As an inventor I have struggled recently with how to come up with a fair and emotionless way to give potential buyers pricing for licensing my patents or buying them outright. I have looked online and found a few bits of information but not found anything yet that gives me a definitive formula for how to do it. I may be wrong and there may be one out there but I would like to know if there is something better, or whether this one sounds ok to the innovative community.

Basically where I start is by researching the cost to manufacture by the thousand and make an emotionless call on what the goods will realistically sell for.

So establish an ‘approximate cost of goods’ and an RRP. Subtract the ACOG from the RRP. Then you have a Gross Profit.

These figures are the key.

RRP – ACOG = $GP

The formula is very lenient in assuming that the buyer will only sell 5 units of your product a day across their network / stores in a given year (so pretty fair by my thinking). Equalling 2000 units per year. We are taking 50% of the GP for the first 2000 sold in the first year on a licensing deal to cover the costs of prototyping and patenting as well as giving them the right to take our IP and sell it for profit. We then take only 8% royalty (8% seems to be an industry standard as far as my research goes) after that first 2000 are sold for the life of the product.

The number is 5000 units before royalties kick in if you are selling the patent.

Please note below that formulas are hard to post but I have an excel spreadsheet with the formulas already done and can send to anyone who would like to test the theory. Forget BODMAS for a minute and just read the below as a step by step.

So you have (X-Y/100) x 50 and then times by Z (which is either 2000 or 5000 depending on what you are doing.

On a product that has a retail value of $100 and $30 manufacturing cost that means that if you were licensing the patent to a company you could look them in the eye and ask for $70,000 for the right to use your IP with 8% of GP after the first 2000 have sold and $175,000 to buy the patent outright with 8% of sales after the first 5000 have sold.

Now this seems a fair and reasonable way to me to decide what the numbers are when I walk into a meeting to discuss licensing or purchase deals. I can show a potential client that I am not just pulling numbers from the air and that the number is not an emotional decision based on my effort in creating the product. It is rational and realistic number that I can explain and show them where it came from.

As I said there may be a better way out there and what I have typed makes sense to me but might not be properly explained here. If there are any interested people I will pop the Excel file somewhere online and people can test the theory. Once you put numbers in it makes more sense.

This is not a money making thing and I will pop it up for everyone to use if it makes sense. I just want to be able to look a buyer in the face with solid and reasonable numbers that work for us both.

I truly appreciate any constructive feedback that will help me make this better and improve this important part of my business.