Inventing 101
Step 4

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This is probably the most important stage of the inventing process.  Up to this point you’ve been relying upon your own instincts and perhaps the input of close friends and immediate family to determine if your idea has commercial potential.  Now you must decide if your invention is worth serious investment. 

As a professional in the inventing business I try to find a solid “No” as quickly as possible.  If I can find something that convinces me the invention is likely to fail then I’ll walk away from it and move on to other things.  All of us have many more opportunities than time or money.   Success comes from pursuing only the best opportunities.

You may feel that today’s idea is the best idea you’ve ever had, that you’ll never have an equally good idea ever again.  This is simply not true.  It’s also a recipe for failure.  You will have many great ideas in the years ahead.   You must believe you will have more great ideas will enable you to take the steps you need to succeed.  This belief enables you to overcome fear. 

You must be willing to throw your idea into the lake to find out if it can swim.  If it can’t swim you should abandon it and develop a new idea.   

The Steps of the Confirmation Process

·         The Swim Test – rough evaluation weeds out likely losers.

·         Financial Evaluation – rough approximation of market potential.  Estimate what the invention might be worth.

·         Review of Prior Art – likelihood of a strong patent.

The Swim Test

The Swim Test is a shorthand evaluation I use that is appropriate for consumer products that might be marketed by a small start-up or a Fortune 500 corporation.  This test edits out many viable ideas but, as I wrote above, there are more opportunities than time and money.  The ideas that pass this test are ideas that should be easy to commercialize and go on to make healthy profits.  The test below is used for consumer products.  Industrial medical and software products could use a similar test with a few modifications.  Here’s the test:

·         Do 75% or more of my “on-target” personal reviewers (wife, brother, partners, friends) say they will BUY it?  “On-target” means potential customers.  Example: I don’t ask my brother about golfing products since he’s never played the game.
 

·         Does the invention solve a clearly identified problem that nearly everyone can relate to?  Vague benefits do not motivate buyers.   Strong selling points that can be communicated quickly are critical for success.
 

·         Does the product have a perceived retail value of $19.95 or more?  In answering this question I also consider kits that might contain the invention as the primary feature.  A kit might enable an invention with a $10 retail value to reach the magic $20 figure.  Items at $20+ can be sold in all distribution channels including catalogs, television, retail stores and even multi-level marketing.  Products sold for under $20 -especially those under $5 - generally have only two channels for distribution: retail and premium/incentive (give-away).   Fewer distribution channels means higher risk.   Catalogs are a great way to launch a new product since the catalog both advertises and sells.  But the economics of the catalog business requires at least a $20 price point ($8 to $10 wholesale).

·         Does the product stand alone?  If the invention requires another product to function it is a hostage to the other product.  Being a hostage may mean that adapters are required or that permissions must be obtained (for example to get the right to use a trademarked name).  If an invention needs to be built into an existing product then the opportunities for success are even more limited.

If an invention gets a “Yes” for each of the four points above it will probably swim.  If it gets a “No” on all four questions it’ll probably sink.  A mixture of yeses and nos means it might float but will probably require a lot of hard work… and a dose of luck.

Does getting 4 nos mean an invention should be scuttled?  Not necessarily.  It means that some other specific reasons for likely success must be identified.  If I believe deeply in an idea I’ll continue to explore it even if the item fails my Swim Test.

Does getting 4 yeses guarantee gold?  No, it simply means that the item deserves further investment and development. 

Some form of quick evaluation similar to the Swim Test is what buyers and potential licensees use when considering a new product.  You may have spent several years developing your invention, but when it gets in front of a buyer or potential licensee (unless you’re there presenting it yourself – a very good idea whenever possible) it’ll probably get less than one minute of initial consideration. 

The Swim Test and the Elevator Pitch

Understanding you’ve got less than a minute (assume 30 seconds) to grab attention, you must perfect the pitch for your invention so that a prospect wants to learn more.  In the Venture Capital world this is called an “elevator pitch” - an entrepreneur running into a VC in an elevator has 30 seconds to pitch his entire business plan (those 30 seconds are worth far more than a 100 page plan).  You can combine details about the development status of your invention, research on prior art and performance on the Swim Test to make a compelling 30-second pitch.  It might go something like this:

Inventor:  “Oh so you invest in new products…  I’ve invented a patent pending kitchen gadget.  My initial surveys found 75% of the target market saying they wanted to buy it on the spot for $20 and up.  It’s a stand-alone product that solves a really annoying problem everyone can relate to.  First stage prototype and concept drawings have been completed.  Initial reviews of prior art seem to indicate we can get a patent with meaningful claims.  Will you sign a NDA so I can tell you the details?”   

