Selling an Invention on Commission

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Selling an Invention on Commission

{Don Debelak’s new book, Turning Your Invention into Cash is now available on Amazon for $3.49. Go to Amazon.com and enter inventions Don Debelak to purchase. From the author of Entrepreneur Magazine’s Bringing Your Product to Market.}

Overview

Inventors often have great ideas – but often they don’t have the money to introduce their idea effectively. The traditional way of addressing this problem is to try and find a company to license the idea. Licensing has its own set of problems, the primary one being that most companies are very reluctant to license an idea.  One way around this problem is to sell your invention on commission.

This tactic requires inventors to change their strategy from having a new product to one of having a new business opportunity. You are offering a company a chance to work with the person who knows the product best and who is willing to sell the product on commission versus a salary.  Companies will be interested if the product fits into their manufacturing capabilities and if they feel the inventor is well connected to the target market and will be able to generate sales.

This approach can work with companies that are manufacturers or distributors.  The benefits to the inventor are that one he or she is selling the product with the benefit of the backing of an established company. Two a 5 to 10% commission is better than a 3 to 5% royalty, and three the inventor is still involved with the product and has input into virtually all the decisions made for the product.

Perfect Products

This tactic works best when a manufacturer only has to make minimal changes to its manufacturing process to produce the product.  To arrange a selling-on-commission deal, the product itself, its benefits and how significant those benefits are to consumers aren’t nearly as significant as the manufacturing costs in making it. In addition it helps if the target market has a small distribution network. The manufacturer will be more likely to believe you can achieve sales success if only a few companies control product distribution and you have established a relationship with those companies.

Your Goals

  1. Quick market entry. Underfinanced inventors can struggle two or three years to get their product on the market.  Having the product financed by an established company gets the product out quickly.
  2. Get established in the market. You want to develop market connections if you plan on introducing a series of products.
  3. Faster income. You start collecting commissions as soon as you sell products and the customer pays. On your own you’d have to pay back start-up and cash flow loans before you start collecting income.
  4. Introduce a product with limited patent protection. Many product ideas can’t get significant patent protection due to prior art. This is a big drawback for licensing. But it doesn’t hinder you if you are selling on commission. Start with a low cost provisional patent even if a patent search details significant prior art. It helps prevent the manufacturer or distributor from stealing your idea.  See patentsbydondebelak.com for a low cost provisional patent.

Prototypes

The key to lining up a selling-on-commission agreement is to know who the key players in the market are and, preferably to have their support for your product idea before you approach a manufacturer. That’s the best way to show your product might sell. But manufactures will often want those contacts to approve a prototype before investing in tooling.  Sometimes the manufacturer will make the prototype especially if the costs are low.  Otherwise you need to make at a model for market research, though a “looks like acts like” prototype is best.  See http://onestopinventionshop.net/services/product-design-and-prototyping/

Pros and Cons

Pros

  1. Requires very little investment by the inventor
  2. Can be the quickest route to full market penetration
  3. Provides instant credibility to customers
  4. Produces reasonably quick income
  5. Stablishes the inventor in the marketplace with key buyers
  6. The inventor continues to have input into his or her product’s success

Cons

  1. Inventors don’t always have control of their product
  2. The tactic doesn’t establish the inventor’s company or brand
  3. Requires sales and marketing enthusiasm and expertise
  4. Works best with products with large customers or a narrow distribution channel

What to Expect

  1. The manufacturer will expect quick results from you. Be sure to line up customers first before approaching the manufacturer to sell on commission
  2. The manufacturer won’t automatically print brochures, attend trade shows or pay for a marketing program. Be sure to propose a marketing program and get the manufactures approval before agreeing to sell on commission.
  3. You will only get paid commission after customer’s pay for the products they buy.
  4. The manufacturer might offer you a standard sales representative agreement, which pays commission only on products you sell.  Insist on a commission on all the sales of your product, including an override (or commission payment) of several percent on any of your products sold by other company salespeople or independent sales representatives.
  5. The manufacturer will want to produce the product as cheaply as possible.  Make sure the manufacturer doesn’t compromise the product’s features.
  6. The manufacturer will not want to make immediate changes in the product after it starts production. Be sure to show a model or prototype to potential customers and get their approval before the manufacturer finalizes tooling and the manufacturing process.

Keys to Success

  1. You Need to Own the Market. The manufacturer or distributor who hires who lures you in commission is really buying your ability to sell the product.  If you aren’t experience try to find someone with experience who will partner with you. You will improve your chances to land a deal with each additional person you know who is either in the distribution channel or a major customer.  Other tactics you can use to generate support are call reports, which you write after you interview key buyers, letters of endorsement from those same buyers, and provisional orders.
  2. Produce Results. The manufacturer or distributor will be watching your sales results to be sure you can back up your potential sales claims before investing significant amounts of money.  You should have one or two customers presold before approaching a manufacturer.
  3. Think Big.  One of the reasons you go with a manufacturer or distributor is that you want to use their size to build credibility.  Take advantage of that. Have your business card share the company’s name, always mention the company’s name when you call, and be sure to have first class brochures, marketing materials and trade show booth.

