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

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

-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.]

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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.

The Tim Ferriss Show is one of the most popular podcasts in the world with more than one billion downloads. It has been selected for "Best of Apple Podcasts" three times, it is often the #1 interview podcast across all of Apple Podcasts, and it's been ranked #1 out of 400,000+ podcasts on many occasions. To listen to any of the past episodes for free, check out this page.