You’ve got more homework to do before making this pitch.  This simply illustrates how results from the Swim Test might be used later on.  Confirming your invention is not only important when making your personal decision to move forward, it’s critical for actually moving forward.

The Swim Test provides a rough method for making the decision to invest time and money in exploring the idea further. 

Financial Evaluation (guessing the potential value)

Remember that along with being an inventor you are also a venture capitalist.  Will your invention make you at least 5X to 10X your money within three to five years?  To answer that question you must gage (“guess” would be a more accurate word) the market potential for your invention and determine (again “guess” would be more accurate) the likelihood that your invention will achieve its market potential.   

The cost of turning a relatively simple idea into a commercial product is generally somewhere between $100,000 and $1,000,000 (not counting your time).  As the inventor your share of this cost (legal advice, patent filings, prototypes, engineering) will typically be around 10%.   In other words you’re likely to invest between $10,000 and $100,000 in hard dollars (your time valued at zero) to move your invention from idea to manufactured product. (If you plan to make and sell the invention yourself your share could be the entire amount).  Don’t worry if you don’t have the money.  If you have a truly great idea and are passionate about it you’ll find partners who will help you. 

Your time is worth something so you should assign a dollar value to it – the dollar value will be low since you’re learning on the job (how low is up to you).  We’ll use a below-minimum-wage figure of $5 and hour to value your time (at least you’re earning something while you learn).   The amount of time you’ll invest will vary tremendously.  For a relatively simple item you should expect somewhere between 1,000 and 5,000 hours over a period of 1-5 years.  It sounds like a lot and it is.  However, if you enjoy what you’re doing it won’t feel like a burden.  For the following discussion let’s assume you’ll spend 2,000 hours (@$5/hr = $10,000) and invest $10,000 in hard cash, a total investment of $20,000.

The VC Calculation

As your own venture capitalist you should ask yourself the following question:  Is my invention likely to generate between $100,000 (5X) and $200,000 (10X) in profit for me within three to five years?  That’s a pretty high hurdle.  Very few inventions ever meet that standard.  Nonetheless, it’s a realistic standard used by professionals.  Let’s look at an easier standard that’s potentially more appropriate for amateurs.  It’s called the “Rule of 72”.

The Rule of 72

To justify going forward more easily you could use the Rule of 72 as your investment guideline.  The Rule of 72 is a quick way of calculating how long it will take for your money to double at a fixed percentage rate.  For example, using the Rule of 72, if you put your money in an investment that returns 6% annually your money will double in 12 years. 

Here’s how it works:

Choose the percentage rate you would expect when investing your money in a safe and secure investment.  The percentage rate could be that offered by a CD, savings bond, mutual fund, in short an investment you believe will be safe for five years or more and generate a stable rate of return.  Next divide 72 by the percentage number (the percentage rate without the % sign or the decimal interest rate multiplied by 100).  For example if the interest rate is 6%:  72 divided by 6 = 12 years to double the investment.  The general formula is:

72 divided by the percentage number = years to double the investment

Using our example of a $20,000 investment and a 6% rate of return for a safe investment, the question becomes: will the $20,000 spent in developing your invention return $40,000 within 12 years?

The Difference between a VC return and the Rule of 72

There’s obviously a huge difference between $40,000 in 12 years and $200,000 in 5 years.  Are venture capitalists simply greedy or is there some other justification?  The difference is risk.  Doubling your money in 12 years does not require you to take much risk – conservative mutual funds have easily generated over 6% average annual returns for many years and will likely do so in the future.   If you wanted to be really safe you could buy US Savings bonds (current yield approx 4.5%) - in that case it would take 16 years to double your money.  

On the other hand VCs know that roughly 6 out of 10 investments will likely be complete losers.  Two out of ten may break even or make a little money.  And one or two should achieve the goal of better than 5X to 10X.

Figuring Risk

The value of an investment is equal to the return on the investment multiplied by the risk (likelihood) that the return will be realized.  Consider a bet on a coin toss (50/50 odds).  The bet pays 2X the amount bet.  Bet $1 on heads and if it comes up heads you’ll get $2.  If it comes up tails you’ll get $0.  In this example, we’ll make the return on investment 2X  and the risk 50%.  Here’s the equation for a $1 bet:

$1 bet = $2 (2 X $1) return on investment X 50% (odds) = $1 value of bet

In other words a $1 bet is worth $1 if it pays 2X and the odds of winning are 50%.  If you were a machine you would be indifferent between making the bet and keeping $1 in your pocket.

Let’s look at the lottery.  Is it rational for people to buy a $1 lottery ticket if the pot is $10,000,000?  The odds of winning the Big Game lottery (5 plus Big Money ball) are 1 in 76 million:

$1 bet = $10,000,000 X 1/76,000,000 = $0.13 value of bet

In this case a $1 bet is worth 13 cents.  A machine would never make that bet. 

