The Inventor’s Dilemma: Manufacturing vs. Licensing

“I have a new invention that I’ve been working on. I’ve done my research, I’ve met with a patent attorney to discuss patent options and I have investigated prototype and design options. However, I’m just not sure how to actually go about producing and marketing my invention. Do I need to arrange for manufacturing on my own, which seems like a challenging process in itself, or are there other options that I can explore for producing and marketing my invention?”
   

Manufacturing vs. Licensing

Does this line of thinking seem familiar? Ultimately, every inventor reaches the point where they need to decide on how they are going to proceed with commercializing their invention. They must choose how to develop, manufacture and market the product. Many inventors are interested in facilitating and managing the process on their own, while many others would prefer to find a company to handle the process for them. Whatever the case, after the idea has been protected with a patent, the inventor must weigh these options and decide which one is the right choice for his or her specific situation.   

Oftentimes, inventors are either unaware of the options for taking their inventions to market or they automatically assume that inventing requires them to manufacture and market their invention on their own. As a result of not being familiar with the options for commercializing their inventions, many inventors end up pursuing a less suitable approach for their particular situation, which can cost them a lot of time and money.

If you are new to the business of inventing or are not really sure how an inventor actually makes money from an invention, consider the following options.

Licensing the Invention for Royalties

When you are trying to license your invention for royalties, the end result of all your hard work is to secure a license agreement. A license agreement is when the inventor [licensor] agrees to let a third party [licensee] commercially use his invention for a period of time.

As a result of the agreement, the inventor would receive either an ongoing payment called a royalty, which would normally be calculated as a percentage of sales of the invention or a one-time lump-sum payment.

Typically, the company that licenses the invention would manufacture and market the invention. The likelihood of an inventor striking a license agreement would depend on the premise that the inventor has “rights” to the invention (i.e., a patent). Without patent protection, any individual or company could make or sell the invention; therefore, it would be less likely that a company would license or buy the invention.

Assigning or Selling the Invention

When the inventor assigns his rights, he is permanently transferring or selling ownership in the invention/patent. The inventor may receive a lump sum payment or a series of payments. The difference between a “license” and “assignment” is in the transfer of rights. With a license, the inventor retains rights, like “renting” the patent, and with an assignment they transfer their rights (i.e., sell it).

Developing & Manufacturing the Invention

When developing and manufacturing on your own, you are taking on the responsibility of facilitating and managing the process of setting up manufacturing either through domestic or overseas manufacturers. You hire a manufacturing company to produce your product. While you maintain control of your invention, you also assume the risks and costs that are associated with the process. Keep in mind that if you manufacture your invention overseas you should also develop an understanding of how you will import, warehouse and distribute the product.

Remember that every invention is different in terms of its complexity and structure. This should be taken into account when deciding whether to license the idea or manufacture. For some inventions, little development and setup is required, which can simplify the manufacturing process. However, other inventions may be much more complex requiring in-depth research, engineering, tooling, molds etc. for mass production. As a result, manufacturing can be very expensive and usually involves a large set-up fee for tooling, molds, etc., and once the invention is ready, there may be a minimum order requirement to pay for inventory.

Some manufacturers can offer short-run production where they’ll make a small order in hopes that the larger orders will come later, but many require the inventor to pay for a large number of units that can result in unsold product and loss of money if the invention does not sell. Overseas manufacturing can have added frustrations associated with the difficulties of finding and communicating with a foreign company.

For the inventor who finds these aspects of manufacturing to be too costly, too difficult or too much of a hassle, seeking a licensing agreement could be a more suitable solution. If the invention is licensed, usually the company that licenses the invention will handle the manufacturing, which allows the inventor to shift the cost and risks to the company that licenses the invention. With licensing, the inventor can rely on the company’s experience and established business to develop and market the product.

Typically, entrepreneurs with aspirations of turning their inventions into a business where they would sell their product would be the best candidates for manufacturing. Manufacturing and marketing an invention can be an exciting and rewarding approach for some inventors. However, the process should be looked at more as a business venture, as it requires the inventor to have substantial capital and a well thought-out plan on how to develop, manufacture and market their idea. Manufacturing is very different than finding a company to license the invention, and should not be jumped into without examining the risks and carefully planning the best route for success.

Thinking through Your Options

Now that you have a better understanding of the options for commercializing your invention, it is easier to see why it’s important to think through the options and determine what makes sense for your situation. It doesn’t make sense to select one approach such as manufacturing your invention when licensing may have been a better solution for your situation.

For example, suppose you invented a new, innovative pet-grooming device and after completing the patent process you decide that you are going to develop and manufacture the invention on your own. You jump on the Internet and spend the next few weeks researching overseas manufacturers to develop and produce your invention. Let’s assume that everything goes smoothly and quickly, which it usually doesn’t, and four to six months later you end up with a finished product and a shipment of inventory sitting in your garage. More than likely, at this point, you would have invested tens of thousands of dollars in your invention and it’s likely that you may not have even secured buyer interest or a purchase order.

Most established product companies and manufacturers don’t pull the trigger on manufacturing until they have done exhaustive market research and testing (i.e., due diligence) and ideally have secured purchase orders or commitments from their customers. However, as a new inventor, you may not have thought about securing interest or purchase orders before paying to have your product manufactured.

As a result, you’re now looking to sell your product either directly to consumers via a website that you will develop, or you begin to look for another company to wholesale your invention. As the example continues, you later realize that having a website to sell your product to consumers is only as good as the marketing behind the website (i.e., no one knows about your website) and eventually you begin looking for a larger pet company to license your invention.

Let’s say that you succeed in finding a company and they agree to license the product from you. While negotiating the agreement you discover that they manufacture all their product in Taiwan, whereas your factory is in China, so they will take over production and scrap your manufacturing setup. At this point, you begin to ask yourself if you could have reached the same license agreement without going through all the hassles and costs associated with setting up the manufacturing.

Although this scenario is just an example, it should highlight the need to think through not just the manufacturing aspect of the process, but what strategies are needed to market the invention after inventory has been produced.

It is important to remember that while neither licensing nor manufacturing is a guaranteed path to success, taking the time to understand the options for taking your invention to market and thinking through what your goals are prior to leaping into either option will help you take the path that’s right for you as you continue along the road of inventing. 

Eager for more advice regarding your inventions? Check out Russell’s other articles:

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