How to Rent Your Ideas to Fortune 500 Companies: Part II (Plus: Hacking Japan Tips)

280 Comments


This bear scared me when I was little, but it made $1,000,000 per month in royalties for the inventor. Stephen worked on it.

This is a continuation of my previous Q&A with Stephen Key, who has licensed to companies ranging from Coca-Cola and Disney to Nestle. He was also involved with the design of both Teddy Ruxpin and Lazer Tag. This second and final part will cover royalty rates, negotiation, and how he calls into companies to sell his concepts (including actual call scripts).

Before we get started, here are a few other resources that I have in my licensing and product design library, which really focuses on deal making and arranging revenue splits:

Inventing Small Products (Stanley Mason, like Stephen, is a specialist at tweaking/combining existing products as a lucrative shortcut to successful deals)
Secrets from an Inventor’s Notebook (Maurice Kanbar, creator of Skyy Vodka, among many others)
How to License Your Million-Dollar Idea
The Inventor’s Bible: How to Market and License Your Brilliant Ideas (stick to the licensing recommendations)

Now, back to Stephen and his approach:

-How much money does it take to license your idea? How much time does it take?

In review, I spend $100 on a provisional patent application so I can legitimately claim “patent pending” status for a full year, $80 or less on a sell sheet that I have created by a graphic design college student. My third cost is the cost of making phone calls to manufacturers. So for many simple products your total costs are $200 to see if your idea has legs. Of course there are always exceptions. Some products will cost more, but you’d be surprised at how little you can spend to be “pitch ready.”

Sample Sell Sheet
mukkk1.jpg

-What is a typical royalty rate?

Royalty rates can range from .0001% to 25%. Royalties are usually based on the wholesale price. This is the price the manufacturer sells to the retailers for, or that they sell to a distributor for.

A very general rough way of figuring out the wholesale price of an item is to just cut the retail price in half. This doesn’t work for all industries or product categories, but it’s a nice way to get a rough estimate of what your royalty might be for your idea.

If you think your product is going to sell for $10 at a retail store. You half that, to get a wholesale price $5. Your royalty would be on this $5 wholesale price.

So why would you ever want a .0001% royalty rate? Well if your invention went of every bottle of Coca-Cola that sold worldwide. That might not be a bad royalty rate. Or if you had a software product that only aardvark researchers bought, 25% might be very fair, since the manufacturer isn’t going to sell many units.

In my experience a 5% royalty is most common for consumer goods. I usually ask for 7% and settle on 5%.

I’ve licensed many novelty products that have sold in stores for one or two years and then never sold again. That can be fun, and I wouldn’t discourage people from licensing novelties, but that’s not where I made my millions. I’ve made serious money by selling ideas that I knew could sell 100,000’s or millions of unit every year.

My advice is to pick a product area that does high unit volume. This way that 5% of the wholesale price on every unit can really add up.

To further illustrate my point, I’ll tell you a little story. I had a student that had already filed a patent when he came to us. My approach, as you know, is to use provisional patents that only cost $100, so you don’t need to spend a bunch of money in advance of selling the idea.

It was to late for this particular student. He’d already spent about $6,000 on a patent. His invention was a drum key that made tightening the thumbscrews on a drum easy, so drummers don’t have to hurt their thumbs to get their drums tuned up.

Drummers loved it. He took our inventRight course and licensed his idea to a musical instruments manufacturer. The manufacturer was already selling another drum key and gave him an idea of how many of his drum keys they thought they would sell each year.

So he did the numbers, then realized that it would take a year just to earn back in royalties what he had spent on the patent. It was a low volume product. The lesson – pick high volume products and you’ll make much, much more money.

Six thousand a year in royalties just isn’t worth the time for me. It takes almost the same amount of energy to license a small idea as it does a big one, so why not go for the big one?

In my prior life, I worked as a product designer at Worlds Of Wonder (a now defunct toy company). I watched the inventor of Teddy Ruxpin, the talking teddy bear popular back in the late 80’s, make $1,000,000 in royalties a month!

I know that’s a long winded response to your questions about what a typical royalty rate is, but I wanted to give your readers some solid advice and examples that they can take and use when licensing their ideas.

-What should people consider when working on their first idea?

Most inventions are just slight variations of existing ideas. I’ve found it easier to sell ideas that aren’t too radically different. The easier it is for people to understand the idea, the better.

