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What is product licensing, and should I use it?

If you’re an entrepreneur and are trying to turn your ideas into products that you can sell to others, then you may want to look into licensing your products.

Product licensing is a process you can use to sell your idea or product to another company that thinks it can make a profit from it. Usually, if a company wants to pick up that item, they will work out a royalty agreement with you.

How do royalties work when you license a product?

Royalties are how you get paid when the product sells. The exact percentage of the sale price you’ll receive will depend on factors such as your negotiated rate, how many items sell and if there is a specific value that has to be met before you can get paid.

For example, you may agree that Company A can sell your product for $100, $50 of which is profit. Of that profit, the company may agree to pay you 50%, so you get $25 for each product sold. If there is a large investment in development, the company may offer a lower percentage of the profits as royalties or ask that enough products sell to make back the investment before boosting your royalty percentage at a later time.

Is it a good idea to license your products?

If you are an inventor or you know that your product is good but don’t want to put in the effort to develop or market it yourself, then you may want to consider licensing your product. The licensing opportunity may be something that will help you bring in case with little effort on your part, which can be appealing.

Most people don’t get rich from licensing a product, but it’s possible if you have an amazing product that really sells. If you’d rather get an up-front payment, you may want to consider selling the intellectual property completely, because that might get you more money in a single payout than licensing a product would. If you’re offered a contract, remember that you have a right to review it with your attorney and to negotiate for a fair portion of the proceeds.