We often hear, “I’ve got a great new product idea, so pay me!” It’s as if the person with the new product idea thinks that the idea itself is worthy of compensation. For the most part, it’s not. It’s usually a very long and arduous journey from ideation to monetization.
Generally, the folks who would pay you for an innovation or new product idea would be large companies who see the merits of your product, but they don’t buy products. They buy businesses! This is why we say, “Take your idea and wrap it in a product, take your product and wrap it in a brand, take your brand and wrap it in a business, and then build your business until it becomes an acquisition target.” In other words, you must prove the market for your idea with product development before you can get compensated.
Sure, there are product licensing companies out there who will gladly sell you on the idea that you can avoid all this by simply paying them fees to prepare licenses that large companies would presumably snap up just to use your idea. They might, but typically you’re going to be the one who has to do most of the selling. And for sure, the licensing company gets paid whether you make a sale or not.
There are also companies that will gladly sell you a patent for your innovation. Again, they get paid whether or not you can sell your patent. The patent doesn’t necessarily protect your product idea, but it does give you permission to throw all whole lot of money and time into litigation with a larger, better financed, company who may be copying your idea and infringing upon your patent. If they can prove they were first to market, or that there is something wrong with your patent, the dispute can go on for years. New businesses typically cannot afford the time and money these legal battles portend.
A patent is also only good in the country in which it is filed. So, get ready to file a bunch of patents, one for each national market in which you intend to sell. The patent process provides you with an additional evidence of ownership of your product idea which will help in a civil proceeding, but you have to pursue and bankroll the fight. Patent infringement is not a criminal proceeding where the government is championing your cause. Will it help? yes. Should you get one? Probably. But be sure to develop the cash flow necessary to defend it first.
These legal concepts certainly appeal to everyone’s desire to find that shortcut. Selling them to inventors is big business. But from a practical stand point, consider building a business which will be worth more and provide you with the income you need to protect your product idea.
The patent also makes your idea public, in most cases, before you can afford to defend it. The big players know this. They have teams of attorneys looking for how they can address the market you have discovered without technically infringing. We once had a new product idea. W asked a patent attorney “How can we best protect this?”’ His answer was candid and surprising, “Build a ton of them, fill a warehouse, be the first to sell them in interstate commerce, and then file a patent.”
Most innovation that earns the “Big Check” does so because it is “wrapped” in a business that is using the idea to distinguish itself from, and gain an advantage over, its competition. When your product development team has successfully demonstrated market viability and increasing sales for your new product idea, when it has a brand name and it is actually being sold under that name, then and only then does the development and recognition of your brand name give your product idea the brand equity your acquirer is looking for …and will pay for.
So, what does that process look like?
1. Intellectual Property (Good Idea)
First, you come up with an idea. Usually, it’s an improvement on existing product. Maybe it’s a new product altogether or something that’s missing. Most inventors are trying to do something, but they can’t find what they need off-the-shelf to do it, so they invent a solution. Because they can’t find it, they can easily assume it hasn’t been invented yet.
Because we live in a first world country with great infrastructure and distribution, it’s easy to believe that if we haven’t seen it in the market, it hasn’t been invented yet. The stores are packed with products all faced out with very few vacancies. Certainly, all the products that currently exist would be there. Not so.
Most new product ideas never see it to the shelf. They are still sitting in a warehouse somewhere because they failed to achieve distribution. Before you go throwing a lot of time, money, and energy into your new product idea check with the patent office.
The best way we have found to come up with an idea for a new product is to ask the big store buyers what’s missing in their inventory, what do they need more of, where is there a hole. Even with a totally unique new product idea with great potential, you run the risk of failure if you can’t access the market. So, start there. What does the market need now that they will take with open arms?
2. Product Development (Design)
Now that you formulated your idea, you must incorporate it into a product. Maybe your product satisfies a market need that has been heretofore not addressed. Maybe it’s a new way of packaging an existing product that is more convenient, practical, or economical. Or maybe, it’s a totally new product altogether. Whatever it is, its logo, label, packaging, signage, and shipping carton must comply with the standards of the distribution and retail channels. This requires some homework. And it is where most new product ideas fail. The ideas are great, but the presentation and delivery don’t work in the harsh realities of the market.
Be sure to do lots of market research in the product development stage. We suggest “making friends in low places,” and we don’t mean that in any kind of a demeaning way. On the contrary, it’s the people who work in the warehouses, on the assembly lines, and in the stores who can tell you what works and what doesn’t. It’s the people who drive the forklifts, drive the trucks, and manage the inventories who can give you the insights you need to develop a product that moves easily through the system.
Also, do tons of testing. Make sure there’s a real market for your idea. Identify and work with betas. Get their feedback and improve your concept. Make changes to your product to satisfy their concerns. We like to say, “Get your act together before you take your show on the road!”
3. Product Launch (Startup)
Hopefully, you dot your i’s and crossed your t’s long before your product launch. This is one of the most critical periods in the process. What if you gave a party and nobody came? You must achieve a positive cash flow before you run out of capital. Don’t get caught up in the idea of scaling fast and failing fast or you surely will fail and fast. Instead, look for the low hanging fruit. Find at least a few customers who will buy your product in advance. You’ll need the income to keep you going.