I prefer simple ideas, but I’ve worked on a few tough ones also. My Michael Jordan wall ball was super simple [a basketball hoop attached to a cut out of Michael Jordan, all of which was attached to a door]. I licensed the idea almost overnight and received royalties for ten years. It was a great product for me to start off with because it was so simple, required very little research and the manufacturing was easy. My spin label invention is much more complicated and after many years and millions of labels, I’m still working on getting it to where I want it to be.

My best advice is to make your first idea a simple one, so you can go through the whole process of selling an idea. Then work on the harder ones after you’ve gotten a little experience under your belt.

-Who do you call at companies when you try to license a new idea?

Sales guys are great, but my first choice is the marketing manager of a product line at the company that would easily understand your invention. Avoid purchasing. [Note from Tim: Find the manufacturers’ names by browsing the relevant categories in a department store, or online at a place like Amazon.]

For example, if you have a new comfortable grip hammer innovation, call and ask for the “marketing manager of the easy comfort grip hammer line” at Stanley. Use the product line name when you call. It’ll sound like you know exactly whom you are calling for. I think you get the idea. This is just one of many tricks I use to get into the decision makers at companies. If this doesn’t work, there are many other tricks you can use to get your idea in front of a decision maker.

[NOTE: For real scripts that Stephen has used in calling into companies, click here to download a PDF]

-What kinds of products can someone license?

You can license almost anything. You just need a new product benefit and some IP (Patent, Copyright or Trademark). In some industries like the toy industry, you don’t even need any IP.

However, I wouldn’t recommend licensing toys. It’s too competitive. You might have to show 200 ideas before you get interest in even one. I don’t like those numbers.

I prefer to sell ideas to industries that don’t see so many new ideas each year. I’m talking about industries that don’t currently have many innovative new products. The packaging industry is one of these industries.

I licensed my spin label invention to a packaging company. They thought I was a genius. I’m not a genius. I’m just more creative than they are, and they don’t see many new ideas.

I guess my little secret tip for you to contemplate is to consider coming up with new ideas in industries that may be a little stale. You won’t have much competition and they’ll think you are brilliant. [Note from Tim: a good method for examining industries is to browse categories or departments in a store like Wal-Mart and look for products that haven’t changed in a long time, or those where most products are nearly identical. Can you reinvigorate a commodity with a small tweak?]

-Do you have any words of advice regarding negotiating for those new to licensing ideas?

The ability to hold back information and dole it out in small intriguing bits and pieces is a critical part of my approach. It works almost every time. And more importantly, it keeps the dialog going. Once the dialog stops, the deal slows down and fizzles out.

If you keep the dialog going with a manufacturer, you’re more likely to close the deal. So don’t give them all the information up front. The manufacturer has no reason to call you back if you give them everything up front.

This is one of the biggest mistakes I see inventors make. They give up to much to soon and don’t know how to keep a dialog going with a manufacturer. [Tim’s note: Don’t oversell. This is as true for PR as it is for licensing — the goal isn’t to sell in one call, it’s to get a second conversation or spark questions that lead towards a deal.]

###

Odds and Ends: Hacking Japan and Living Like a Rockstar in Tokyo

A number of you have asked me to do a “How to Live Like a Rockstar in Tokyo” post like the how-to article I wrote for living large on little in Buenos Aires. Now you can get some of my top picks and tricks for Tokyo. I have a series of sidebars called “Tokyo Tips” in the debut issue of Everywhere magazine, which is out now. It’s a gorgeous magazine and one of the best I’ve seen in the travel genre. It should be available starting today in most bookstores.

Posted on: November 27, 2007.

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280 comments on “How to Rent Your Ideas to Fortune 500 Companies: Part II (Plus: Hacking Japan Tips)

  1. Another thought/question…how does licensing an idea to a co. relate to just contacting their customer support and offering a suggestion? Granted, my mindset is more in terms of software or maybe even technology hardware. But if something doesn’t do what I want it to, I think I’d be more apt to contact the company and offer the suggestion rather than patent the idea and sell it to them.

    Maybe I’m just not cutthroat enough. I’m still very much intrigued all the same, and will be putting my thinking cap on soon to see what I come up with.

