“If you are looking for perfect safety, you will do well to sit on a fence and watch the birds….. “
The following material explains the practical aspects of developing, protecting, and most importantly, marketing a new product idea. It is directed primarily to the inventor and entrepreneur. Intellectual property information is based on U.S. Patent Law. Although information is readily available on patents and intellectual property rights, usually, an inventor or entrepreneur is on his own when it comes to marketing his intellectual property. Based on more than 20 years experience with new product development and startup operations, these pages provide an outline of how best to succeed at this most challenging and potentially fruitful endeavor.
At the outset I would like to challenge two opposing, but interrelated, myths. The first myth is the belief that if you invent a better mousetrap, the world will beat a path to your door. In truth, the world will hardly notice. What really counts is the time, effort, and resources that go into developing and marketing a product. The second myth is that one has to be tremendously lucky to beat the odds against success with a new invention. In reality, much depends on how well you know the field of your invention (the political, economic, and marketing factors), and then on the action you take to develop and promote it. A good product idea is important, but an average idea powered by well-targeted action is better than a great idea that stands alone.
Create Intellectual Property
If you are a private inventor with aspirations to license a manufacturer you must own your idea in order to license it. In other words, you must create some form of intellectual property (patent, copyright, trademark, etc.). With a startup operation, a patent will be considered an asset by investors and lenders. When intellectual property is included in the business plan, it will be easier to attract financing. For a company already in the widget manufacturing business, the decision on whether to proceed with a patent application will primarily be a business decision. The protection afforded by a patent may not be as important as the potential benefits of allocating the same resources to building and/or marketing the product itself. On the other hand, a small entity with limited marketing resources will benefit from the extra time in the marketplace, unchallenged, due to the exclusivity provided by patent protection.
What is Intellectual Property
Intellectual property is established by obtaining a copyright, trademark, or patent. A copyright protects literary, dramatic, musical, and artistic works. A trademark protects a word, name, symbol, or device used in trade to indicate the source or origin of the goods, and to distinguish them from the goods of others. In our business, we are concerned primarily with patents and the patentability of product features that result from our development services. Such patents then become the property of the client through assignment. (The person who actually makes the invention or creates the patentable design must be listed on the patent application as the inventor. If the inventor and the rightful owner are not the same, such as in the case of work done for hire, ownership would then be assigned to the correct party.)
There are two types of patents: a design patent and a utility patent. A design patent protects the ornamental design of a product, such as a unique design for the face of a clock or the particular styling of a product. Normally, minor changes can circumvent a design patent. The most valued and effective patent is the utility patent. Throughout the remainder of this document, the term “patent” will imply a utility patent. A utility patent protects any new and useful process, machine, manufacture, or composition of matter, or any new and usefulimprovements thereof. The term “useful” means that the invention must have a purpose and it must work. A patent cannot be obtained on an idea or a concept. The invention must be a real and workable item, composition, or process. The term “new” implies novelty. A patent cannot be obtained if:
- The invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the invention by the applicant for patent, or
- The invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country more than one year prior to the application for the patent in the U.S.
A patent attorney is the best source of patent information and the best judge of patentability. Typically, a patent attorney will provide a complementary consultation on the first visit.
The General Agreement on Tariffs and Trade
The recent General Agreement on Tariffs and Trade (GATT) has caused changes in U.S. Patent Law. Again, your patent attorney is the best source of detailed information, but significant changes already in effect are as follows:
Term: The term of a patent is now 20 years from the application date. Prior to GATT, it was 17 years from issuance.
- Provisional Patent Application: You can now file a Provisional Patent Application, which is essentially a patent application without claims. The advantages include lower initial cost and one extra year of protection (1 year on the provisional application, plus 20 years on the patent itself). The disadvantages are that it delays the issuance of the patent, total cost is greater, and it carries the risk of inadequate disclosure.
