Industries are not equal in terms of generating royalties for product ideas. “Where is the big money in licensing being made?” is a question I get asked all the time. I get it. You could end up spending quite a bit of time developing a new product for the market and licensing it, only to be disappointed by the size of your royalty checks.
The solution is simple. Before you spend too much time on any one of your ideas, do the math. You can get a sense of your potential passive income pretty easily. Make a list of potential licensees. Select one. How many stores carry their products? If stores sell less than one unit a week, your product will get kicked to the curb. Then estimate the wholesale price of your product, which your royalty will come off of.
Calculate what you would earn if your royalty was three percent. What about five percent? Seven?
If the company is selling in 10,000 stores, the wholesale price of your product is 10 dollars, and your royalty is five percent, you would earn 50 cents for every unit sold, resulting in $5,000 a week. That’s $260,000 a year selling half a million units. Not bad.
Here’s a breakdown of some popular industries to invent for and where the big money is.
I started out licensing my ideas for novelty gifts. Most novelty gifts are seasonal. As a result, the ideas I licensed for Valentine’s Day, Easter, Christmas, and graduations produced low royalty streams. Companies needed to fill their distribution channels with new products, but they only sold for about 60 days. I earned about $10,000 for ideas like these. That worked for me, because basically all I had done was show a very simple sketch. I’d spent very little time or money.
If you like to come up with silly and whimsical product ideas, focus your energy on events that are celebrated daily, like birthdays and anniversaries. I began coming up with my own novelty gift ideas because the inventor of the pet rock was from my hometown Los Gatos. I could not believe how well his product did!
This industry is always looking for new ideas. A rough sketch is basically all you need. Sometimes even a short paragraph is enough.
The same downsides apply to summer toys. The selling window is short! Your licensee might have wide distribution, but still. On the other hand, there are hit number one hit toys like Bunch o Balloons — licensed to ZURU — that produce a ton of revenue. In my opinion, it’s not easy to make big money licensing summer toy ideas. The competition is stiff.
Toy and Game
Who doesn’t want to relive their childhood and play with toys? It is extremely difficult to succeed at making big money toy licensing. So many people are chasing a number one hit toy. I experienced the mania firsthand when I worked at the startup that brought Teddy Ruxpin and Laser Tag to market. If you succeed at producing a hit toy, your royalties will be monumental.
I got lucky once. My toy idea could not have been simpler. I loved basketball and so I shot hoops in my office with an indoor Nerf set. The backboard was boring; it had just a small image of Michael Jordan. Why not shape the backboard itself into image of Michael Jordan? Three days after I contacted Ohio Art, they sent me a contract. I was extremely fortunate to earn royalties for 10 years. The Michael Jordan Wall-Ball was in every major retailer; there were even commercials on Saturday morning. If my memory serves me correctly, I made about $100,000 that first year. Not bad for a $10 prototype.
If you produce a number one hit toy or a toy that sells for many years (an evergreen) the royalties can be extremely large. For example, the inventor of the card game Phase 10 — Ken Johnson — has been earning royalties for decades. That’s the power of a trademark.
The toy industry is full of highly creative people. These companies have been working with outside product developers forever and see thousands of ideas every year. So, it’s tough. If you want to become successful, stick with it. Make relationships. Familiarize yourself with its history. That’s the key to inventing for the future.
Kitchen and Housewares
This industry is on fire! It has been for quite a few years now. Licensing agreements are common. Some are looking for the next gadget, which will have a lifespan of three to four years at best. Others, like OXO and Joseph Joseph, are committed to making small improvements to existing products. These have a lifespan closer to 10 years. That’s what I would stick to if I were inventing for this industry today. No gadgets, just popular products made better.
The pet and hardware industries are thriving and have also embraced open innovation. These are some of the easiest industries for licensing, because they’re looking for new ideas.
Prototypes are helpful and you will need a well-written provisional patent application to secure a deal.
Direct Response Television (DRTV)
Everyone is familiar with “As Seen On TV” products. Today these products are sold everywhere, including social media. This industry moves fast and is capable of selling large volumes. Some of the top companies offer very large minimum guarantees, meaning there’s a good chance your royalties are going to be correspondingly large. If you have a hit, wow!
This is a difficult industry to succeed in. There are only five major players, and they only need one or two big hits a year. They review thousands of ideas, test some, and move forward with just a few. Your likelihood of success is small.
You will need a prototype. Most of these companies do not care about intellectual property.
These are products people use every day. Usually only once before they’re thrown away. This is where the big money is.
In my experience, this is also one of the most difficult industries to invent for. Yes, the volumes are enormous. But think of the speed at which products like these are manufactured. If your innovation depends on new equipment, that requires a huge investment of capital. (More than one facility will be impacted no doubt.) All of which adds up to risk for potential licensees.
You will need a wall of intellectual property to secure your ownership over an idea like this.
One example that comes to mind is the Zip It, a tool for cleaning drains invented by my friend Gene Luoma. It’s a thin inexpensive piece of plastic that you can find in every major hardware store. Tens of millions have been sold. You might use it more than once, and it’s not as if this product is used every day, but every home in America has drains that need unclogging at one point.
Only one of my products sold hundreds of millions of units worldwide, and it was a rotating label called Spinformation. It appeared on many different types of products, including water, vitamins, spices, alcohol, etc. These products are used every day.
My royalty was five percent and based on the label’s cost. Not a large royalty. But, due to volume, it added up very quickly. A small account that ran one line generated about $250,000 in royalties, and this was just one category. Because there were so many different categories of products that featured labels, the royalties were very large.
That’s a double whammy. If you invent a product that offers a benefit across many different categories, sells worldwide, and involves consumables, the royalties can easily merit you millions. Spinformation barely scratched the surface of its potential. After all, billions of labels are consumed every day.
Don’t be surprised. It all comes down to distribution.