The Online Inventor -- May 1999

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THE ONLINE INVENTOR -- May, 1999

(c) 1999 Market Launchers, Inc.

http://www.marketlaunchers.com

Publisher: Paul Niemann

E-mail: [email protected]

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In this issue:

Article # 1:    "Licensing To Large Companies," by Ed Zimmer.

Article # 2:    "The Silver Platter Approach" and "Common Ways and Places to Find New Product Ideas" by Ken Tarlow

Article # 3:    "Licensing vs. Self Production," by Carol Rehtmeyer of Rehtmeyer Design & Licensing

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Article # 1:    "Licensing To Large Companies," by Ed Zimmer. (Summary of a 1988 talk given by Howard Hermann of Dow Corning to the Inventors' Council of Michigan) (INCOM)

Why companies deal with outside inventors:

Simply to increase their supply of new products. Companies need new products to survive. As old products become obsolete, new products must come on stream to replace the lost revenue.

Companies need new products to grow. Every company wants to increase its market share, which requires a continuing stream of new and improved products. All companies engage in in-house product development. The smarter companies also look outside to augment their resources and give them a competitive edge over those who don't.

Why companies resist dealing with outside inventors:

Of 1001 reasons, the first 999 are fear of lawsuits. Companies have much more to fear from outside inventors than inventors have to fear from companies.

When a company deals with outside inventors, it exposes itself to frivolous lawsuits. These can be brought long after the event. Memories of what transpired have a way of changing over time. The company finds itself in a David and Goliath situation, where the biases favor the underdog David. If the case appears to have even superficial merit, there's always a attorney who will pursue it on spec. Companies dealing with outside inventors must protect themselves from such exposure.

Other reasons include an NIH -- "not invented here" -- factor, and simply that dealing with outside developers can be terribly time consuming. Many product developers don't do their homework before approaching the company. They send in proposals that don't fit the capabilities of the company - in development, in manufacturing, in marketing. Their understanding of the market is nebulous to poor, often requiring re-invention, re-development. They have unrealistic expectations of the value of their proposal. Just screening these proposals and corresponding with the submitters takes an inordinate amount of time.

What an inventor should do before approaching a company:

Get an outside objective evaluation of your invention:

    *    Get someone who is not as emotionally tied to it as you to give you a realistic assessment of its strengths and weaknesses.

Understand the risk factors in your proposal:

    *    Be sure you have thorough and objective answers to the such questions as: Will it really function as intended? What will it take to produce it? What will it take to define product, price, market? What is its profitability potential, based on analysis of cost vs. acceptable selling price?

Understand its demand potential:

    *    If one includes all products of this type, is the total demand large enough to justify the effort? Is the trend in demand up or down? What is the potential sales volume? How predictable is it? What is the likely life of the product? Can a family of products be made to improve its on-going potential?

Understand the competition:

    *    What is there now? What are your advantages, in function, appearance, price, need for service? What are your disadvantages, in function, appearance, price, need for service? What might be expected in future competitive products? What protection can you offer, in patents, trade secrets, copyrights?

Understand the benefits and risks to society of your product:

    *    What are the legal problems: potential product liability, applicable government laws and regulations? What product standards apply: UL approval, etc.? What are the potential safety hazards? Environmental problems?

Understand the market:

    *    Is it possible to tap into existing distribution networks? How obvious are advantages to the customer after learning of the product? Is it compatible with the present way of doing things? Is there teaching required for safe and effective use? Will the costs of promotion and teaching be in line with other costs and expected return?

Understand your alternatives:

    *    Is the product something you can exploit yourself? Do you want to? Does it make more sense to try to sell or license your rights to it? What existing product lines does it fit? What companies offer those product lines? Which of those companies would consider a proposal?

What to expect when approaching a company:

Most larger companies really do play fair. If you're offering something of value, it's infinitely easier and less expensive to work with you than against you. The people representing these companies are professionals. They are trying to put together a sound business deal in which both sides win. You'll get much farther, faster by negotiating to that same end.

A company will feel much more comfortable evaluating your proposal if you have a patent issued or pending. Not only does it clearly define the invention, but it allows the company to deal with you with assurance that your rights are adequately protected.

