If you want to commercialize an idea, the traditional way has been to start a business. Starting a business to turn an idea into a product requires writing a business plan, manufacturing, marketing, fulfillment, and hiring people.
But there is an alternative. It’s called product licensing.
In simple terms, product licensing is what happens when you, a creative person, more or less rents your idea to a company that’s already in business. This company has shelf space, manufacturing, marketing, and distribution in place, and needs a new idea to be competitive.
This company is responsible for all of the heavy lifting of commercializing your idea! They’re taking on all of the responsibility, including the financial responsibility.
For many creative people, starting a business is a barrier to bringing their ideas to market. Making a new business successful requires time, money, and expertise. Many creative people who would like to see their ideas come to market don’t want to take on so much financial risk or quit their day job.
For many creative people who have lots of ideas, starting a business to commercialize each one doesn’t seem remotely possible, or even like a good idea.
Truth be told, most ideas should not become businesses.
Product licensing is not a new business model — it’s been around for over 200 years.
It’s been very popular in the toy industry for over 70 years. Now, because of open innovation — the term for companies looking outside their own walls for new ideas — product licensing is becoming more and more popular in all different industries.
More and more companies are looking at outside ideas and partnering with outside collaborators because this is a faster and more effective way of developing innovative products.
Product licensing allows companies to find a great idea from anywhere. It also lowers their research and development costs. They only pay you when they license an idea from you and commercialize it.
Product licensing is a wonderful business model for companies that do not have an R&D department and would like to lower their R&D department costs while increasing their chances of finding a hit.
If you are a creative person with ideas that you want to license, it’s very important that you identify and work with companies that have a history of working with outside inventors. In other words, companies that see the value in open innovation!
In these industries, open innovation is exploding: Toy, pet, hardware, kitchen, automotive, accessories, fitness, medical, novelty, gifts, sports, packaging, and games.
Not every country has embraced open innovation. However, it is growing rapidly globally.
What Does Licensing Mean In Business?
Licensing is a business arrangement that allows for the transfer of rights to manufacture, distribute, sell, or otherwise use a form of intellectual property — such as a product, brand, or technology — from an owner to a user. It has existed for a long time in many forms. A licensing agreement, which is signed by both parties, lays out the terms of the relationship.
For example, if you are creating intellectual property, you can generate revenue by licensing it out for others to use.
Industries where licensing agreements for patents are commonly implemented include software, biotechnology, semiconductor, clean tech, healthcare, manufacturing, aerospace, and transportation, writes Caldwell Intellectual Property Law attorney Katherine Rubino.
Consumer-facing industries — including toy, pet, kitchen, and hardware — are also popular for licensing ideas.
What Is An Example Of Product Licensing?
There are many examples of product licensing. Many of your favorite products may have been licensed from independent inventors or small businesses. You just didn’t realize it. This is especially true in the toy industry.
For example, the best-selling water toy of all time, the Super Soaker, was invented by aerospace engineer Lonnie Johnson and later licensed to Hasbro.
Hasbro estimates that 50 to 60 percent of its portfolio started as an idea from the outside! The company highly values its relationships with inventors.
Is Product Licensing New?
No, not at all!
“Licensing has long been an essential feature of the uniquely American patent system, which secured property rights in innovation to both inventors and to the marketplace actors who commercialized the innovation,” writes George Mason University law professor Adam Mossoff in an article about the history of licensing.
The Difference Between Product Licensing And Brand Licensing
Licensing is a tool that all entrepreneurs need to know about, because it is a way of getting paid for your creativity. You can license a brand as well as an idea. You can license both at the same time.
For example, when the entrepreneur Nancy Whiteman wanted to scale her marijuana edibles brand Wana into other states, she had to decide how.
“Whiteman had a choice,” writes Forbes. “Build a kitchen in every state she wanted to expand into or license her recipes, formulations and branding to partners in other states. She went with licensing.”
It paid off: As the legal market for cannabis has expanded, her edibles company has gone from experimental baked goods in a shared kitchen to a powerhouse worth $350 million as of 2021.
Licensing made all the difference.
The Difference Between Product Licensing And Selling A Product
When you begin selling your new product yourself, you take on all of the responsibility for its success. When you enter into a product licensing agreement, you rely on your partner — your licensee — to focus on what they’re good at. Typically, that means manufacturing, marketing, and distribution — all of the hard work.
The people with the best new ideas aren’t necessarily very good at the business of bringing new ideas to the market, and the licensing business model embraces this.
In the academic setting, licensing professionals are referred to as tech transfer professionals. Licensing is a popular way for ideas generated at universities to make it out into the world.
Where To Learn About Product Licensing
inventRight is the leading resource on the product licensing process. If you are serious about learning how to license your ideas for new products, consider becoming an inventRight member.
Licensing is not very well-understood in part because we don’t learn about it in school. That is beginning to teach. Leading invention educators like Rachna Nath understand that student innovators want to do more than learn how to build prototype and file patent applications. They need and want to be empowered with a simple process they can rely on to help them become entrepreneurs.
Anyone can learn how to license their ideas for new products.