On the other hand, if the pay-out were $350,000,000 (and there could be only one winner), the calculation would look like this:

$1 bet = $350,000,000 X 1/76,000,000 = $4.61 value of bet

A $1 ticket would be worth $4.61.  This example does not represent a method of calculating the return for a real lottery.  In a real lottery there can be multiple winners. The total prize may be shared.  Thus the payout of $350 million needs to be reduced by the odds of multiple winners.

Your invention is in many ways like a lottery ticket.  The difference is that the odds are much better and to a very large extent you control them.   At the same time, the cost of the invention lottery ticket is much higher and requires a lot more work than simply choosing a few random numbers.

Once you’ve preformed a more thorough market analysis and survey you will be better able to guesstimate appropriate odds for success.   The entire process of determining market potential and assigning odds on the success of an unknown product is somewhat dubious.  Nonetheless, the process is worthwhile because it will make you think things through.

Guesstimating the Market

Approximation is the name of the game here.  We’re only trying to hit the broad side of a barn.   Recently an inventor sent me an email with a subject heading, “$100 billion dollar opportunity.”  If she had been pitching a cure for heart disease or cancer I’d have been on board with that.  But no, she was pitching gift-wrap!  A quick thought exercise illustrates that she missed the barn by a continent:  In the US there are approximately 100 million households.  If we assume that EVERY household spends $20 retail on gift-wrap each year then the total retail market is $200 million and the wholesale market is ½ of that or $100 million.   Now $100 million is indeed a fine opportunity, but it’s 1000 times less than $100 billion.  Hitting the barn will make you credible to potential licensees.  If a potential licensee believes you are realistic then your odds of getting a deal rise tremendously.

The “market” for your invention is comprised of anyone who might buy your product.  It does not include everyone.  For example, the market for fishing rods does not include people who do not fish – it’s comprised of people who go fishing (50 million in the US according to the American Sportsfishing Association).  Keep in mind that the market for your particular invention is probably a subset of the market you’ve identified.  While there may be 50 million people who fish recreationally, only a portion of them go deep-sea fishing. 

The US Census Bureau has statistics on all kinds of things and is a great place to for basic statistics on the US population (281 million):

http://factfinder.census.gov/servlet/BasicFactsServlet

A research librarian at your local library can be an incredible resource for finding industry specific statistics. 

Another way to find statistics is to perform a Google search at http://google.com.  Enter various key words that describe the market segment until you find listings of relevant organizations.  Check out the organization sites and pretty quickly you should be able to find a few basic numbers.

Finally, the best way to guesstimate the market size for a particular item is to go to the ultimate data source, the retailers.  Buyers and buyer assistants at some retail chains can be surprisingly helpful and receptive. 

For example a Wal-Mart buyer for housewares knows precisely how many plastic hangers Wal-Mart sells in one year (it’s a big number – in 1995 a hanger manufacturer gave me an estimate of 2-5 billion – that’s billion with a “B” - units annually worldwide.  This information put stars in my eyes and led my company to waste $40,000 developing a failed adjustable hanger).  For many consumer products it’s not unreasonable to assume that Wal-Mart sells between 25% of the total number for that specific item.   If you can get a number from Wal-Mart you could multiply by 4 and probably get a half decent idea of the market size. 

How do you do this?  Call up Wal-Mart headquarters in Bentonville Arkansas.  Ask to speak with the assistant buyer for your product category.  Explain briefly that you’re an inventor and are hoping you can get a quick answer to a simple question – how many (your product category) does Wal-Mart sell each year?  Be clear you’re not trying to sell anything and thank whomever you speak to – even if the person turns you down.

If a buyer at headquarters won’t help you go to some local stores and talk to the sales people on the floor.  For example, if you were to go to a few (5 to 10) Home Depot stores and ask the tool personnel how many hammers they sold in a week (or a day) you’d come up with a very rough idea of the average weekly hammer sales for a single Home Depot.  Multiply that number by the number of stores in the Depot chain (approximately 1,300) and you’ll get a rough number for Home Depot’s total hammer sales.  Do some homework and you’ll find out Home Depot’s share of the hardware/DIY market.  Multiply annual hammer sales by the reciprocal of its share of the DIY market (the reciprocal of 33% or 1/3 is 3) and you’ll have a very rough approximation of the total US market for hammers per year.  For our purposes a very rough estimate is fine.

Les ethically you could call manufacturers and pose as a student gathering research for a term paper.  The funny thing about this is that the manufacturers you speak to have gathered their information doing many of the things discussed above (or have hired someone else to do them).  