If you don't have a patent issued or pending, the company will want a written agreement either waiving any confidentiality between you or explicitly specifying the terms of confidentiality. If the latter, the company will insist that its obligations under the agreement ends if the information was previously known to the company, if it is available to the public or later becomes available through no fault of the company, or if the same information comes to the company through a third party, and in any event that its obligations end after a specified period of time. The company will also specify that its obligations will apply only to information that you have conveyed in writing, and it will want to hold and preserve those writings in its records.

Companies do not want to see any details of what you are proposing until the respective confidentiality rights are clear. They will frequently assign a non-technical clerical to handle all initial dealings with outside inventors until such rights are cleared.

Companies are interested in complete inventions, not in suggestions for ad campaigns, methods of doing business, or vague ideas.

Target your approach as best you can. Take the time to find out what division is most likely to be interested, and what group you should deal with, e.g., patent department, licensing group, new products group. If you can target an individual in the company, e.g., by knowing someone who can arrange an introduction, that's your best bet, as you come in with a bit more credibility,

What to expect in a license agreement:

Exclusivity:

    *    The company will want exclusive rights to the invention, either as an assignment or license.

Royalty terms:

    *    If you're offering patent protection, you can expect royalties on the order of 1-5% of the company's sales of the product, depending on how much the company has to do to bring the product to market and how much it wants it. Keep in mind that a manufacturer's sales are typically half what the product ultimately commands on the shelf since most sell to wholesalers or distributors at such discounts. Up-front payments are rare. Companies typically want you to take the risks right along with them. If you're not offering patent protection, there's still possibilities for royalties. However, they will be less and for shorter term.

Patent work:

    *    Many companies are willing to take on clean-up of patent work, especially the filing of foreign patents -- in fact they'd prefer to. The perfection and enforceability of the patent is at least as important to them as you, and they're typically better equipped to do it.

Diligence:

    *    The company will expect to provide you with some obligations for diligence on their part, e.g., that they will exercise reasonable effort and timeliness in bringing the product to market.

Summary:

*    File patent applications.
*    Unless patented, don't submit full details until you get interest.
*    Consider third-party independent evaluation of an invention before filing an application or submitting it for license or sale.
*    Have good written records of an invention, dated and witnessed by someone who can understand them.
*    Consider filing a disclosure document with the Patent Office to establish an invention date.
*    Don't publish or offer for sale prior to filing a patent application.
*    Target your potential licensee or buyer carefully.
*    If you submit before filing a patent application, try to get a confidentiality agreement.
*    Keep a copy of everything you submit.

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Thanks to Ed Zimmer of The Entrepreneur Network for permission to re-print this article. Their site has a ton of useful info for inventors -- be sure to check it out at: http://tenonline.org/index.html

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Article # 2:    "The Silver Platter Approach" and "Common Ways and Places to Find New Product Ideas" by Ken Tarlow

"THE SILVER PLATTER APPROACH:"

This is probably the most important section in my book, "Mind to Money." The "silver platter" approach has dramatically helped the success rate of products developed by myself and my clients. Normally when "experts" talk about the chances of success for a newly developed product, they talk in terms of 2 out of 100 products making it! With those odds you might as well go to Las Vegas and play roulette.

The silver platter approach means that all aspects of the product are thought out and the illusion of a finished manufactured product has been created before one dime is spent on tooling or manufacturing.

THIS IS CREATED BY HAVING:

1.    Good-looking, working prototype.

2.    Packaging

3.    Patent pending

4.    Pricing

5.    An O.E.M. (Original Equipment Manufacturer) is lined up to make the product.

6.    Positive feedback from potential store buyers who are ready to order the product.

When a potential marketing or manufacturing company sees all this, all they can say is "YES!"

There are a number of rip-off companies out there who advertise to inventors and tell them that they will get their inventions placed or licensed for them by sending drawings to potential manufacturers and entering the invention in a trade show. They don't develop the product, they don't use the silver platter approach and their success rate is about one in one thousand! For this they charge approximately $3,000 to $6,000.