Cost of a Patent
Although it is possible to save money by preparing and filing your own patent application, it is best to use a patent attorney. A correctly prepared patent application with correctly defined claims will provide the strongest foundation for subsequent commercialization efforts. In addition, a new product may have patentable features that may not be obvious to the untrained eye. A patent attorney can identify patentable design attributes, and then correctly structure the claims to obtain the broadest possible protection. The costs of obtaining a patent (for a small entity) are as follows:
Cost When Using a Patent Attorney
- Professional Fees……….$3500
- Issue Fee……………………..$ 650
- Maintenance Fees………$ 445 in 3.5 years, $1025 in 7.5 years, and $1575 in 11.5 years (from issuance date)
- Professional Fees……….$1300
- Issue Fee……………………..$ 215
Cost When Applying Yourself
- Filing Fee………………….$375
- Issue Fee…………………..$650
- Maintenance Fees……….Same as above, due at 3.5, 7.5, and 11.5 years
- Filing Fee…………………..$155
- Issue Fee……………………$215
Prior to maintenance fees (introduced about 20 years ago), an inventor who filed his own patent applications could afford to have a number of active patents and take his time pursuing commercialization. Today, however, maintaining several active patents on uncommercialized inventions can be quite costly. In addition, the decreasing value of an uncommercialized patent (due to less time remaining on the patent), in combination with escalating maintenance fees, tends to discourage inventors from hanging on to older patents that may have little commercial value.
A number of potential pitfalls exist with patent law. A few of the primary areas of caution are as follows:
Co-Inventors and Co-Owners: When co-inventors are listed on a patent, each inventor has full rights to manufacture, sell, and license others, without regard to the other inventors. The same rights extend to co-owners of a patent, no matter how small the percentage of ownership. Consequently, it is best to make a separate agreement with co-owners/co-inventors outlining mutual obligations and restrictions.
- Assignment or Sale: When possible, avoid an assignment or outright sale of a patent, unless you are happy with the initial payment. When a patent is sold or assigned, it becomes the property and asset of the assignee. In the event of financial difficulties, the patent could be lost to a lender.
- Infringement: When the owner of a patent becomes aware of an infringement, the owner must notify the infringing party, or risk jeopardizing his patent rights. However, when a party is accused of infringement, the accused party has the right to bring legal action against the accuser and claim an invalid patent. The patent owner will then have to defend the action in federal court. Expect to spend at least $100,000 in legal expenses on such a defense. If an infringement does occur, a patent attorney can notify the infringing party in a way that will not provide grounds for this type of counter litigation (normally by subtle suggestion, rather than overt accusation).
Turning a Patent into Income
After obtaining a patent, an inventor faces the prospect of marketing the invention to a manufacturer. In order to develop an effective marketing strategy, one must first see the world from the customer’s perspective.
From the licensee’s perspective, the key factors that determine an idea’s success potential are its technical and economic feasibility, and its market potential. And regardless of a product’s technical and economic feasibility, success will ultimately depend on market factors. Unfortunately, when a new product does reach the marketplace, nine out of ten fail. In the event of a failure, development and marketing expenses become a total loss. To put the impact of such a failure in business terms, consider that a manufacturer must sell at least $10.00 worth of profitable goods for every $1.00 lost to an unsuccessful venture….. just to break even on the loss. As a result, a great deal of the effort that goes into evaluating a new product idea is oriented toward heading off a possible failure. Moreover, a substantial investment of time and resources is required to properly evaluate a new product idea and estimate its potential for success. So when a company executive declines a seemingly good product idea, what is probably being declined is the expense of properly evaluating the idea, and after having paid these expenses, the prospect of embarking on an expensive commercialization effort that has a 90 percent chance of failing.
Despite the foregoing, new products are essential if a manufacturer is to remain competitive, and successful new products translate into new markets, increased market share, and greater profits. The key is to avoid failure while pursuing success. In order to comfortably move ahead, a manufacturer must have accurate knowledge about the associated expenses, risks, and market factors. When soliciting a licensee, let the following guide your presentation:
- The most effective incentive is PROFIT.
- The biggest obstacle is FEAR.
- The most powerful antidote is KNOWLEDGE.
A well developed package of knowledge about the product and its market will provide the prospective licensee with essential information that he would otherwise have to develop.
Package the Product for the Buyer
The most common shortfall of efforts to solicit a licensee is the failure to develop a refined prototype and a well targeted presentation (package of knowledge). In a sense, one must package the new product idea for the prospective buyer. And from the inventor’s perspective, two buyers exist: The end user and the prospective licensee. Consequently, the most effective packaging will contain elements that are directed to each of them.
Your presentation package should include a manufacturing cost study, a market study, and a working prototype. Ideally, the prototype will be fully refined and production-ready. If the product is not ready for production, an outline of additional development tasks and expenses, as well as an estimation of the time required, should be included. The manufacturing study would include a review of production materials and processes, and an estimation of direct materials, components, and labor costs, along with economies of scale. The market study should include an overview of market trends, and a review of the various factors that will impact marketing strategy and expenses, as well as an estimation of potential sales. Sketches of display package design and advertising layouts might also be included. This will project the product visually and emotionally into the marketplace.