    Like

  2. Pete Wrote. . .

    “Another thought/question…how does licensing an idea to a co. relate to just contacting their customer support and offering a suggestion? Granted, my mindset is more in terms of software or maybe even technology hardware. But if something doesn’t do what I want it to, I think I’d be more apt to contact the company and offer the suggestion rather than patent the idea and sell it to them.

    Maybe I’m just not cutthroat enough. I’m still very much intrigued all the same, and will be putting my thinking cap on soon to see what I come up with.”

    REPLY FROM STEPHEN KEY

    Hello Pete,

    If you really like a company and it’s products, i could see calling in and suggesting a new feature for a product. But will anyone ever even look at your idea? Probably not.

    Submitting ideas through formal channels on a companies web site or over the phone to customer service will most likley go into a black hole. I’m speaking from my experience and the feedback I get from my student.

    Doing what I suggest in this blog post and getting in the back door with the right marketing manager or sales guy will be 1,000 times more effective.

    If you put the time in to contact the company, you deserve to get paid in my opinion. I teach my students how to set up the deal so you make sure you get paid for your new product ideas.

    It can be done with very little money invested in a provisional patent application, a sell sheet and the cost of your phone calls.

    Kindest Regards,
    Stephen Key
    inventRight.com

    Like

    • More than a year ago I was live on the air purchasing a new Keurig mini brewer. I asked them when they were going to make “soups”. The representative looked kind of puzzled by the suggestion; the program host shared how I perhaps should receive royalties over that. Well fast forward . . . . in 2014 they will be selling soup in collaboration with Campbells!!!! This was my suggestion so how do I get any royalties? They can’t deny it wasn’t me–it was viewed live on TV by millions of people!

      Like

  3. Thanks for the great interview. Before trying to rent your idea, is it advisable to first set up an LLC/corp to protect yourself? What happens if you somehow end up licensing an idea for a product that then (directly or indirectly) results in an injury or harm at a later time? Could you potentially be liable for that? Sorry if this is a dumb question and thanks in advance!

    Like

  4. Hey Pete… when you make your suggestion to customer service it goes on a slip of paper that nobody reads.

    when you make it to the right person, combined with your teaser sales pitch, you may see your improvement actually happen

    …and get paid!

    I think you’ve made a great point, it could be the very same idea, but it must be presented right and go to the right person. Nothing cutthroat about that.

    ~V

    Like

  5. Hey Tim, I’m negotiating to become a distributor of the Invent-Right program, so don’t worry about the FERRISS50 coupon code…

    I will offer my own discount to the loyal fans of 4HWW!

    I spoke with Andrew Krauss, the co-founder of Invent-Right and was amazed to find out that their $400 DVD program actually comes with 1 year of follow up support, where you can call in and Andrew or Stephen themselves will answer your question.

    This really is the ultimate 4HWW plan for inventors and idea guys.

    ~V

    Like

  6. So you go to a company with this idea that you put in a PPA. What would cause them to wait a year for the PPA to expire and then produce your idea cutting you out?

    What about overseas protection?

    Like

  7. Scott G. F. Wrote. . .

    So you go to a company with this idea that you put in a PPA. What would cause them to wait a year for the PPA to expire and then produce your idea cutting you out?

    What about overseas protection?

    REPLY BY STEPHEN KEY

    Hello Scott,

    I get this question often. You don’t call just one company, you call five or eight or maybe even 10 or more companies.

    A year is plenty of time to see if an idea has legs if you start making calls the second you file your provisional. So don’t sit around feeling all warm and fuzzy that you can say patent pending. Start making calls ASAP after you’ve filled your PPA.

    Here’s a little trick. Subtly let the companies know that you have filled additional provisionals. They won’t know what is in them and they just might think you’ve made even more improvements.

    I won’t get into overseas protection in this comment. There are so many things to cover there. Maybe Tim can interview me about International patents for a future blog post.

    BTW- I’ve just started blogging on the mega business site http://www.AllBusiness.com . You can check out my new blog by visiting http://www.allbusiness.com/4969065.html

    Kindest Regards,
    Stephen Key
    inventRight.com

    Like

  8. Scott:

    I would assume, since you would then be shopping the idea to their competitors, they would not be able to wait you out if the idea has merit (i.e. a competitor could buy the idea and help you get the patent to cut out the company trying to wait your PPA out). I have no experience in the area, but that’s my guess.

