The value of your IP is derived from what it does. It’s based on the economic benefits your IP delivers – increasing revenues, reducing costs, creating new products and extending product or technology lifespans. The more of these economic benefits that your IP provides, the greater its value.
Increase revenues from existing products. For example, a well-known brand or big movie franchise is a valuable IP because applying it to your existing products can increase your revenues. When I was licensing big entertainment properties at the studios, the price paid (i.e. royalty rate) to license these properties was 10% – 15% or more.
Reduce costs or increase profits on existing sales. A manufacturing or business process is very valuable, especially if it helps a licensee make more money. An example is a manufacturing process (know-how) that saves the licensee 50% on their manufacturing costs. The price a licensee will pay could be 25% – 50% of the cost savings profit.
Creates a new line or class of products: A new product or technology that’s market ready saves development time and money, and costs less to launch. The price (royalty rate) a licensee will pay depends on how quickly they can get it to market. For example, the royalty rate for an unproven technology may be 1%-2%. On the other hand, a consumer product that’s in the market may get a 7%-10% royalty. A good rule of thumb is the closer to market ready your IP is the higher the price a licensee is willing to pay.
Improve or extends the life of a product or technology: An IP that improves quality, reliability, or ease of use. Even a small improvement can have big commercial value, especially in highly competitive markets. Some examples include computers, cell phones and electronics, which license bundles of incremental IP, including LED screens, app software, key board designs and a host of electronic components. How much a licensee will pay ultimately depends on how big a part your IP plays in extending or improving their product or technology.
Creating value is the secret to attracting licensing partners. Showing that you’re IP works – solves a problem, lowers costs, increases revenues or meets a need and customers will pay for it is the key. The more you can prove this, the greater your IP value.