What’s My Idea Worth?
If you are thinking about patenting a new idea, chances are you are hoping to monetize that idea in the form of a marketable product at some point in the future. But how do you determine what your idea might be worth? Here are some pragmatic calculations you can make to give you a realistic idea of what the market potential might be for your product.
You may have to do a little homework to come up with some of the values for this simple model, but don’t get too hung up on having exact figures, you can start with broad estimates and refine your calculations as you develop your idea.
Step 1: Determine your product’s selling price
Take a look at similar products, or the range of products in your category and try to make an objective estimate for where your product fits in. Is your idea at the high end of the range, or are you going to offer a cheaper alternative to products already in the market? Set your selling price appropriately based on the competition.
Step 2: Estimate your manufacturing cost
Ideally your manufacturing costs will be no more than 25% of your retail selling price. Some products might allow even greater margins. You may need to talk to potential manufacturers in your industry to get an estimate of their costs, or you can try researching wholesale prices for similar products and make an assumption that the actual cost to produce is 20% - 30% of that price.
Subtract your manufacturing price from your selling price to calculate your potential profit per unit.
Step 3. Find your target market
You can make some assumptions about who might buy your product. Will it be sold nationally across the US? Will it be sold internationally? Are the buyers primarily men? Or women? Or only families with children? What age ranges are you targeting? You can search for US census data (www.census.gov) or similar stats internationally to get rough estimates of your target market.
Step 4. Determine your market penetration
Even the most successful products don’t sell to everyone in their target market. The percentage of people from your target market who actually buy your product is what is referred to as your market penetration. You may guess you can capture 10%, or 5% or 50% of the market, depending on the strength of your idea, the strength of the competition and your ability to market it to the right people.
Calculate the potential number of sales by multiplying the target market by the penetration percentage. For instance, if your target market is 5 million households and you estimate you can capture 5% of the market, you will have 250,000 potential sales.
You can now multiply your per unit profit by your potential sales to get a gross profit number, but don’t get too excited just yet! There’s a lot more that goes into getting a product to market besides manufacturing. The cost of distribution and marketing and other retail costs need to be considered. If you plan to take your product to market yourself, you’ll need to estimate those expenses, which could be an additional 20 – 30% of your product cost. If you are considering licensing your idea directly to a manufacturer, a wholesale distributor or a retailer, you can assume they will be looking for sufficient margin on your idea to cover those expenses.
Try to be realistic and perhaps run a few scenarios at different levels to come up with the ultimate market potential for your idea. Also think about the life cycle for your product. Some products may stay viable for a decade, some may be relevant for only a season or two. Having a good sense of your product’s potential will help you decide if the idea is worth developing and allow you to negotiate successful licensing agreements.