Another option that many independent inventors are choosing nowadays is to license their inventions for royalties. This is a method of choice for many inventors for lots of compelling reasons. Once a product is licensed to a manufacturer, that product will automatically have a place on the planogram of the retail stores where the manufacturer places goods. The manufacturers handle all of the responsibility for producing the product, selling it to retailers, bookkeeping, etc. The licensor (the inventor) goes to his mailbox and collects his royalty checks at regular intervals, usually quarterly. The inventor’s time is entirely his own to spend creating other moneymaking new products or in whatever way he chooses.
While receiving a royalty amount of 3-5 percent of net sales on your product may seem like settling for a very small amount, consider this: the manufacturer is taking all of the financial risk in getting the product on the market. He is spending the money to make the product, warehouse it, insure it, sell it, ship it and handle the bookkeeping. His profit margin on the product may not be as great as you imagine. In addition, if you have a guaranteed annual amount of royalty (and you should!) you will receive at least that amount whether your licensee sells that much of your product or not. Lest you jump to the conclusion that 3-5 percent of the wholesale price does not amount to much, do the math. A product that retails $8-$10 million annually returns between $120,000 and $250,000 in royalty, depending on the percentage. This is money that you didn’t lift a finger to earn once it was licensed. If you are still thinking 3-5 percent is a paltry amount of royalty, consider this; if you are unable to get the product marketed on your own, 3-5 percent of something is much to be preferred over 100 percent of nothing!