Know Your Product’s Real Value
Patent licensing can be very profitable. Put yourself in the driver’s seat and know how to evaluate your product’s value.
This week, we’ll take the final step in our journey, From Potential to Pitch and share how we calculated the value of a client’s patented idea.
If you are just joining us, we are following along as Albert explores how to make money from the motorcycle bra he designed to protect from bug splats and road dirt while looking good. He has two patents and wants to license them. So far, we have looked at researching a target market, sizing up sales potential, exploring regional opportunities, examining similar markets and targeting original equipment manufacturers and aftermarket distributors for license deals.
Millions for a Motorcycle Bra? Maybe So
This road trip is winding down and we are facing one of the biggest questions yet: How can Albert figure out a value for his potential licensing deals?
Let me walk you through the assumptions I made when I helped Albert map out this journey.
Warning! There are many ways to make a wrong turn along the income projection highway. My examples are very general and may not work for your project.
Here are the questions I asked and the answers we determined along the way:
- How many potential total units could be reached through OEM channels?
880,000 existing motorcycles
250,000 new sales
- How many potential total units could be reached through aftermarket channels?
420,000 existing motorcycles
125,000 new sales
- What market penetration is assumed?
Market penetration will not exceed that of auto bra buyers (29%)
- What rate of market growth should we assume?
A gradual ramp up from 5 percent to 29 percent over a period of nine years before leveling.
- What is an average retail price for the motorcycle bra?
- What cost structure will we use?
Cost of Goods = 62%
Operating (selling, general and administrative or SG&A) expenses = 15%
Net Profit = 23% (I based this structure on my research into Harley-Davidson, Inc. and XPEL Technologies Corp., using their Statements of Income and Operation as a guide.)
- What royalty is reasonable?
I project 5.75%, representing approximately a quarter of net profits.
The Grand Total
Still with me? I’ll spare you the rest of the calculations and assumptions, but rest assured the 20-column chart I handed Albert broke down estimated investments, market growth by year, present value rate for each year of the patent life, broker fees and more.
I projected total royalties to be paid over the remaining life of the patent at $12.3 million for the OEM approach or $9.6 million for the aftermarket route.
Using this basis, the value of Albert’s technology in today’s dollars is:
OEM: $5.5 million
Aftermarket: $4 million
These totals and the reasonable assumptions behind them put Albert in the driver’s seat when he made decisions about where to go next on his patent licensing journey.
Today’s lesson: Patent licensing can be profitable, but collecting knowledge and knowing how to evaluate it is essential.
Share your story
Have you identified the potential market for your invention? Are you sure about your assumptions? Leave comments below.
About the Author
Will Jacques is President of Emanus, a consulting firm that works with entrepreneurs, early-stage, and small-/medium-sized businesses.