When we began our negotiations to license the PowerShotâ staple gun to Black & Decker we walked in with our guesstimate of the total size of the staple gun market.  “Staple gun sales” is not a statistic gathered by the US census bureau so we had to do research the hard way.  We talked to retailers, we got a Dun & Bradstreet report on Arrow (the market leader) we looked in trade magazines for sales statistics on screwdrivers and hammers (assuming that staple guns would be less than hammers and screwdrivers)… we licked our fingers and stuck them in the air to feel the wind… and we guessed that the total US market for staples and staple guns was around $200 million.   Within minutes of our first meeting the B&D marketing person asked me how big we thought the market was – she didn’t really know either – I gave her our $200 million figure (this may or may not have been a good negotiating tactic) – she let out a sigh of relief and told me she was thinking the same thing.   The point here is that the “experts” often know as little as you do. 

This guess became very important when we were negotiating our royalty.  We had decided that a deal that would get us $1 million a year if/when B&D achieved 25% market share would be OK.  Many different formulas could have achieved that goal.  The one we ended up with for our royalty was, for each year, 2.5% of net sales for the first 500,000 units and 4% for all units thereafter. 

Guesstimating Market Share

Once you’ve selected a total market number the next question becomes how much of that market you might get (and how long it’ll take to get it).  Your guesstimate on this number should be guided by the reactions you received to your initial survey, the existence of alternatives and competitors and how narrowly you’ve defined the market (“fishing” vs. “deep sea fishing” or “hand tools” vs. “staple guns”).   You can assume you’ll get a larger portion of a more narrowly defined market.  There are always alternatives to your invention.  A horse and a bicycle are alternatives to a car.  A pair of running shoes is an alternative to a bike.  Think broadly about this question.  There is no one way to arrive at good guess.  Supporting a guess of upwards of 30% market share is awfully hard, no matter how great the idea.  If your guesstimate is between 5% and 20% it’ll be pretty safe.

100% Market Share is Unreasonable

If your invention will truly revolutionize a market and EVERY person you survey in that market says, “Yes, I will absolutely positively buy it,” then projecting 50% market share might be reasonable.  But 100% is never a reasonable expectation because:

·         It takes time to commercialize an invention and competitors are not standing still.

·         Even when people are highly enthusiastic and supportive they don’t always act.

·         There are always alternatives to your invention, including the choice of not benefiting from it (not spending money on it).

If you want anyone to believe you’re going to get more than 30% market share you need to have an invention and supporting data that really knock their socks off.  Likewise for self-evaluation: no matter how deeply you believe in your invention, never assume you’ll get more than ½ the market – even if all signs point to yes!

Guesstimating Odds of Success

You may sense that we’re piling one half-baked assumption on top of another.  And we are.  But the thought process is almost as important as the result.  Remember, we’re trying to hit the broad side of a barn.  Simply asking the questions, “How big is my market?” and “What are the chances I’ll succeed in reaching that market?” will cause you to focus on how you’ll make money from your invention.  If you have a great idea (you know this because EVERYONE tells you it’s great and everything else checks out positively) and you’re prepared to work your butt off and you’re fair and reasonable… then I’ll give you 50/50 odds on hitting a jackpot. 

Guesstimate of Invention Value

The basic equation for guesstimating the value of your invention is:

·         If Licensed:

Market Size X Market Share X Wholesale Price X Royalty = Maximum Invention Value of License

·         If a New Business is formed around it:

Market Size X Market Share X Wholesale Price X Net Profit =
Maximum Value of New Business

·         Market Size: Total number of units that might be sold over ___year period in the product category (consider market size for competitive/alternative products).   Hardware items should use a 5-year time frame.  Electronic items and software should use a 2-3 year time frame.  Fad items should use a single year.

·         Market Share: choose a number between 1% and 50% based on survey information, competitive/alternative products and gut.

·         Wholesale Price: 50% of average retail price for competitive/alternative items. 

·         Royalty: 1% to 5% - consider industry norms, development stage, patent status.

·         Net Profit:  10% to 40% - consider industry norms.

This number needs to be tempered by your odds of success.  As a last step multiply your final number by a gut feeling on your odds of success.  If you are willing to devote several full time years of your life and have no doubt that you’ll achieve maximum success your odds might be 75%.  If you are merely willing to put in a little effort and see where it goes then odds of 5% might be reasonable.