Don’t fall into the trap of investing in too much overhead before you have the cash flow to justify it. You don’t need to buy offices, production lines, and administrative assistants. Go for rentals, leases, outsourced production, and virtual assistants during the launch phase. Focus on sales! Remember it’s not about the launch, it’s about the landing. Don’t make it a crash landing with an unsustainable model or poor product-market fit.
The launch should be low-key. As we like to say, “Start small, make your mistakes in a small place, and don’t sell further from your house then you can drive and apologize in the same day.” The Product Launch is where the metal meets the road. Now’s your chance to find out what’s wrong with your product and fix it before you spread yourself too thin. Now is your chance to find out what the true cost of sales is. Not the cost of goods, but the cost of sales! This is what it costs to support what you’ve sold with excellent customer service. What does that cost?
This is also your chance to get the reputation of being a ‘Hot Mover” if only in a few initial placements. Successful consumer brand builders are constantly vigilant about how their products look on the shelf of every retail outlet in which it is placed. Are they visible? Are they in stock? Are they priced right? Are they positioned correctly? Are they salable? Your representatives must answer and correct all these issues in the very first stores in which your products are placed so you will gain the reputation of selling fast. That’s all your next buyer is concerned about! How much does that kind of vigilance cost?
4. Customer Development (Build Up)
Now you are in a race against the clock to find a few large customers that can pay your bills. Now you know what the true cost of sales are, and you probably grossly underestimated them. Because you are “new,” you face all the problems of being unknown, unproven, and constantly running out of stock. This is the part of the process where you finally have developed a real business.
Your new product idea is finally out there. It has finally achieved distribution albeit in just a few retail chains. Now you discover even more costs you hadn’t planned on. There’s returns, special packaging, and distribution management. Now you find out what’s wrong with your label, your logo, and maybe even the name of your brand. Now you must make those changes quickly just to survive.
This is also the part of the process where you can easily get discontinued from your “cash cow” and find yourself prematurely having to close the doors. Once the big buyers get the idea that they represent the majority of your net profits, they can easily put the squeeze on you for lower prices and longer terms. They can ask for concessions and programming that you are compelled to grant. In a word, you are at their mercy.
5. Expansion Process (Build Out)
You quickly begin to realize that the only way that you can protect yourself is to create a brand that is in demand by the general public and not just by the customers of one or two chain stores. So, you parlay your successes in the existing few chain stores in which your products are placed and use that, hopefully, good reputation to sell more and bigger chain and box stores.
But this is where most proven new product ideas fail. Why? Because they simply don’t have the budget to support their own success! Now you’ve expanded into other territories, regions, states, and countries, each with its own particular compliance rules, business practices, taxes, shipping and warehousing costs.
Now you must have a representative in those territories to watch out for your products as they make their way through the distribution channels to the ultimate, general public customer. Now you must entertain buyers, attend meetings, visit stores, and champion your products at every level of distribution.
The implications of the cost of sales in the expansion process are so great we recommend employing a good cost accountant who can identify those costs to such a degree that they can actually lay out the strategy for your expansion. For instance, in our case, our cost accountant told us to forget about certain markets until we were much stronger. We were successful because we adopted a strategy of “striking where the enemy is not!”
6. Acquisition Target (Enterprise)
Few brands get purchased during the startup or build up phases. Many brands get acquired during the build out and enterprise stages. You don’t have to become a big enterprise with a national brand to become an acquisition target. In fact, many acquirers will add value to your brand by the very fact that they are well-positioned in the distribution and retail channels. For them, it’s just throwing a new brand into a smoothly running, well-oiled machine.
Be sure to find out from investment brokers what a brand like yours, in a category like yours, at a price point like yours, sold for in the last year. Find out the number of units, the rate of growth, the market share, the multiple of earnings, and other metrics that will give you an insight into what your own goals should look like. You will have to achieve these comparable metrics in order to be an acquisition target.
Brand builders who are keen on being acquired will be careful and thoughtful about their expansion strategy. For instance, they may choose to be sold through the same distributor as their potential acquirer. In most industries, because of the megatrends of consolidation of production, distribution, and retail, the company that will buy your brand is not hard to figure out in advance. In most industries, there is not more than five big players who are gobbling up all the little guys.
How do you get your peanut in front of that elephant? Get noticed by being the fastest growing brand in your category at your price point. You don’t necessarily have to sell the most, just show the greatest increase in sales year-over-year. Enter every contest. Win and display medals, awards, accolades, and third-party endorsements. Get writeups in industry publications in print and online.
Once you achieve the metrics that make you an acquisition target, your distributors and retailers will tell your potential acquirer they should snap you up before their competition does. It’s easier for them to buy a proven new product idea than it is to develop it from scratch like you did.
This is the process we had to go through to get paid for our new product idea. As you can see, it was a whole lot more than just, “I’ve got a great new product idea – Pay Me!”