.95) is sold via QVC, catalogs, hardware stores, marine stores and more. Customers also include the U.S. military and distributors serving industrial markets such as mining and petroleum companies.

Startup: Approximately $10,000, which was spent on developing operational and marketable prototypes. When AIT received their first catalog order in 1998, an additional $280,000--raised by the inventors and by selling stock to family and friends--was spent to fund patents, tooling and an initial production run.

Sales: $4 million to $5 million projected for 2005

The Challenge: How should a small company respond when an almost identical company enters the market and launches a similar product made by an overseas manufacturer?

Early on, AIT found success when it began selling its NightStar flashlight to catalogs, hardware stores and retail outlets. Then, in 2001, a competitor--Daka Corp.--introduced the Forever Flashlight, a knockoff of the product manufactured in China. The Forever Flashlight sold for $15 less than AIT's version. Before long, some of the catalogs decided to switch to the lower-priced product, and big retailers like Sears also started purchasing from Daka. Making matters worse, about 10 other suppliers with similar products have since hit the market. But despite these challenges, AIT has remained successful, increasing sales year after year. The following tactics helped these entrepreneurs secure a bright future.

Steps to Success

1. Compete on price. When the knockoffs first appeared, the NightStar was being produced in Denver, and AIT just couldn't compete with the foreign company's pricing. To lower its price, AIT had to secure an overseas manufacturer. They soon located a company in China, AWI, which manufactured a lens they could use in the NightStar. Says Vetorino, "As time went on, AWI took over 100 percent of the production, which kept our prices down."

2. Offer a better product. "We had been selling the product for several years, and we knew how to improve [it]," says Vetorino. "Once the knockoffs appeared, we implemented numerous upgrades." The new features included improved light output, altered housing construction so the flashlight would float, and more. "We are very happy with AWI. They give us a high-quality product at a competitive price, and we are able to easily make design changes to keep us ahead of the competition."

3. Develop a marketing edge. To emphasize the NightStar's improved quality, the company sought laboratory verification from Aero-Nav Laboratories in College Point, New York, and Hauser Laboratories in Boulder, Colorado. "The Aero-Nav tests demonstrated that the NightStar can be safely used in explosive environments containing volatile substances, and the Hauser tests verified NightStar's durability in chemical baths of salt water and various acids," says Vetorino. "Hauser also conducted extreme-temperature, deep-immersion and drop-impact tests."

The competition didn't conduct any of these tests, leaving the NightStar the preferred light for military, industrial and extreme-condition uses. Once AIT completed the laboratory tests, it approached specialized distributors serving those markets to carry the NightStar. Industrial buyers can also purchase from the website (www.appliedinnotech.com).

Lessons Learned

1. Don't expect customer loyalty. Many of the retailers and catalogs AIT had been selling to immediately switched to the lower-priced knockoffs when they became available--despite the fact that the NightStar had pioneered the market. Most retailers and catalogs are unwilling to carry a higher-priced product for fear of losing sales to their competitors.

2. Respond to market changes. On the plus side, customers will often give you some leeway if you respond immediately to a competitive threat. But you have to notify them of the action you're taking to keep your product cost-competitive or to offer improved features. When a low-cost knockoff appears, determine if you can find a lower-cost manufacturing outlet. If you do, but it will take several months to receive production, consider selling your current product at the new, lower price to keep the competition out.

3. Target the smaller markets where you have an edge. You may not be able to compete against knockoffs at large, low-priced retailers. But you may be able to dominate smaller, specialized markets with unique needs the knockoffs just can't meet.

4. Make quality a priority. There will always be a market for a top-quality product. Knockoff manufacturers don't have the inventor's experience and knowledge about features that need improvement. Upgrade your product for high performance, and you should find a market at high-end catalogs and stores that shun the lower-priced imports.

5. Understand that getting a patent doesn't prevent competition. Patents protect a specific product design. A new product with minor design changes can often circumvent another product's patent. In NightStar's case, the product's main feature--passing a magnet through a coil to create a current--is a well-known principle that isn't patentable, which is what allowed the knockoffs to design around Vetorino's patent.

Protect Your Patent

You have a patent, a great product, and sales are popping--but suddenly, out of nowhere, somebody introduces a product that infringes on your idea. Can you afford to sue? With full-blown patent suits costing $250,000 and up, you might have a problem. One solution is to check out patent insurance. It's not cheap (it starts at about $25,000), but it will provide 80 percent of the money for any suit. And the fact that you have patent insurance may force the infringing company or person to settle.

Patent insurance is available from many sources, but one to check out is Intellectual Property Insurance Services Corp.

Don Debelak is author of Entrepreneur magazine's Start-Up Guide #1813, Bringing Your Product to Market (www.smallbizbooks.com), and host of inventor-help website www.dondebelak.com.