Example of SuperWidget

A widget is a thingamajig that does something-or-other.  In this example a typical widget sells for $20.  We’ve done our homework and believe that 10 million widgets are sold each year.  Our new SuperWidget is so incredibly good that everyone who sees our prototype says they’ll buy SuperWidgets instead of old-fashioned widgets.  We expect SuperWidget to sell for the same $20 price as the old fashioned widgets.  A royalty of 4% is on the high side for the widget industry but plausible because SuperWidget is so super.  Our guesstimate of value looks like this:

50 million units (5 year market size) X 50% (market share) X $20/unit
= $500 million X 4% (inventor royalty)
= $20 million Maximum Value of Invention License

Use 50% for odds of success:

$20 million X 50% = $10 million potential return

I’d say a potential return of $10 million merits serious attention.  Actually that depends on how much that potential return costs me.   If I need to spend $10 million in real dollars to earn a weighted (theoretical) return of $10 million, then it’s hardly a good investment.

Now remember how we came up with this number.  It’s not something you’d want to bet your life on.  You can’t count on it in any way at all.  It simply serves as a yardstick for determining whether or not your effort will be well spent.  Remember our VC number, we’re looking for 5X to 10X our investment.

The Utility of 10%

Whenever you’re in doubt about assigning odds of success or market share and you have no particular reason for choosing one number over another, choose 10%.  It’s easy and plausible to imagine you’ve got a 10% chance of success and will manage to get 10% of a given market.  Empirically, in my experience, 10% also seems pretty accurate.

Some Words on Sweat

All inventors should heed the words of Thomas Edison:  "Inventing is 1% inspiration and 99% perspiration."

In other words, the idea is the easy part. I would add further, that once an inventor starts perspiring, it's hard to stop. Each hour or dollar spent developing an idea can become justification to spend yet another hour, yet another dollar, until fatigue, an empty bank account, or just possibly success, ends the cycle.

When you have a great idea it’s hard to be realistic about its chances of success.  It’s even harder when you hear stories about how persistence pays off.  Persistence does pay off… if the requirements for success are there.  Other times persistence can lead to throwing away hard to find time and good money.

Work hard.  Get honest input from people you trust.  Be honest with yourself.  If the idea seems unlikely to succeed you should drop. 

Tomorrow is Another Day

In Gone With the Wind Scarlett O’Hara gets through the Civil War and Reconstruction by starting off each day with a belief that the past is irrelevant: “Tomorrow is another day”.  Economists say the same thing differently: “Sunk costs are irrelevant.”  It doesn’t matter how much time or money you’ve spent getting to where you are.  What matters is how much more you’ll spend to go forward. 

Let’s say I’ve bought a used car for $2000.  It’s given me nothing but trouble.  During the past year it’s broken down a dozen times and cost me another $2000 in repairs.   I hate the thing and want to sell it.  I figure I’ve got $4,000 in the thing so I plan to sell it for $4,000.  Anyone who’s tried this logic knows the world doesn’t work that way.   The amount I’ve spent is irrelevant to a buyer.  The buyer only cares what the car is worth to him or her.  If an equally good car can be purchased for $1,500 then my car is worth only $1,500.

The same logic holds for your invention.  How much time and effort you’ve spent is irrelevant to your customer. 

You should have the same attitude toward further development.  Forget how much you’ve spent getting your invention to where it is today.  Regularly ask yourself if $1 is well invested to continue with your invention.  Maybe the $1 is better invested someplace else.

Summary of the Confirmation Process
The above discussion provided some tools for considering the potential value of your invention.  To use the tools you will need to estimate (“guesstimate”):

1.       Odds of achieving success.

2.       How much money you will invest.

3.       Profit you will earn from your invention during the next 5-10 years.

The Wrong First Question
Many inventors begin by asking whether their idea can be patented. This is the wrong first question. A patent is only useful if an idea can make money and then, only if the patent itself helps make even more money.

The Right First Question
The first and most important question to ask, is this:

“Will anyone buy my product?”

It is truly amazing how many inventors proceed without research on this fundamental point. Some inventors feel that people will buy anything put it in front of them. "Look at the Pet Rock," they say.

Yes, let's look at the Pet Rock. For those who don't know, the Pet Rock is a... rock! It's packaged in a cute, brightly colored, cube shaped, cardboard box that looks like a cage. Printing on the box tells the "pet owner" how to care for his or her rock and details the joys of Pet Rock ownership. In 1976 this was considered very funny and the product sold 1.5 million units in six months at retail prices in the $7.50 to $10 range (the item cost maybe $0.50 - $0.75 to "produce"). Then, as quickly as it arrived, the Pet Rock faded off the shelves and into cultural history... never to be seen again. Well, "never" is a word that should never be used in marketing. The 70's are back in style. Maybe we'll soon see a resurgence of the Pet Rock!

But the Pet Rock is not an example that people will buy just anything. Rather, it's an example that people will buy a particular thing at a particular point in time if it suits their fancy. Surveys of prospective Pet Rock customers in 1976 would surely have indicated that the market potential was huge. In 1977 surveys of prospective customers would surely have shown that the market was dead. What does the market think of the Pet Rock today?  Go out and ask.

