So, you have an idea for a new product and you’re wondering what the difference between selling and licensing products is.
Should you start a business to manufacture and sell your idea yourself?
Or, should you license your idea to a company that is already in business and receive royalties instead?
There is a big difference between selling and licensing products. I learned firsthand because I’ve been successful at both!
Most people don’t know about product licensing, but they should, because not everyone with an idea wants to start, grow, and run a business. Maybe you don’t have enough time, money, or experience. Perhaps you already have a full-time job or an existing business. Maybe you simply have zero interest in starting a new business.
Don’t worry! You don’t have to start a business to launch a new product. There is an alternative, and it’s called product licensing.
I have licensed many ideas as well as started a business to sell my designs myself. In this article, I’m going to share the story of my business Hot Picks, and why it convinced me that product licensing is the better fit for entrepreneurs like me.
What Is Product Licensing?
The term product licensing involves taking your idea and licensing it to a company that is already in business and looking for new ideas. This company is responsible for handling everything from manufacturing and marketing to selling and distributing your product idea.
In exchange, the company pays you the royalty for each unit they sell.
For many creative people, product licensing is a perfect alternative to starting a business.
The Big Difference Between Selling And Licensing Products
The experience of starting a business to sell a new product idea was priceless. After licensing my product ideas for many years, a friend named Rob came to me with a request to design a new style of guitar pick.
Initially, I was a little surprised, wondering why guitar picks of all things?
Well, Rob was a musician who also owned two music stores, and had an entrepreneurial spirit. We knew someone locally who was selling guitar picks with an alien face printed on them and reportedly making around $500,000 a year from that design.
Undoubtedly, the design was clever and unique. I got a chance to meet the owner of the alien guitar pick business and observed his simple operation, with just one person packing up the picks for stores. Furthermore, the owner used to handle all sales. While I couldn’t confirm the exact figure of $500,000 he was generating, one thing was certain: He was achieving remarkable success. How hard could it be?
In reality, it was not easy! The whole process of selling my designs myself was much more difficult than I expected. Two other friends wanted to participate, so we each pitched $10,000 in to launched the business.
Soon, we discovered that $40,000 isn’t enough amount to get you very far. Especially when we were not making any money as our initial designs didn’t sell well.
I realized that I needed a fresh idea.
That’s when I visited Hot Topic and noticed that kids were interested in buying skulls. I was inspired to change the guitar pick’s shape into a skull, and named it the “grave picker”. Surprisingly, it became a huge hit. Changing the shape was quite easy for me because I wasn’t a musician and didn’t know any better. I simply got lucky.
But even with a popular product, you are required to sell a LOT of guitar picks to earn a profit. Costs kept adding up: trade shows, building inventory, some advertising attempts, and contacting music stores. It took continuous hard work.
I took another chance when I became a Disney licensee to expand our product line. Being a Disney licensee had significant benefits. Our products were soon available at Walmart, 7-Eleven, and countless other locations. We distributed our products worldwide. Fortunately, once again, luck seemed to be on our side.
The best part was, our industry was quite small and no one was copying our products since they required tooling which was expensive. We were flying under the radar. Luckily, online selling hadn’t fully taken off at that time which gave us a considerable benefit.
When I mention how challenging it was, I want to emphasize that we dedicated a minimum of 60 hours per week to our work, and despite our efforts, we were unable to generate a profit for some time. Marketing on MySpace was a timely opportunity that allowed us to promote our business without spending much money. Additionally, no one else was doing anything innovative with guitar picks. Our picks became popular not only with fans but also with musicians, giving us a large market to cater to.
Even with a low-cost product like a three-cent guitar pick, it consumed more effort and money than anyone could have thought. I still remember receiving the first purchase order from Walmart for $500,000. It was a nerve-racking experience. To fulfill that order, I needed approximately $250,000, and the deadline was just two weeks away. Despite the pressure, we managed to meet the deadline successfully. However, the stress was tremendous.
Soon, we had a warehouse and 30 people responsible for packing up guitar picks. It was at that point that I realized running a company wasn’t the right fit for me. I wanted to focus on being creative and avoid excessive financial risk. The business became all about managing the cash flow, filling large orders, and waiting to get paid. There was always the nagging worry of what would happen if the orders stopped and we were left with a massive inventory.
Although our products were a hit, we didn’t face any potential competitors or copycats and even became a Disney licensee, I didn’t feel like I had hit the jackpot. I recognized that what I truly enjoyed doing was designing. I ultimately sold the company and have never looked back.
This experience is a major reason why I feel product licensing is such a great alternative for entrepreneurs like me — entrepreneurs who don’t want to form a firm and manage employees, yet yearn to see our creations out in the world.
I went back to the product licensing business model because it allows me to focus on what I enjoy most: Developing distinctive designs, packaging, and goods that people desire.
If you have great ideas and no interest in operating a business, consider product licensing. It allows you to focus on what you love most — being creative.
Understanding the difference between selling and licensing products is crucial! It’s all about how you want to spend your time and what your priorities are.
