Original Win Learn how to respond to knockoffs so you can put your product back on top.
By Don Debelak
Opinions expressed by Entrepreneur contributors are their own.
The Entrepreneurs: Steve Vetorino, 45, founder of AppliedInnovative Technologies Inc. in Fort Lupton, Colorado, and inventorof the NightStar; electrical engineer Jim Platt, 39, who helpedVetorino create the design and prototypes; and Todd Brown, 46,president of AIT, who provided business expertise for theproduct
Product Description: The NightStar flashlight usesmagnetic-force charging instead of batteries to power the light.Users gently shake the flashlight for a charge that lasts up to 30minutes. Today, the $39.95 product (as well as a compact versionthat's $29.95) is sold via QVC, catalogs, hardware stores,marine stores and more. Customers also include the U.S. militaryand distributors serving industrial markets such as mining andpetroleum companies.
Startup: Approximately $10,000, which was spent ondeveloping operational and marketable prototypes. When AIT receivedtheir first catalog order in 1998, an additional $280,000--raisedby the inventors and by selling stock to family and friends--wasspent 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 analmost identical company enters the market and launches a similarproduct made by an overseas manufacturer?
Early on, AIT found success when it began selling its NightStarflashlight to catalogs, hardware stores and retail outlets. Then,in 2001, a competitor--Daka Corp.--introduced the ForeverFlashlight, a knockoff of the product manufactured in China. TheForever Flashlight sold for $15 less than AIT's version. Beforelong, some of the catalogs decided to switch to the lower-pricedproduct, and big retailers like Sears also started purchasing fromDaka. Making matters worse, about 10 other suppliers with similarproducts have since hit the market. But despite these challenges,AIT has remained successful, increasing sales year after year. Thefollowing tactics helped these entrepreneurs secure a brightfuture.
Steps to Success
1. Compete on price. When the knockoffs first appeared,the NightStar was being produced in Denver, and AIT justcouldn't compete with the foreign company's pricing. Tolower its price, AIT had to secure an overseas manufacturer. Theysoon located a company in China, AWI, which manufactured a lensthey could use in the NightStar. Says Vetorino, "As time wenton, AWI took over 100 percent of the production, which kept ourprices down."
2. Offer a better product. "We had been selling theproduct for several years, and we knew how to improve [it],"says Vetorino. "Once the knockoffs appeared, we implementednumerous upgrades." The new features included improved lightoutput, altered housing construction so the flashlight would float,and more. "We are very happy with AWI. They give us ahigh-quality product at a competitive price, and we are able toeasily make design changes to keep us ahead of thecompetition."
3. Develop a marketing edge. To emphasize theNightStar's improved quality, the company sought laboratoryverification from Aero-Nav Laboratories in College Point, New York,and Hauser Laboratories in Boulder, Colorado. "The Aero-Navtests demonstrated that the NightStar can be safely used inexplosive environments containing volatile substances, and theHauser tests verified NightStar's durability in chemical bathsof salt water and various acids," says Vetorino. "Hauseralso conducted extreme-temperature, deep-immersion and drop-impacttests."
The competition didn't conduct any of these tests, leavingthe NightStar the preferred light for military, industrial andextreme-condition uses. Once AIT completed the laboratory tests, itapproached specialized distributors serving those markets to carrythe NightStar. Industrial buyers can also purchase from the website(www.appliedinnotech.com).
Lessons Learned
1. Don't expect customer loyalty. Many of theretailers and catalogs AIT had been selling to immediately switchedto the lower-priced knockoffs when they became available--despitethe fact that the NightStar had pioneered the market. Mostretailers and catalogs are unwilling to carry a higher-pricedproduct for fear of losing sales to their competitors.
2. Respond to market changes. On the plus side, customerswill often give you some leeway if you respond immediately to acompetitive threat. But you have to notify them of the actionyou're taking to keep your product cost-competitive or to offerimproved features. When a low-cost knockoff appears, determine ifyou can find a lower-cost manufacturing outlet. If you do, but itwill take several months to receive production, consider sellingyour current product at the new, lower price to keep thecompetition out.
3. Target the smaller markets where you have an edge. Youmay not be able to compete against knockoffs at large, low-pricedretailers. But you may be able to dominate smaller, specializedmarkets with unique needs the knockoffs just can't meet.
4. Make quality a priority. There will always be a marketfor a top-quality product. Knockoff manufacturers don't havethe inventor's experience and knowledge about features thatneed improvement. Upgrade your product for high performance, andyou should find a market at high-end catalogs and stores that shunthe lower-priced imports.
5. Understand that getting a patent doesn't preventcompetition. Patents protect a specific product design. A newproduct with minor design changes can often circumvent anotherproduct's patent. In NightStar's case, the product'smain feature--passing a magnet through a coil to create acurrent--is a well-known principle that isn't patentable, whichis what allowed the knockoffs to design around Vetorino'spatent.
Protect Your Patent
You have a patent, a great product, and sales are popping--butsuddenly, out of nowhere, somebody introduces a product thatinfringes on your idea. Can you afford to sue? With full-blownpatent suits costing $250,000 and up, you might have a problem. Onesolution is to check out patent insurance. It's not cheap (itstarts at about $25,000), but it will provide 80 percent of themoney for any suit. And the fact that you have patent insurance mayforce the infringing company or person to settle.
Patent insurance is available from many sources, but one tocheck out is Intellectual Property Insurance Services Corp.
Don Debelak is author of Entrepreneur magazine'sStart-Up Guide #1813, Bringing Your Product to Market(www.smallbizbooks.com), and hostof inventor-help website www.dondebelak.com.