Survey the Market 

Surveys can be expensive, formal, affairs conducted by research companies using focus groups and statistical analysis. They can be as simple as asking for a few opinions from friends and members of your family.  The first hurdle you should jump is a private survey with family members and close friends.  When your invention is ready for public disclosure (generally after a patent has been filed) you should do more extensive surveys of people who do not know you.  The Invention City Survey in the Index is a good tool for performing this research on your own.

A Caution about Surveys

In a perfect world you would have patents filed and a professionally developed prototype before you start the survey process. 

1.       End users (and buyers) have a bad habit of considering even crude prototypes as samples of the actual product.  It’s therefore worthwhile to make the prototype as nice as possible before starting the survey process.  The closer to reality your prototype, the more accurate your survey information will be.

2.       Public disclosure of your invention may limit your rights to getting a patent (You can lose rights to file foreign patents.  And in the US public disclosure starts a 1-year clock ticking – you must have a patent filed within that 1-year period or lose the rights to a US patent).  Having a patent filed in advance of public disclosure is therefore a good idea.

Reading those notes of caution you might feel a big hand reaching into your pocket.  Making a nice looking functional prototype and filing a patent will cost you well over ten thousand dollars.  Would you spend $10,000 on a car if you were unsure whether or not it was in good working order?  In the same vein you shouldn’t spend $10,000 on your invention until you know (believe) it will sell.

The Disclosure Dilemma

So there you stand in the middle of the road not knowing where to go.  If you perform a comprehensive survey in public you could lose your rights to a patent.  If you build a fancy prototype and file a patent prior to confirming the market you could end up wasting a lot of money. 

What should you do? 

·         You should perform a preliminary survey in private with trusted family members and close friends.  Explain that you need honest answers, not answers that make you feel good.  Tell them that if they give you positive feedback you might end up spending a few years of your life and tens of thousands of dollars developing your invention.  Honesty is vital.  Be sure you listen carefully and don’t criticize the answers you hear.  A solid “No” is almost as good as a hearty “Yes.”  The most agonizing answer is a wishy-washy “Maybe.” 

If the people you trust are in a position to give you meaningful answers, if they could be customers for the invention themselves, then their opinions should be accorded a lot of weight.  If they give you a flat “No” it’s time to work on something else.  If they give you anything from a “Maybe” to a strong “Yes” or if they aren’t able to give you a meaningful opinion, then you must soldier on. 

Somehow some way you need to get a few meaningful opinions (5-10 will do initially if the 5-10 are on target for the item).  One way to do this while maintaining your rights is to ask reviewers to sign a confidentiality agreement.  You may need to offer something in return – perhaps a gift certificate. 

The purpose of this preliminary survey is rule out a clearly bad idea.

How a Preliminary Survey Predicted that an Invention Would NOT Sell

Some years ago an inventor came to me with an idea for a smoke detector that would be attached to the top of a Christmas tree in the form of an angel-shaped ornament.  Christmas tree fires are very dangerous.  Each year local fire departments air public service announcements about them.   I thought this was a fantastic idea.  So did my partners (all guys).  A smoke detector ornament right on the Christmas tree… the thing that was most likely to cause a house fire… how could that not be a hit?  I was absolutely positively sure that my wife would be an enthusiastic customer.  Imagine my surprise when she replied, “No.  We already have smoke detectors. Why do we need another one?”  Not taking my own advice I argued the case with her.  She still said, “No.”  Next I asked a secretary at my office.  She was a nervous type with two young boys.   I thought she was a slam-dunk for the angel fire detector.  “No”.  She went on to say the same thing my wife did, “I already have a smoke alarm, why would I want it?”  I asked a few more women.  No.  No.  No.  Here’s an important point – while all the guys thought the idea was great none of us would actually have bought the thing.   Women primarily make the buying decisions for Christmas tree ornaments and women had no interest!  I called back the inventor and told him I had no interest in his invention.  “Great idea, but it won’t sell.”  Naturally he wasn’t persuaded.  But here’s the kicker.  The following year a smoke alarm Christmas ornament (from someone else) made its way into a few catalogs.  The item didn’t sell and hasn’t been seen since.  The preliminary survey saved me well over $100,000 and many months of work.

