Many people don’t know that being an inventor can be a lucrative and rewarding career. It can even be a side hustle for those who don’t want to completely back away from their day jobs.
Many people shy away from monetizing their ideas because they get stressed thinking about the risk and the effort involved in developing their ideas. In reality, you don’t have to make it onto Time’s list of the year’s best inventions or create something that will change history forever.
A good product design can be as simple as something that you’re able to sell to other companies for profit. Doing so can give you financial freedom and transform your life. Through licensing agreements, it might even be easier than you think.
Freedom and flexibility
You may be surprised to know that developing your own product idea doesn’t have to be complicated if you stick with the licensing route.
Licensing is a way to develop a product while taking away much of the risk. It’s like renting your idea to a company that helps get your idea to market. They take over things like testing, manufacturing and distribution of the product. Once it’s on the market, you’ll receive payments through royalties on the company’s profits from the sales.
One of the drawbacks of licensing is that you lose control of the product. For some, that’s not necessarily a big deal. If taking less risk in order to sell your idea and earn some extra cash sounds appealing to you, then go for it!
Going the licensing route has an advantage in flexibility because you can develop your own schedule. Bringing an idea to reality can supplement your career income while you research and develop your idea on evenings and weekends.
For many, licensing a product idea to a company won’t be like winning the lottery. While there are some that can hit the jackpot, for most inventors, licensing an idea can mean an additional few thousand pounds to their annual salaries.
If you’re thinking about licensing your idea, you can reap some of the following benefits:
- Passive income. Once you’ve put the legwork of successfully selling your idea to a company, the future royalty payments through your licensing agreement are an exceptional form of passive income. Royalties can generate thousands in income on total autopilot for your future.
- Up-front payments. Sometimes up-front payments can be negotiated into the licensing contract. Sometimes these are deducted from future royalties but the availability of up-front cash is appealing to many. That liquidity might help you win your financial freedom to invest in a tuition fund for your kids or save for retirement. Keep in mind that upfront payments normally lower the royalty payments. If your idea is a huge success, you may be walking away from untold riches in future royalty payments.
- You can adapt your idea. If you find success with your licensed idea, you can often further adapt the concept to appeal to new markets. For example, if you created a software for business, you can later develop a new option that has consumer appeal. These adaptations can net you more revenue opportunities.
- Sub-licensing. Sub-licensing is when the company that develops the product re-licenses your idea to other countries around the world. You receive two forms of royalties in this case – those from direct product sales plus a cut of royalties from the companies in other countries.
What kind of financial freedom are we talking about?
Because so many elements are negotiable in licensing agreements, there is no one-size-fits-all baseline for the deal you can get.
Factors like the cost of the product, the number of units sold, the distribution channels and the contract period will all impact the bottom line of your final contract.
Royalty percentages for retail products can be anywhere from 2 percent to as high as 7 percent of the product’s wholesale cost. In other industries like technology or business-to-business, the royalties can be much higher, like 25 percent.
A percentage on the wholesale cost of the product might not sound like much but you have to consider that the licensor took on the major risk. Plus, if the product sells well, those small percentages can add up quickly to help with your financial freedom.
Professional inventors who license their consumer product ideas to retail companies like Ikea or Procter & Gamble can earn decent salaries through their royalty revenues. An annual range of £16,000 – £24,000 is considered good. Plus, full-time inventors and designers have multiple patents on the go at one time.
Crunching the numbers
Let’s look at an example to better understand the financial impact that selling your idea can have.
Daisy is a mechanical engineer and discovers a new solution that’s great for cleaning any spill. She sells her idea as an industrial cleaning solution.
- Daisy enters a contract with a retailer. She’ll make 6 percent of the wholesale cost in royalties.
- It’s a national chain with 40 stores. Let’s say the product does fairly well and each store sells 8 barrels of cleaning solution per week. That means that within the year, 16,640 units are sold.
- The product costs £90 in-store and the wholesale cost is £30, of which Daisy gets 6 percent. That gives her £1.80 per sale.
- For the first year, Daisy gets £29,952 in royalties.
Daisy is happy and while she can’t exactly quit her job as a mechanical engineer, that cash goes a long way toward paying for her student loans. With the new flexibility, she can afford some nice things for herself as a result of her initiative and hard work.
As you’d imagine, she’s even looking forward to her royalty payment next year.