For a cake to turn out right you need to use all the proper ingredients. If you want your product to be totally successful you also need the right ingredients. So read the above points again carefully.

When you've got all the Silver Platter ingredients, you can present your new product with total confidence. You know your product inside and out and you have a strong knowledge of the industry your product is a part of. Remember, speak with authority. You're the expert!

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"COMMON WAYS AND PLACES TO FIND NEW PRODUCT IDEAS:"

1.    BEING DISSATISFIED WITH THE WAY SOMETHING WORKS

2.    BEING AN "EXPERT" IN AN AREA AND SEEING A NEED FOR SOMETHING NEW TO MAKE DOING A JOB EASIER

3.    LISTENING TO OTHERS DESCRIBE THEIR PROBLEMS

4.    STARTING A SENTENCE WITH "WOULDN'T IT BE GREAT IF ... "

5.    BEING AWARE OF CHANGING TRENDS IN SOCIETY

6.    ASK YOUR KID WHAT THE LATEST FAD IS AND TRY TO CAPITALIZE ON IT

7.    VISIT A FOREIGN COUNTRY AND SEE IF YOU CAN ADAPT FROM AN UNUSUAL PRODUCT YOU FIND THERE

8.    REMEMBER WHAT YOU USED TO LOVE TO DO AS A KID AND THINK OF A RELATED PRODUCT

9.    GO TO A CRAFTS SHOW -- SEE WHAT PEOPLE ARE BUYING MOST. DESIGN A CONSUMER PRODUCT AROUND IT

10.    SIT QUIETLY WITH YOUR EYES CLOSED. CENTER YOURSELF, ASK FOR A NEW PRODUCT IDEA TO MANIFEST!

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Ken Tarlow is one of the most prolific inventors in the country. He has developed more than 300 products which have combined to sell for over $1 billion in retail sales. The material in the above article came from Ken's book, "Mind to Money," which comes with an excellent set of cassette tapes to walk you through the inventing-prototyping-patenting-marketing process in a step-by-step format. His company, America Invents TM, can be reached at (415) 927-0311 or on the Internet at www.americainvents.com. Ken can help you develop your invention, or you can do-it-yourself with his book and set of cassettes, which sell for $40 & $5 S/H.

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Article # 3:    "Licensing vs. Self Production," by Carol Rehtmeyer of Rehtmeyer Design & Licensing

You have a great idea that you know is going to be very successful. But which way should you turn? Do you license this concept to another company to produce, or do you produce and distribute this product yourself? Which is better? To determine which may be best for you, it is paramount to understand what "Licensing" and "Self Production" really mean and what they entail.

In basic terms, product licensing is where you allow a company to utilize your patent and product likeness in return for royalty payment.

Understanding Licensing:

First, there are basically three kinds or variations of licensing to understand:

1.    Character / image property -- typically thought of as cartoons, but any image or illustration could apply. Some varied examples include: "Disney," "Sesame Street" characters, "Looney Tunes," "Sabrina -- the Teenage Witch," "Baywatch," and the Anne Geddes baby images. Royalty rates will vary widely, based upon demand. Toy companies often pay for exclusive rights to utilize a popular image. The dollar amount paid for the top properties can be staggering, plus, there may be many demands placed upon a licensee for performance, advertising, etc. Licensee are limited to a very narrow and specific product or product category.

2.    Trademark property such as: "McDonalds," "Coca Cola," "Nike," etc. Royalty for the top "brands," trademarks and properties can be a staggering dollar amount for a licensee. Companies seek brand identities as they do character or images for their ability to have immediate public awareness and appeal. Companies often add a popular identity to their product instead of expending money advertising. Therefor, they need that broad consumer "reach."

3.    Product or patent properties: This probably includes any product that you have invented. These are traditionally unproven and "risky" propositions for the toy companies.

Product / patent licensing is where most toy inventors are likely to be. Payment is typically based on the wholesale selling price of your item. The typical royalty percentage is 5%.