Momentum Makers

  1. The Monster Account.  Nothing succeeds like having a account to land a selling-on-commission deal.  In the post “Success story on Selling an Invention on Commission” which was included in the mailing,  http://onestopinventionshop.net/blog/2015/12/how-inventors-can-sell-promotional-products/  Cindy Jones had strong interest in Antenna Buddies from both Taco Bell and Radio Shack (prior to Radio Shack’s decline).  Both of those firms could order million of the product and the lure of big orders landed Jones three offers
  2. Orders First, Production Second.  You want the credibility of the manufacturer and the manufacturer wants the extra business. But the manufacturer doesn’t want to spend a ton of money before knowing whether or not the product will sell.  One solution to this concern is to allow the manufacturer allow you to represent it while obtaining initial orders. This is a win-win situation for everyone.

Before You Start

  1. Identify the Market.  Your job is to identify customer groups who will buy your product, the distribution channels you will use, and the key players in the distribution channel. You also need to understand the industry’s price structure, which includes discounts to distributors and retailers, packaging required, key buying periods and important trade shows.  The best way to find this out is by reading trade magazines, and attending trade shows.  You can find out the magazines and trade shows with Internet searches.  Try to read at east 10 – 12 back issues of trade magazine, and try to attend at least one trade show.  Check out these posts for more information on how to attend and network at a trade show.  http://onestopinventionshop.net/blog/2011/08/selling-through-regional-trade-shows/ http://onestopinventionshop.net/blog/2016/01/how-inventors-should-network/
  2. Customer Defined Products.  The most successful products are typically ones based on actual customer desires.  When you talk to manufacturers and distributors start with a customer focus, detailing how you have surveyed potential customers and explaining how your product meets their expressed needs.

The First Steps

  1. A Clear Advantage.  You can achieve a clear market advantage by having a superior or markedly different product.  The Antenna Buddies are clearly a different product.  But you also gain a clear advantage if you are approaching a market the manufacturer doesn’t sell to, or if your marketing campaign, name or package stands out in the marketplace.
  2. Work the Manufacturer or Distributor.  You will typically get better results if you propose your arrangement in steps. You might start by approaching your targeted companies to see if they would make the product for you as a contract manufacturer.  At a later meeting you can mention that the product’s potential is large than you expected and that you can’t proceed on your own.
  3. Write an Agreement.   You need a formal contract with the manufacturer or distributor that defines your relationship.  The manufacturer will probably propose a manufacturer’s representative agreement.  (Sample contracts are widely available on the Internet or in books on legal forms in bookstores or libraries.)  But you need to add some additional clauses. One is that you receive a sales commission override on every sale of your product. A second clause states what happens to the override if you or the company decides to terminate the agreement. In most manufacturer’s representative agreements commission stops three to six months after the salesperson leaves.  You want the contract to state that your override continues for an extended period of at least two years after the agreement ends.  You should also insist that the manufacturer sells you the product, all of the inventory you wish to purchase and the product tooling if it decides to discontinue the product. Finally if the manufacture decides to sell the product line to another company the contract should state you get a commission on that sale.
  4. Connections.   Creating a network of influential contacts is a key step for every inventor. It is even more important for inventors selling on commission.  Keep a file of every contact you make so you can go back to them when you are ready to sell the product.  Check out these posts for more information on finding contacts.  http://onestopinventionshop.net/blog/2011/07/how-to-find-and-work-with-marketing-contacts/ and http://onestopinventionshop.net/blog/2016/03/finding-industry-insiders/.

Off and Running

  1. Set up Distribution.    There are usually plenty of sales opportunities for a product besides the big accounts you use to land your agreement.  You can continue to increase sales by using independent manufacturer’s sales representatives around the country to sell to smaller accounts. See this blog for more information on finding sales reps. http://onestopinventionshop.net/blog/2016/01/how-to-find-sales-reps/
  2. Develop a Marketing Calendar.   Sales and marketing professionals always feel there is way too much to do in far too little time when introducing a product.  You can overcome this problem to a degree by setting up a yearly calendar of all you major marketing and sales events.  Major trade shows, product press releases, calls on big companies, adding new distributors and representatives should all be listed on the calendar.  This not only helps you to succeed but it also demonstrates to your manufacturing partner that you are earning your money.
  3. Have the Manufacturer Hire other Sales People.  This of course cuts into you commission.  But it is the right strategy if you have many other products you would like to introduce to this industry.  You can’t take on the entire sales burden and continue to introduce new products.  You should have more options after selling on commission as you will be established in the industry and that could allow you to launch your own company.

Building a Business

  1. Become a Resource. Your long term success in commission sales depends on your expertise at introducing a product into the market or your creativity to continually come up with new product ideas. Both of these skills are ideal for going into business for yourself.  You may not be able to reclaim your original idea from the manufacturer but you can move onto to introduce a new product of your own, or even products from other inventors.
  2. Create a Key Industry Presence. You can create an industry presence by being on industry committees, by volunteering for associations, and by serving on standards or trade show committees. You can also write articles for trade magazines, give speeches or presentations at meetings, and volunteer to help with any training meetings in the industry.
  3. Take Control.   There is an inevitable clash when you sell your product on a commission basis. Inventors want to develop a network of contacts that will lead to long term success. The manufacturer on the other hand will feel vulnerable if it doesn’t have direct contact with the customers and the distribution channel.  The best path for inventors to follow is to introduce buyers and distribution channel contacts to the manufacturer when starting out and then work to cut back the manufacturer’s involvement as sales develop.