I am often asked the question of forming a business around a product rather than licensing the product. I don’t have a crystal ball on new products, and very seldom see new products go to market the same way, so I will lay out some details of why I personally like the Entrepreneur option over Licensing.
There are two basic ways a product goes to market. One is through licensing. Think of professional sports. When we buy a t-shirt of our favorite sports team, a percentage of the proceeds of that shirt goes back to the team on the shirt. This is the same way a product works, but with products, the inventor will get on average 2%-10% of the manufacturing price. If you have a product that will retail for $20.00, then the average manufacturing price will be $4.00, of which the invetor would receive $0.02-$0.40 per unit sold. That is not very much on a $20 item, but inventors are paid on the manufacturing price, not the wholesale or retail price. The advantage of licensing is that typically the manufacturer will front the money for any tooling costs, advertising costs, etc…
As for being an entrepreneur, we will set up our clients up with a custom manufacturer who can build the product in volume. The client is responsible for all of the tooling costs, setting up their own advertising, etc… The differnce in price is that the inventor gets to keep the profits from the $20 retail price. And on the example above, works out to be $16 per unit that you will keep when becomming an entrepreneur.
Even on the high end of licensing, $0.40 per unit is not even close to the $16 per unit profit margin being the entrepreneur, but you do have up front costs for tooling and inventory.
Some products are best for licensing based on volume sold, but as the entrepreneurs, I will let you make the call. Personally, I’ll be an entrepreneur every day of the week.