Many inventors tell me that they want to license their invention to as many different companies for as many different applications as possible. This is the "ultimate licensing goal", but one that requires a great deal of public knowledge and demand for your property before this can typically happen. Many companies try to turn their products into character or trademark licensing opportunities. This means a company licenses their product, company name or logo to another company or manufacturer for a specific item or application. For example, "Fisher Price" licenses their name for clothing, "Lego" licenses their name for children's furniture, "Barbie" licenses to thousands of different manufacturers for everything from paper plates to bed sheets and children's clothing. The "Power Rangers" and all the popular new character introductions have lists of licensees as well.

Some Advantages of Licensing:

*    Low to no initial investment (the cost of your time and prototype)
*    If you work with an agent, licensing usually requires no further effort on your part
*    You can make a lot of money each quarter without doing anything
*    You benefit from the financial backing, marketing and development efforts, and more from your licensee
*    Spin-offs or line extensions of your product are possible- giving you a broader royalty base
*    Toy company licensees will be aggressive in protecting your concept
*    Worldwide opportunity without complex distribution

Some Disadvantages of Licensing:

*    High demand for innovation -- few products will be appropriate for most manufacturers
*    Your product will likely need to be shown to numerous companies
*    It can take a while to get a license. Eighteen months or more is not uncommon.
*    It is also not uncommon to enter into a licensing agreement with a company to find that your concept never "goes anywhere"
*    Auditing may be necessary to assure proper royalty payments
*    Sometimes smaller companies "forget to pay"
*    5% of the wholesale price isn't anywhere near what you can make if you self-produce and market your item. An item that wholesales for say $7.00, will give you $0.35 cents per unit.
*    Licensees may expect royalty-free accounting for returns, samples, defects, shipping allowance, discounts and much more
*    You are at the mercy of your Licensee for performance
*    Licensee will likely change your product -- a lot

Understanding Self Production and Direct Marketing:

This is where an individual or a company has their product produced and is responsible for getting their toy or game into the retail market. This is where you become the "toy company". You have your product designed, produced as well as sell and ship your product directly to retailers that you have encouraged to buy your product.

Some Advantages of Self-Production:

*    Some products have great potential for marketing, but are inappropriate for licensing
*    You "run your own ship"
*    You can make a lot of money. An item that you are wholesaling for $7.00 will likely provide you $3.50 per unit-- that's 10 times as much as most licenses
*    Niche opportunities can be lucrative and are typically avoided by major manufacturers

Some Disadvantages of Self-Production:

*    You get to pay for everything -- or use O.P.M. (other peoples' money)
*    If you're using O.P.M. -- you'll have people to report to
*    There's a lot of money to risk!
*    You'll have a lot of responsibilities including: product development, engineering, manufacturing, importing, graphics, packaging, selling, marketing, warehousing & shipping
*    It requires a lot of work and coordination
*    You get to protect your own product
*    Don't forget about liability insurance!

Okay, are you more confused than ever? So which is better -- Licensing or Manufacturing your own product? The answer might vary. It all depends on your product and you. Some products lend themselves to both. You might produce and distribute your own product in the United States, for example, and license the rights to your product outside the US.

Another strategy is to first produce and sell your own product in an effort to "raise public awareness," hoping to later license this game at a higher than usual royalty rate to a major manufacturer. Trivial Pursuit did this and negotiated a royalty rate more than twice the average rate!

For more information on licensing and producing your own product, contact Rehtmeyer Design & Licensing!

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Carol Rehtmeyer is President of Rehtmeyer Design & Licensing, a product development, graphic design, packaging & manufacturing company serving the toy, game, novelty and juvenile product industry. Rehtmeyer Design & Licensing is the host and sponsor of the renown "Toy & Game Inventor's Forum (T.G.I.F.), held annually in Las Vegas. As an agent, Ms. Rehtmeyer welcomes your questions and new talent. Please feel free to call, write, fax or e-mail your name and address for information regarding T.G.I.F., answers to your questions and for a general information packet.

Rehtmeyer Design & Licensing
1979 North Mill Street, Suite 206
Naperville, Illinois 60563

Phone: 630-717-9304
Fax: 630-717-9384
e-mail: [email protected]

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Click here to read the April 1999 issue.