In the simplest form licensing means, you sign the rights of your invention over to a manufacturer to make, package and distribute your invention. Every time your invention sells you receive a royalty on the wholesale price.
For example, if your royalty was 5% and your invention sold for $100 but the wholesale price is $75 you make $3.75 every time your invention sells. So, for every 1000 sales, you make $3750. You receive these checks based on quarterly sales.
I know this may seem like a bad deal and many people would prefer to venture their idea or bring it to market themselves but if you look at the costs of development, manufacturing, packaging, advertising and the list goes on your Licensee isn’t making much more than you. This is why manufacturers carry such a large catalog of products because they need a large catalog to remain profitable and in some cases, stay in business.
In my opinion, starting a company with only one product is not the best idea unless your product is revolutionary or very cheap to produce.
Licensing is a great way to bring your great idea to the market without dealing with the many headaches associated with starting a company and bringing it to market yourself.
I hope this explained it well.