What was the first thing you thought about after you had your great idea?
How rich you were going to be, right?
Independent inventors usually begin dreaming of how everyone on the planet will buy their product.
Part of this dream involves an inflated price for this great new innovation. And it’s one way independent inventors inadvertently sabotage themselves.
If you try to license the invention and you include an ivory-tower selling price in your presentation, the manufacturer is likely to disregard your entire pitch. If you distribute the item yourself at an inflated price, you’ll add financial disaster to your disappointment.
One inventor who came to us for advice had invented a rubber thumb tip for video-game players. He believed the tips would give gamers more control. The tips could be manufactured for a fraction of a penny. Yet he thought he could sell them for $10 to $15 dollars each!
This inventor believed that because some video games sell for $50 or more, gamers would be willing to pay up to 15 bucks for one of his thumb tips. He pulled this retail price out of thin air. Manufacturers dismissed him as totally unrealistic. They didn’t want to negotiate a license agreement with someone who had unreasonable expectations.
Taking pricing cues from friends and family is another way to arrive at impractical pricing.
When we were first developing our Ghostline poster board product, we asked the people closest to us what they would be willing to pay.
Our mom said she thought it was so great and it would save so much time and effort (echoing what we had told her) that she would be willing to pay $2.99 per sheet. We loved hearing that. But we realized no one would pay that much for a sheet of poster board, even if it did have faint grid lines. Our mom was telling us what she thought we wanted to hear.
It wasn’t until we were actually manufacturing and selling it ourselves that we realized that $1 per sheet is about the maximum anyone will pay for a poster board with a ghosted grid. Luckily for us, that price allowed for a nice profit.
So, how do you determine what the retail price should be?
The rule is that your product’s retail price should be approximately four to five times the manufacturing cost. If the manufacturing cost of your item is even less than one quarter to one fifth of the retail selling price, you are in a great position for marketing it.
So when you purchase a retail product for $10, you can usually assume that it cost around $2 to $2.50 to manufacture. The retailer bought it for a wholesale price of around $5. This is the way it works 90 percent of the time. This pricing structure allows for a nice profit margin for all parties involved.
If your product won’t fit within this formula, it’s unlikely that you will be able to find a manufacturer who is willing to license it. That’s just the hard truth regarding the factors manufacturers take into account when determining whether they should license a product.
Take an objective look at your product from the point of view of manufacturers and buyers.
If you have a fabulous innovation, but the manufacturing costs will not allow it to fit within the above formula, it may be time for you to move on to another great idea.
Mary Russell Sarao and Barbara Russell Pitts are co-authors of “Inventing on a Shoestring Budget.” Contact them at www.asktheinventors.com
