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Licensing vs. Self Production and Promotion of Your Toy or Game
Understanding Licensing
You have a great idea that you know is going to be very successful. But which way should you turn? Do you license this concept to another company to produce, or do you produce and distribute this product yourself? Which is better? To determine which may be best for you, it is paramount to understand what "Licensing" and "Self Production" really mean and what they entail. In basic terms, product licensing is where you allow a company to utilize your patent and product likeness in return for royalty payment. Understanding Licensing: First, there are basically three kinds or variations of licensing to understand;
1. Character / image property-- typically thought of as cartoons, but any image or illustration could apply. Some varied examples include: "Disney", "Sesame Street" characters, "Looney Tunes", "Sabrina- the Teenage Witch", "Baywatch", and the Anne Geddes baby images. Royalty rates will vary widely, based upon demand. Toy companies often pay for exclusive rights to utilize a popular image. The dollar amount paid for the top properties can be staggering, plus, there may be many demands placed upon a licensee for performance, advertising, etc. Licensee are limited to a very narrow and specific product or product category.
2. Trademark property such as: "McDonalds", "Coca Cola", "Nike", etc. Royalty for the top "brands", trademarks and properties can be a staggering dollar amount for a licensee. Companies seek brand identities as they do character or images for their ability to have immediate public awareness and appeal. Companies often add a popular identity to their product instead of expending money advertising. Therefor, they need that broad consumer "reach".
3. Product or patent properties: This probably includes any product that you have invented. These are traditionally unproved and "risky" propositions for the toy companies. Product / patent licensing is where most toy inventors are likely to be. Payment is typically based on the wholesale selling price of your item. The typical royalty percentage is 5%. Many inventors tell me that they want to license their invention to as many different companies for as many different applications as possible. This is the "ultimate licensing goal", but one that requires a great deal of public knowledge and demand for your property before this can typically happen. Many companies try to turn their products into character or trademark licensing opportunities. This means a company licenses their product, company name or logo to another company or manufacturer for a specific item or application. For example, "Fisher Price" licenses their name for clothing, "Lego" licenses their name for children's furniture, "Barbie" licenses to thousands of different manufacturers for everything from paper plates to bed sheets and children's clothing. The "Power Rangers" and all the popular new character introductions have lists of licensees as well.
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Some Advantages of Licensing:
1. Low to no initial investment (the cost of your time and prototype)
2. If you work with an agent, licensing usually requires no further effort on your part
3. You can make a lot of money each quarter without doing anything
4. You benefit from the financial backing, marketing and development efforts, and more from your licensee
5. Spin-offs or line extensions of your product are possible- giving you a broader royalty base
6. Toy company licensees will be aggressive in protecting your concept
7. Worldwide opportunity without complex distribution
Some Disadvantages of Licensing:
1. High demand for innovation- few products will be appropriate for most manufacturers
2. Your product will likely need to be shown to numerous companies
3. It can take a while to get a license. Eighteen months or more is not uncommon.
4. It is also not uncommon to enter into a licensing agreement with a company to find that your concept never "goes anywhere"
5. Auditing may be necessary to assure proper royalty payments
6. Sometimes smaller companies "forget to pay" - 5% of the wholesale price isn't anywhere near what you can make if you self produce and market your item. An item that wholesales for say $7.00, will give you $0.35 cents per unit.
7. Licensees may expect royalty free accounting for returns, samples, defects, shipping allowance, discounts and much more
8. You are at the mercy of your Licensee for performance
9. Licensee will likely change your product- a lot
Understanding Self Production and Direct Marketing
This is where an individual or a company has their product produced and is responsible for getting their toy or game into the retail market. This is where you become the "toy company". You have your product designed, produced as well as sell and ship your product directly to retailers that you have encouraged to buy your product.
Some Advantages of Self Production:
1. Some products have great potential for marketing, but are inappropriate for licensing
2. You "run your own ship"
3. You can make a lot of money. An item that you are wholesaling for $7.00 will likely provide you $3.50 per unit-- that's 10 times as much as most licenses - Niche opportunities can be lucrative and are typically avoided by major manufacturers
Some Disadvantages of Self Production:
1. You get to pay for everything- or use O.P.M. (other peoples' money)
2. If your using O.P.M.- you'll have people to report to - There's a lot of money to risk!
3. You'll have a lot of responsibilities including: product development, engineering, manufacturing, importing, graphics, packaging, selling, marketing, warehousing & shipping
4. It requires a lot of work and coordination
5. You get to protect your own product
6. Don't forget about liability insurance!
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Okay,- more confused than ever? So which is better- Licensing or Manufacturing your own product? The answer might vary. It all depends on your product and you. Some products lend themselves to both. You might produce and distribute your own product in the United States, for example, and license the rights to your product outside the US. Another strategy is to first produce and sell your own product in an effort to "raise public awareness" hoping to later license this game at a higher than usual royalty rate to a major manufacturer. Trivial Pursuit did this and negotiated a royalty rate more than twice the average rate!
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