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THE ONLINE
INVENTOR –
(c) 2009 Market
Launchers, Inc.
http://www.marketlaunchers.com
Editor:
Paul Niemann
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Dear Inventor –
This issue of our humble little newsletter brings you an
article written by Trevor Lambert. MarketLaunchers has teamed up with Trevor’s
company, Lambert & Lambert, for several years now, and that relationship is
expanding.
Below is an excerpt from a book recently written by Trevor
Lambert, entitled Invent Secrets: How to Market and License Your Product
Ideas. To learn more or order the comprehensive manual, which includes
sample agreements, proposals and much more, please visit www.inventsecrets.com
Trevor Lambert is also the President of Lambert & Lambert, Inc., one of the
leading licensing agencies involved in establishing royalty agreements on behalf
of inventors and product developers. To find out how you can have them represent
your invention, learn more on their website at www.lambertinvent.com
Also, we welcome our newest sponsor, Primo Design Importers
out of
Primo specializes in off-shore production and importation,
and they have developed a direct factory network in
The factories that Primo works with can create new molds,
and they can quote to mass produce your current company products, whether it’s
a complete product or part or accessory. As you search for service providers to
help you in your inventing, Primo is another option for you to consider. Please
contact them at tony@primodesignimporters.com
Now, on with this week’s issue …
Best Regards,
Paul Niemann
Paul
Niemann
http://www.MarketLaunchers.com
800-337-5758
217-224-8194
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CLEVER QUOTE: “I fail my way to success”… Thomas Edison
CLEVER QUOTE: “You
can’t build a reputation on what you’re going to do”… Henry Ford
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Article
# 1: “Calculating the Royalty Rate,”
by Trevor Lambert of Invent Secrets
CALCULATING
THE ROYALTY RATE:
Royalty rates can vary greatly depending on the industry and the expected
profit margins of the product. For
consumer products, the average royalty rate can range from 4-12% of Net Sales,
however high technology, software or medical technologies tend to capture a much
higher royalty rate, as much as 25%+ of Net Sales.
Rather than pulling a number out of thin air, it is best to have
reasoning behind the royalty rate that you are asking for.
To ascertain what may be reasonable for your invention, there are two
commonly used methods by licensing professionals to value intellectual property:
they are the Market Method and Income Method.
The first method, the Market Method, is a comparative method which is
similar to purchasing a home. This
is exactly like a realtor would find “comps” that are similar to the house
that you are purchasing or selling (comparing the number of bedrooms, bathrooms,
square footage, acreage, etc.) to ascertain the value.
It is possible to find industry specific royalty rates through services
that compile these license transactions. That
way you can note the most recent published license deals with the royalty rates
and various other terms and use that in your negotiation.
One service that we have used is called Royalty Source and can be found
online at www.royaltysource.com.
Also the Licensing Executives Society publishes ranges for specific
product categories. The problem is
trying to figure out if your invention deserves the high end or the low end of
the scale. Does your consumer
product deserve 5% or 12%? As a
result, these usually give you a rough estimate to start the negotiation from,
not a definitive answer.
The second method, the Income Method, values intellectual property based
off of the anticipated income that the invention is likely to produce.
The most common way to calculate a royalty rate using the Income Method
is by utilizing the 25% Rule, which is widely used by universities and the
Licensing Executives Society. This
states that the royalty rate should be equivalent to 25% of the pre-tax profit
of the product. To ascertain a
royalty rate using the 25% Rule, the pre-tax profits are calculated based on the
various market forces for the product and market segment.
If a product is expected to have a 40% profit margin, then the royalty
rate would be 10%. As another
example, for a product with tighter profit margins of 10%, then the royalty rate
would be 2.5%.
Below is a sample simplified calculation based on the 25% Rule showing the
common costs associated with importing and retailing a product at a big box
store.
