Product Licensing vs. Manufacturing – Which Option is Best?

Product Licensing

Whether you are the inventor of a new and groundbreaking product or run a startup that has access to emerging innovations, profit is always a concern.  Getting a prototype produced and an idea of proper market placement is important.  Yet, the biggest decision regarding new products is whether to opt for licensing or manufacturing.  Here are some key ideas to consider as you travel down this path.

Product Licensing

When you license your product, you allow a 3rd party company or individual to sell and manufacture it.  The rights to do this could be traded for continuous royalty payments or a single payment (lump sum).  It is a misconception that product licensing royalties are a windfall, as the average royalty percentage is 3% of the wholesale price (not retail price) of the product.

The Pros and Cons of Licensing

Several product licensing Pros are:

  • Products are brought to market with little to no capital investment on your end.
  • The risk is lower as the licensee is assumed to know the market and the industry.
  • Royalty payments can begin immediately if you negotiate an upfront payment.
  • Royalty payments can continue for many years, depending on the success of the product.

Several product licensing Cons are:

You risk losing control of your product (packaging, pricing, marketing, distribution).

  • Depending on the agreement, the licensee may choose not to produce your product at all.
  • Royalty payments may not be delivered to you for a variety of reasons.

Product Manufacturing

When you develop and manufacture the product on your own, you have made the choice to shoulder the responsibility for facilitating and managing the entire process, either domestically or overseas.  You will need to hire a manufacturer to produce the product, budget costs, and have a plan for distribution.

The Pros and Cons of Manufacturing

Some of the Pros of manufacturing are:

  • The most obvious benefit of manufacturing is that the inventor or startup maintains complete control of both the product and the process.
  • Profits in this method could have greater potential depending on how well costs are controlled. The owners are able to keep all of the profits long-term with a manufacturing arrangement.

Some of the Cons of manufacturing are:

After you’ve weighed your options and made your choice, it’s important to understand that neither is a guarantee of success.  Depending on your particular strengths, interests, and even personal circumstances, however, one or the other may be the better option for your business and the potential profitability of your product.  In the end, the decision and best pathway to victory is equal parts personal preference and an objective weighing of the pros and cons of each method for your particular project.

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