Depending on the magnitude of the information, each of the three categories (development, manufacturing, and marketing) may be formatted as individual reports, or they may be presented as chapters in a single report. The goal of the presentation package is to project the product into the marketplace according to your vision, and remove the unknowns for the prospective licensee. In addition to providing essential information and correctly framing your idea, a comprehensive presentation will also imply that the product has been professionally conceived and developed.
A Refined Prototype is an Essential Sales Tool
Unfortunately, most new product ideas are unnecessarily penalized because they have not been rendered in the correct technology. They have not been designed for production processes, and they have not been correctly packaged nor professionally styled. Manufacturers are rarely presented with anything resembling a production-ready new product. Consequently, an inventor with a well designed and well built prototype will be miles ahead when it comes to soliciting a licensee. Conversely, a poorly built prototype will psychologically project similar deficiencies into the product idea itself. The prospective licensee will then have to use his imagination to see the product in its finished (marketable) form.
In the final analysis, a professionally developed prototype represents a bundle of knowledge about the product, and it represents development expenses that the potential licensee does not have to pay.
Tips on Market Research
A market study can indicate attributes about the product that should be modified or emphasized. It can point out distribution avenues, strengths, and weaknesses, suggest advertising appeals, and indicate potential sales. This information is an essential part of the presentation. However, market research studies can be expensive. Even the most basic study will cost $2,500 to 3,500. If marketing information is expensive to obtain, the cost can rapidly escalate. Actual expenses depend the particular product and the scope of the information necessary to analyze market factors.
It may be possible to save money by doing some of the work yourself. But unless you have a marketing background, it is probably unwise to attempt to design the study, interpret data or survey results, or prepare the final document yourself. Another way to save on costs is to solicit the participation of a local university. Perhaps a market study can be done as a class project.
The Wal-Mart Innovation Network (WIN) provides new-product evaluations that may be useful in a market study. The WIN process begins with an evaluation conducted by the College of Business Administration at Southwest Missouri State University (SMU). The cost is $175.00. If the product receives a high enough rating, it is then sent to a Wal-Mart buyer for a more extensive evaluation of its market potential. Although a successful outcome would be significant, neither the initial evaluation by SMU, nor the Wal-Mart buyer evaluation would suffice as a market study by itself. For more information, write to: Wal-Mart Innovation Network, Southwest Missouri State University, Center for Business and Economic Development, 901 South National Avenue, Springfield, MO 65804. Their phone number is: (417) 836-5671.
One of the most powerful indicators of potential success is actual demonstrated success in a micro-marketing environment. If it is feasible to build a small run, offer the product for sale through an appropriate end user purchasing outlet. Price the product as though it were in production, even though each sale may result in a loss. The information obtained by test-marketing could dramatically document your product’s potential. However, if the product is unrefined, poorly packaged, or inappropriately priced, the exercise could backfire and indicate poor sales of an otherwise potentially successful product. Moreover, many products do not simply disappear off the shelves when they are offered for sale. Instead, sales are generated by the marketing effort, which undoubtedly will be lacking in a limited trial run. But if your product can stand the test of unsupported exposure, there is no better way to demonstrate its potential.
Distribution Related Marketing Considerations
The sales potential of a new product is not necessarily a function of end-user appeal. Distribution factors could be much more significant. In fact, an ordinary product with good distribution may experience excellent sales, whereas a superior product that is not well distributed would likely fade into oblivion. A popular adage in manufacturing circles is that one can sell almost anything, provided the price is right and the distribution is good. To complicate matters, a manufacturer often has to pay a large initial fee ($5,000 to $30,000) to a retail chain in order to get a new product into their stores. Shelf space is a premium commodity, and retailers are increasingly unwilling to absorb the expense of stocking a new product that may turn out to be a poor seller. Consequently, the market study must address distribution realities that are likely to impact marketing efforts. These factors could be even more important than the benefits and appeal of the product itself.
