Tag Archives: Entrepreneurs

Plan on Licensing? Keep Your Product Life Cycle in Mind When Negotiating Royalties

Many small businesses, entrepreneurs, inventors, designers etc. want to go the route of licensing because it potentially brings profits without having some of the traditional accompanying headaches, like manufacturing. Or, it can bring in additional income if manufacturing arrangements are already in place.

But you need to understand that there’s a Product Life Cycle. Your royalty rate (that is the fee your get for licensing your product, brand, etc.) is influenced by where your product is in that cycle.

All products have a limited life. At each stage the product passes through during its life, there are different challenges and opportunities that affect your royalties. Here’s an overview of four main stages of Product Life Cycle:

STAGE 1: Development/Market Introduction Stage
This is where your costs are very high, there’s virtually no sales volumes to start, there’s a lot of market uncertainty – product price, competition, market acceptance to name a few. No $$ is being generated at this stage.

STAGE 2: Growth Stage
Your costs are reduced due to economies of scale. Public awareness increases. Your sales volume increases significantly. Profits rise. For a short time. Risks rise because of increased competition. Increased competition leads to price decreases.

STAGE 3: Maturity Stage
Sales volume peaks and the market becomes saturated. In order to maintain and grow market share, branding and marketing comes into play (the brand has to be differentiated, feature differences have to be emphasized). Commodity-like returns are seen. There’s a fairly long duration of profitability.

STAGE 4: Saturation and Decline Stage
Sales may stabilize or decrease. Prices and profitability shrink. Profit becomes more a production/distribution efficiency question than increased sales. This stage is riskier than the mature stage.

Keep in mind that this model has limitations and exceptions. But you should be aware of the Four Stages when negotiating a licensing agreement so you can understand why royalties vary.

Sandra Holtzman teaches CEO 035: Licensing.

Negotiation Pays

Whether a newbie or seasoned business owner, saving money should be high on your list. One of the best ways to do this is to learn to negotiate.

Here are some suggested approaches to save you money:

Bank Fees

Banks have become ‘fee happy’. There are monthly fees for checking/savings accounts, and fees for not meeting balance minimums. Ask to speak to one of the bank managers at a desk. Tell them you were distressed to see a fee on your account. Can they help by waiving the fee? You might also ask if there is a similar type of account that doesn’t incur fees? Either way, your objective is to put more money in your pocket not theirs.

Office Supplies

When purchasing office supplies, ask the representative if they honor internet prices? These prices tend to be much lower than catalog or business customer pricing. In addition, you can also save on delivery fees. My office supply company just initiated new fees for any delivery under $50. As a small business, my order can frequently come in just below that amount. I asked that the fee be waived and it was.

Hotel Rates

After you have checked available discounts and it’s still too pricey, it’s time to call the hotel directly. Call the phone number for the hotel, and not the 800#. Ask for the name of the sales manager or general manager and ask to speak to one of them. Tell them you are a long term customer or will be now that your business requires more travel. Ask if they can assist with the room rate? Mention you would like to get a rate say, below $100/night. The longer you stay for business or vacation, the better the discount. I just had my rate reduced over 35% for a stay in a high demand hotel in Florida.

Organization Membership Rates

Find out who in the organization is responsible for membership recruitment and talk to them. Ask if they have small business rates or if you can join for a six month membership or reduced rate membership? Think about you or your business providing a service to them to help supplement a reduced rate membership.

So, what are you waiting for? Successfully negotiate and you can be saving money right now!

Jill Youngerman teaches CEO 008: Marketing Techniques for Promoting Your Business.