Alternative to the Preliminary Survey

The WIN Innovation Center provides inventors, entrepreneurs, and product                                 marketing/manufacturing enterprises with an honest and objective third-party analysis of the risks and potential of their ideas, inventions, and new products. Fees are $175 for inventions and $200 for market-ready products.  The WIN program is a good value and a useful service.  When I see a new invention I consider a WIN review to be a plus.  But I’ll put just as much stock (if not more) in a well-conducted survey by the inventor himself.   As an inventor I don’t like the WIN program.  It’s too remote and keeps me from getting my own feel of the pulse.   That said, if you can’t find a good way to perform a preliminary survey on your own then I recommend the WIN program wholeheartedly.  For more information go to: http://www.wini2.com/

Remember RJ Reynolds

There is an art to conducting surveys and even huge corporations make colossal mistakes. RJ Reynolds spent nearly $100 million developing a healthier, smokeless, cigarette called Premier. Some people who tried Premier said it tasted, "like a fart." Others compared the taste to burned lettuce. Further, the company failed to consider that flicking ashes is an important part of the pleasure of smoking. Upon introduction, Premier failed dismally. Reynolds' surveys focused on the market potential for a healthier cigarette and failed to consider that, for cigarette smokers, health came second to taste and overall experience. The company assumed that the demand for health was high enough that even a bad tasting product like Premier would find success. The company was wrong.  Asking the right questions is the key to getting the right answers.

Another story About Collecting Information

A Taiwanese doctor claimed that he had a cure for prostate cancer.  He claimed a 100% success rate.  “How do you know your treatment is successful?” the doctor was asked.  The doctor replied, “After I treat my patients I never see them again.”

Should I Invest in a Patent Now?

Not in my opinion.  You’ve got more work to do confirming that your invention can be made profitably.  Once an inventor has determined that there seem to be customers for the invention, the question becomes whether or not the invention can be profitable, not just for the inventor, but for all of the parties involved in the commercialization process. Answering this question requires estimating a retail price at which the item will be successful and then finding out if the item can be made for a price (with acceptable quality) that allows you and your partners (retailers, marketers and manufacturers), to profit.

Often the true cost of manufacturing a product is not known until long after the product has been introduced. A complete and accurate estimate of costs requires a product to be completely engineered and designed. This is a time consuming and expensive process that should best be put off until after the inventor has committed to moving forward. At preliminary stages, cost estimates for making the product can come from looking at similar items that are already being sold.  

Likewise, in addition to surveys, looking at retail prices for similar, alternative and competing items can provide clues for retail pricing. A rough guide for consumer products is that retail cost is four to five times manufacturing cost.  If you can find products that utilize, more or less, the same components in a more or less similar structure, those products alone can provide a rough guide for your estimates. Alternatively, you might look at multiple items to find representations of the various aspects of the invention.

Let's say you've invented a hybrid flashlight/screwdriver. You could go to your local mass merchant and look at the prices for flashlights and screwdrivers. Your item could not sell for less than either item alone since it would certainly cost more to make. At the same time the cost to make a combined product should be something less than the cost for making the two individual products. Some parts are shared. For example, the handle of the screwdriver could become the battery compartment for the flashlight; the costs for packaging and distribution are paid for only one item instead of two. 

Estimate the retail price.

Now it is time to review the survey results or better yet, to survey again. Do people want to buy your product at the minimum retail price you've approximated? If people generally hesitate or say "no" to the estimated retail price, it's time to reconsider the project.

There are costs that need to be paid and money to be made as a product moves its way from drawing board to factory floor to warehouse to sales representatives to retailers and finally to customers. Each link in the supply chain costs money. Money for raw materials, labor, equipment, services, transportation, warehouse space, manufacturing space, office space, shelf space, packaging, advertising, customer service, telephones, inventor's royalty, legal and accounting fees, taxes, etc. 

A typical rule of thumb for consumer products is that the manufacturing cost for an item is 20% of its retail cost at a conventional retail outlet such as Sears. It is likely that a product retailing for $20 costs no more than $4 to make. (As products become more expensive this ratio changes and the manufacturing proportion rises. Thus a video camera selling at Sears for $1000 might initially cost $500 to make - including amortization for tooling and R&D).

Just as the best way to survey the market is with a working, finished model, the best way to know the cost of manufacturing your invention is to actually have it fully engineered, designed and quoted upon. Once again, however, our goal is to make a determination before spending all that time and money.

Estimate the Cost of Manufacturing.

Use existing products as guides to infer costs from retail prices and other information.  Saying that a product retailing for $20 should cost $4 to make does not mean that there are profits of $16. It means that there could be combined net profits of roughly $7.50 for both the manufacturer and the retailer. Net profit means profit after all the
expenses have been paid, the money that's pocketed at the end of the day. 

