When inventors contact my company about Due Diligence I like to explain the concept with a simple example. Think of it this way, if a manufacturer is getting ready to make the decision to develop, manufacture, and market a new product that could potentially cost $50,000 to $150,000 to produce plus inventory costs, they would most certainly take their time to ensure that they are making a good business decision in moving forward with the product (i.e.: have they done their homework on the product). Therefore, you can sum up "due diligence" as the process of gathering all the information necessary to make a good business decision prior to making the large financial expenditure. It can generally be assumed that the more time, effort and money (i.e.: "risk") that a company must spend to develop an invention, the more they will evaluate the potential license. Keep in mind that even if a product appears to be simple and low cost, the process of developing and manufacturing is rarely simple and low cost. Companies will evaluate such criteria as customer feedback, retail price points, unit cost to manufacture, competitive landscape, manufacturing feasibility, market opportunity, etc.
Inventors often wonder if they need to perform Due Diligence on their invention.
As discussed, this will depend on the option you have elected for taking your product to market.
Option 1 - Manufacturing on your own - If you are planning on manufacturing and marketing the invention on your own, then yes you will need to perform due diligence. Essentially, you become the manufacturer of the product and as a result you should perform the due diligence on your invention just like other manufacturers would. The problem that I have found is that many inventors who elect to manufacture their own inventions do little, if any marketing due diligence, which is a big mistake.
Option 2 - Licensing for Royalties - if you are planning on licensing for royalties, then I believe you can minimize your due diligence efforts, because prior to any company licensing your invention, they will perform their own due diligence. If you are working with a company such as Invention Home, the costs to market your invention to companies can be minimal - therefore it could cost you more to actually perform the due diligence than it would to just market the invention to companies (which, is ultimately your best form of due diligence anyway). Remember, you should have taken the time to do your basic market research and a patent search earlier in the process to be assured that your product is worth pursuing in the first place (i.e.: the product is not already on the market and there is a demand).
Let me summarize. If you are planning on investing a large amount of money on your invention, then you should always analyze the opportunity first to make sure it's worth pursuing; however, if you can actively market your invention to companies with minimal cost, you can be assured that an interested company will perform their own due diligence (not rely on yours). Note: it is always helpful to have marketing due diligence information available as you discuss your invention opportunity with prospective companies; however, it is not always easy to obtain this information so you need to balance the effort and expense of gathering the information with the real need of having it.
I also will provide you with some due diligence tips.As discussed, the idea of marketing due diligence is to gather as much information as possible to make a well-informed decision on investing in any invention. In a perfect world, we would have all the relevant information on sales projections, retail pricing, marketing costs, manufacturing setup and unit costs, competitive analysis, market demand, etc. However, this information is not always easy to come by.
If you are not in a position to pay a professional firm to do your marketing evaluation, it is possible to perform the research on your own; however, you need to understand that research should be interpreted and used for decision-making and on its own, it has no value. It is what you do with the information that matters. Note: I would recommend that you DO NOT PURCHASE "market research" from an Invention Promotion company. Often sold as a "first step" (they'll usually approach you again with an expensive "marketing" package), the information is largely useless because it is not specific research on your invention. Rather, it is off-the-shelf "canned" industry statistics, which will not necessarily help you make an informed decision.
Before we get to the "tips", let me clarify that "due diligence" can come under various names, but essentially they all mean the same thing. Some of the terms that I have seen to describe the diligence process are:
· Due Diligence
· Marketing Evaluation
· Commercial Potential
· Invention Salability
· Profitably Marketable
· Market Research
· Invention Assessment
Each of these terms is basically referring to the research to assess the likelihood of an invention's salability and profitability. The question of whether your invention will sell can never be known with certainty, but you can perform some steps to help you better understand the likelihood of success.
Again, if you are planning on manufacturing your invention on your own, you should consider performing marketing due diligence on your product. If you are planning on licensing your invention for royalties the company licensing your invention should perform this research.
Some suggestions for marketing due diligence are listed below.
1. Ask and answer some basic questions
- Is your invention original or has someone else already come up with the invention? Hopefully, you have already answered this question in your basic research. If not, check trade directories or the Internet.
- Is your invention a solution to a problem? If not, why do you think it will sell?
- Does your invention really solve the problem?
- Is your invention already on the market? If so, what does your invention offer over the others?
- How many competing products and competitors can you find on the market?
- What is the range of price of these products? Can your product fall into this range? Don't forget to factor in profit and perhaps wholesale pricing and royalty fee, if any.
- Can you position your invention as a better product?
2. List the pros and cons that will impact how your invention sells and objectively evaluate your list
- Demand - is there an existing demand for your invention?
- Market - does a market exist for your invention, and if so, what is the size of the market?
- Production Capabilities - will it be easy or difficult to produce your invention?
- Production Costs - can you obtain accurate manufacturing costs (both per unit and setup/tooling)?
- Distribution Capabilities - will it be easy or difficult to distribute or sell your invention?
- Advanced features - does your invention offer significant improvements over other similar products (speed, size, weight, ease of use)?
- Retail Price - do you have a price point advantage or disadvantage?
- Life - will your invention last longer than other products?
- Performance - does your invention perform better than other products (including better, faster output, less noise, better smell, taste, look or feel)?
- Market Barriers - is it difficult or easy to enter your market?
- Regulations and Laws - does your invention require specific regulatory requirements or are there special laws that must be followed (i.e.: FDA approval)
3. Seek advice or input from others (consider confidentiality)
- Target professionals / experts in the field.
- Ask for objective feedback and advice.
- Talk to marketing professionals.
- Ask sales people in the field.
- Ask people you know in the field.
- Talk to close friends and family members whom you trust.
- Ask for input on the invention such as features, benefits, price, and if they would buy it.
During the diligence stage, existing manufactures have an advantage in that they have the ability to talk with their customers (retail buyers, wholesalers, etc.). In my experience, one of the most important factors that a company will consider is whether their existing customers would buy the product. If I took an invention to a company to discuss licensing (assuming they could produce it at the right price point), there is a very high likelihood that they would license the product if one of their top customers agreed to sell it.
Whether a retail buyer is interested in purchasing a product is a driving force for companies considering product licensing. I've seen many scenarios in which a company had interest in an invention but they ultimately decided to pass on the idea because their customer (the retailer) did not show any interest in the product. Conversely, I've seen companies with mild interest in an idea who jump at a new product when a retailer expresses interest in it.
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