Avg Retailer Markup
50.0%
Retail Price
$9.95
Wholesale Price
$4.95
Manufacturing Cost
$1.15
Ocean Shipping
$0.10
Packaging
$0.14
Duty
$0.06
Drayage/Truck/Handling
$0.10
Warehousing/Fullfillment
$0.12
Commission (10% avg) $0.50
Overhead/Administrative
$0.05
Advertising
$0.15
Promotion Allowance (3%)
$0.15
Estimated Total Costs
$2.86
Estimated Net Positive Cash
$2.09
25% of Net Positive Cash
$0.52
Suggested Royalty Rate
10.5%
The “Suggested Royalty Rate” is established by subtracting the
amortized per product costs from the wholesale price to find the net pre-tax
profit. Then 25% of the profit is
then divided by the wholesale price to get the royalty percentage.
It is supremely important that you base the royalty off of “Net
Sales” rather than profits in the license agreement.
If it was based on profits the licensee could “cook the books” to
reduce your royalty unfairly. Furthermore,
be sure to define Net Sales as narrow as possible, commonly it is defined as
“Gross invoices minus returns actually credited, freight, Allowances and Trade
Discounts.”
Another way to calculate royalties is by establishing a per-unit royalty,
where the licensee pays a set amount for each unit sold rather than a percentage
of sales. Generally I prefer this if
I know the costs and expected wholesale price since it is easier for accounting
and auditing, thus making it less likely for the licensee to make a mistake.
The downside to a per-unit royalty is if the product sells for a long
time, it becomes complicated to make inflationary adjustments.
Additionally, if the licensee sells a product line at various price
points, you might actually make less when compared to a percentage royalty rate.
To establish a “Suggested Royalty Rate” for your invention, utilize
the royalty calculator found on the resources CD.
There is also a unique tool that will allow you to monitor quarterly
royalties to insure accurate payments by the licensee.
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Article
# 2: “THE DIFFERENCE THAT MAKES THE DIFFERENCE,”
by Trevor Lambert of Invent Secrets
EXCERPT
FROM INVENT SECRETS
By: Trevor Lambert
President, Lambert & Lambert (www.lambertinvent.com)
Author, Invent Secrets (www.inventsecrets.com)
Copyright 2009
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Ask my employees and they will tell you that they have heard this
millions of times from me. Whenever
we have a meeting to consider representing a new product, I ask our staff who
have been researching the product, prior art and competition, “What is the
difference that makes the difference?”
Usually with any category or market segment there are companies with
products vying for the consumer’s attention, giving them the central reason to
purchase the product sitting on the shelf before them.
The “difference that makes the difference” goes to the very core of
the product and needs to be ascertained instantaneously.
It is the immediate impact of a product on a person where their eyes
light up and they say, “Ah ha!” That
“ah ha” moment is what you need to identify and what your marketing must
communicate clearly.
Perhaps your product will “clean in half the time” or “last 30%
longer” or “cost less than the leading brand.”
Whatever it may be, it must be identified and analyzed for effectiveness
in your market research. Once
established, this will be your beacon as you move forward in the rest of your
marketing and sales preparation.
(continued after the break)
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The “difference that makes the difference” will set you apart from
competing products and is especially crucial if the market segment that you are
working in is crowded. Often times
for a product to be successful it does not need to be a complete breakthrough,
it just needs that element of key innovation where the consumer will see great
value.
A great example of this is with one of our client’s inventions, a plow
system called POWERtach™. There
were numerous existing plow systems available to consumers, but our client
incorporated a new level of convenience, use of hydraulics and elegance of
design that made it stand out. The
difference that made the difference was that it could be attached and detached
in minutes, as opposed to the competition which took upwards of 400% longer.
In the end we were able to license the technology for the client and I am
pleased to report that it is now the plow system for the John Deere® Gator™,
which is the industry leader in utility vehicles (UTVs).
If your product does not have a difference that makes the difference, then
it is destined to simply be a me-too product.
Elements of key innovation signal a departure from your product to all of
the others and without it, licensing will be nearly impossible.
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This excerpt is from a book recently written by Trevor
Lambert, entitled Invent Secrets: How to Market and License Your Product
Ideas. To learn more or to order the comprehensive manual, which
includes sample agreements, proposals and much more, please visit www.inventsecrets.com
Trevor Lambert is also the President of Lambert & Lambert, Inc., one of the
leading licensing agencies involved in establishing royalty agreements on behalf
of inventors and product developers. To find out how you can have them represent
your invention, learn more on their website at www.lambertinvent.com
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