    Jim

    Like

  9. Great Question Scott,

    I have the same question. This is really something new to hit my brain. Almost an alternative to owning a company. I like this article and really want to thank Tim for his contribution to making society a more fun and enjoyable place to experience. He is by far one of the newest humanitarians. I would even go as far to say he is the next Bono. Look forward to the responses.

    Best

    Jose Castro

    Like

  10. Tim – thanks for yesterday’s reply! I imagine your gym woulda been pretty bad ass! I think licensing my gym might be sorta as mentioned here, not enough profit, although I’ve seen a few guys do it, I don’t think they’re putting their kids through college on it.

    talk soon bruddah,

    lata!

    –z–

    Like

  11. We tried to promote a popular product (already developed and patented) in the US to the market in the UK. Although everyone found the product fascinating, innovative and useful. The hierarchy of approval was too lengthy! At times we would bounce emails and calls to whom would sound like the right person and then you get reshuffled to someone else. Now this may not be the case if the maximum exertion to develop and produce a product/item/implement solution is on the shoulders of the actual company pitched.

    Like

  12. The cold calling seems too simple :P

    But saying that I did actually come up with a brilliant idea to prevent Credit Card fraud and called it the CreditCard Firewall. I did get response from the right people but was looking at the angle of development throughout. Come to think of it, on several occasions I did this; it maybe time to pitch as an idea instead of as a product ?? So are you available for email or telephone discussion for a brief chat Steven? I think I missed the tele-seminar or we do not cross times as I am in the UK

    Like

  13. Stephen,
    Thank you for the time you took to reply to my query. I already hold one patent 7080668 and have 5 others in the cue but it’s for the Co. I work for and I don’t realize the benefit.

    I do have ideas that do not apply to what I am working on and will try and use what you have suggested to see if I can do this.

    Thanks again.

    Like

  14. Hello
    I’m the founder of an online shop, and a reader of your book.
    I always have hundreds of ideas to invent and build stuff and it could be an option for me to patent/license those inventions. But I’m not sure if in France (where I am) it’s enough to show a sale sheet to patent an invention.
    Also if I have someone interested they’d like to see a prototype, how will you make it?

    Like

    • Hi Andrew &Stephen,
      Thank you for all the help you’ve shared to inventors & product developers.For a while I felt so lost when I started my invention ,I did a lot of research but looking back I wish I could have been one of your student then my stress could have not been so overwhelming to me. Reading through your advices, I think I did not do bad. I have a utility patent pending on a medical device ( Class 1) I listed it with FDA , sampled them to hospitals , sold quite a few but since marketing seemed to be a struggle in the process . ,I have decided to submit it for licensing with positive response from a medical company . The IP market is vast ( US/WW ) . I wonder during the negotiation process if the licensee determines the figure first , I mean . The upfront & royalty. Kindly advice me in this aspect. Thank you . Best Regards.

      Like

  15. # RM Says:
    November 27th, 2007 at 1:11 pm

    Thanks for the great interview. Before trying to rent your idea, is it advisable to first set up an LLC/corp to protect yourself? What happens if you somehow end up licensing an idea for a product that then (directly or indirectly) results in an injury or harm at a later time? Could you potentially be liable for that? Sorry if this is a dumb question and thanks in advance!

    ——————–

    I’m actually interested in this as well. Anyone have any comments regarding the above?

    Tim & Stephen, great job. I’d love to see this series continue. Thanks!

    Like

  16. Hey Tim,

    It seems that patent research is an elusive aspect of the inventing process that is also key to being successful with inventions. I don’t know how much experience you’ve had in this department, but you usually seem to have some website or trick up your sleeve – any tips regarding patents and patent research for newcomers to the licensing / inventing industry?

    Thanks!
    Phil

    Like

  17. Azzam wrote. . .
    The cold calling seems too simple :P

    But saying that I did actually come up with a brilliant idea to prevent Credit Card fraud and called it the CreditCard Firewall. I did get response from the right people but was looking at the angle of development throughout. Come to think of it, on several occasions I did this; it maybe time to pitch as an idea instead of as a product ?? So are you available for email or telephone discussion for a brief chat Steven? I think I missed the tele-seminar or we do not cross times as I am in the UK

    STEPHEN KEY’S REPLY

    Yes, Azzam. I’m very reachable.

    Feel free to call me at 1-800-701-7993.

    Kindest Regards,
    Stephen Key
    http://www.inventRight.com

    Like