Assuming that the limited test-marketing exercise mentioned in the previous section were feasible, it may be possible to achieve more than valid sales data. A test-marketing effort could be parlayed into a purchasing commitment from a large chain. Depending on the product and the particular chain, many large retailers will test-market a new product (after it is in production) by placing it into a limited number of stores. If the product sells well, the retailer will then order an appropriate quantity for the remaining outlets. Consider the effect on a prospective licensee if you were to negotiate a test-market through a large retailer, and on the basis of the results, obtained a commitment to purchase the product for the entire chain. As a rule, retailers tend to avoid such early-stage involvements. But regardless of conventional wisdom about today’s impersonal business protocols, the vast majority of transactions are still based on personal relationships between individuals. Much depends on your ability to connect with a buyer on a human level and gain his support.
Avoid Building Weaknesses into the Presentation
A seemingly good presentation can backfire if any of its elements are poorly executed. For example, if you have invented a better widget and the potential licensee is in the widget manufacturing business, he will probably be an expert at manufacturing and marketing widgets. In other words, he will be an expert at evaluating the design of your widget and judging the validity of supportive information in your presentation. Poor design, inaccurate manufacturing cost estimations, or unsound market research methodology in support of unlikely sales projections will all be apparent to an experienced professional. Should the presentation contain any of these shortfalls, the prospective licensee will then have more on which to base a rejection – possible uncertainties about the product itself, as well as unsound technique and improbable conclusions. Unless you have the elements professionally developed, you may have to rely on a more abbreviated, and possibly less powerful presentation. If you are refining the product and preparing the presentation yourself, the key is to provide the most complete and fully developed package, within the limits of your expertise. Above all, it is essential to maintain credibility with the prospective licensee.
The Option of a Joint Effort
Today, companies are turning more and more to “partnering” to cooperatively pioneer new products and markets. While a large commitment may be outside the capabilities of most inventors, some form of partnering may be feasible. In fact, the foregoing suggestions for promoting an invention actually amount to a form of limited partnering, wherein the inventor assumes responsibility for part of the development effort.
Recently, a client/inventor was able to get his product into production through a similar, but more expansive arrangement. The inventor approached the manufacturer with an offer to underwrite the direct costs of developing the product to production-ready status, and pay for direct tooling costs. Because of the inventor’s commitment, the manufacturer agreed to put the product into production and market it internationally. The inventor retained U.S. distribution rights and received royalties on international sales. In this case, the license agreement was based as much on mutual business commitments as it was on the product itself.
Whether the foregoing are good terms depends on the value that each party places on their respective contributions and benefits. The point, however, is that business relationships can take many forms, and there are many roads to the same goal.
The foregoing outlines a very entrepreneurial role for the inventor. Undoubtedly, it is possible to secure a license agreement on the basis of a patent alone. But when an inventor does invest extra time, energy, and resources toward making his vision a reality, the prospects for success increase. By correctly packaging the product, obstacles are minimized and assets are enhanced. Assuming that the product idea is a good one, professional assistance will be the single most important factor in making it a success.
Information and Assistance Groups
- National Congress of Inventor Organizations (NCIO), 727 North 600 West Logan, Utah 84321 (801) 753-0888.
- Minnesota Inventors Congress, P.O. Box 71, Redwood Falls, Minnesota 56283-0071 (507) 637-2344.
- United Inventors Association of the United States of America (UIA-USA), P.O. Box 50305, St. Louis, Missouri 63105 (include a stamped, self-addressed envelope).
- CompuServe Ideas & Inventions Forum
- Inventors: This link leads to another website that offers weekly articles and net finds on a wide range of topics of interest to inventors (http://inventors.miningco.com).
- Invention News Groups: alt.inventors, misc.entrepreneurs, misc.int-property
- U.S. Patent and Trademark Office Website: Offers much info on intellectual property, as well as online patent searches. Click on the foregoing hyperlink, or go to: http://www.uspto.gov
- FreePatentsOnline.com: This site provides fast, easy-to-use access to millions of patents. FreePatentsOnline.com now provides free PDF downloads. Many sites charge $2 – $5 each to compile individual image files into a PDF and let you download it. This site does it it for free.
- “Patent It Yourself,” by Patent Attorney David Pressman, Nolo Press, 950 Parker Street, Berkeley, CA 94710. (This excellent soft cover book provides in-depth information on applying for a patent yourself, as well as information on how to commercialize your invention.)
- “General Information Concerning Patents,” by U.S. Department of Commerce. Purchase from: Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402. (This is a soft cover primer on patents, which also contains forms and applications.)
Other Documents at This Site
- Product Design and Development: The Generic Process for Developing New Products
- One Hundred Year After the Wright Brothers’ Conquest of the Air