Here's a rough breakdown on where the money might go for a prototypical new product (from a new vendor) retailing for $20 at a mass merchant:

Manufacturer

Retailer

To manufacturers and retailers the product itself is really unimportant. Manufacturers and retailers are in the business of building and selling boxes, boxes that contain profits. A new product is an opportunity to sell additional boxes that hold additional profits. No one really cares what's in the box! The value of an invention to a manufacturer or retailer is specifically the profits it represents. Features and benefits are merely mechanisms by which consumers are motivated to buy the box.

Once an invention has been reduced to a box it should be clear that manufacturers and retailers can easily substitute one box for another. No matter how special the invention in the box, no one will make it or sell it unless the box holds profits at least equal to or better than those of other, alternative boxes. In the case of real world retailers and catalogs (as opposed to internet retailers) shelf and page space are limited and products are literally chosen for their ability to pay "rent" on the retail space they are allocated. Products that fail to pay are evicted.

I knew an inventor who, upon hearing that Sears might sell his product for $20, said, "ok, I want them to pay me $17." Sears said that they'd pay no more than $10 (they were planning to advertise the item with a big, expensive TV advertising campaign). The inventor responded with a price of $13 and Sears lost interest. Had the project moved forward Sears almost surely would have sold several million units and the inventor could have made several million dollars. Instead, the inventor went on to earn very little from his invention.

Everybody is happy to make money. Make people happy with healthy profits and they'll return the favor by helping you develop, manufacture and sell your invention. 

This brings us to the fourth step: 

Determine if Everyone Involved Makes Better than Normal Profits.

Consider the difference between the estimated retail price and the estimated manufacturing cost.

The best reason for a manufacturer or retailer to make and sell your product is that your product makes them more money than other products. In considering this point, it is important to look at the total picture. If your product is easier to make, sell or service than other items, manufacturers and retailers might be happy with a lower profit percentage; likewise if your item sells in higher volume. For a given use of resources, the lower profit percentage could be more than compensated by higher profits overall - at the end of the day it's possible that more money may be made from your product (with regard to its use of shelf space, manufacturing equipment, people, etc.) than from others. But... but... but...

Even if it is true, inventors should be wary of using the argument of higher volume to justify lower than normal retailer and manufacturer profits. Manufacturers and retailers are unlikely to believe you; they feel that all inventors believe their inventions will sell millions upon millions. There is a tremendous credibility problem. Manufacturers and retailers probably won't believe that higher volume will happen until after it has happened. 

Here's the bottom line: if the profits available from your product are perceived to be less than others, you'll have an uphill battle.

While manufacturers and retailers care only that boxes contain profits, consumers care only that boxes contain useful features and benefits. Retailers marketed the Pet Rock because it earned high profits; consumers bought it because it had the benefits of being funny, new and different.

In our society there are alternatives for everything. For established market categories the many alternatives are often nearly exact substitutes; consider breakfast cereals, soaps, headache remedies, stereos and compact cars. For newer market categories the alternatives are older technologies. Cordless phones compete with cord phones; cell phones compete with pagers and pay phones. When first introduced, personal computers competed with typewriters. In some cases the alternative is to do without the technology altogether. Even though a private plane would significantly cut the travel time to visit my wife's family, we do not own and fly a plane. We drive a car. If a car were too expensive we'd travel by train or by bus.

The consumer always has the choice of buying an alternative product or buying nothing at all. Always! (Except perhaps in North Korea).

If an innovation delivers benefits greater than its costs, users have reason to adopt the innovation. Each user views costs and benefits differently. This is the basis for the demand curve familiar to economics students. At lower and lower prices, more and more of a thing is sold. The thing could be first class airline seats, lobsters or toothpicks. With a few weird exceptions, the rule is that as the price of a thing goes down, more people will buy it. In considering the value of an innovation it is critical to think of the user and how and why the user will value it with respect to alternatives. 

Imagine a brilliant new machine that turns lead into gold. It only works with a hand crank, cannot be automated and for metaphysical reasons must be located in North Dakota. If you put in one pound of lead and crank for 48 hours you get one ounce of gold. In this example the price of gold is fixed at $240 an ounce and the machine, the lead and the workspace are available free of charge. Even with all of the free stuff, few people would want this amazing machine. Working the machine for 48 hours produces only $240 or $5 an hour! More money could be made by flipping burgers at a McDonald's in warm Miami for minimum wage. In this example, working at McDonald's is an alternative that is preferred to cranking out gold!

There is no doubt that a machine that turned lead into gold would be acclaimed as brilliant. The inventor would be featured on the cover of magazines and on innumerable TV talk shows. Nevertheless, if it took 48 hours of hand cranking to turn out one ounce of gold, few people would want the machine, even if it were free. The inventor would make no money. The machine would be a commercial failure.

If that same machine produced an ounce of gold with a mere 6 hours of cranking, the machine would have an output worth $40 an hour - so long as gold remained at $240 an ounce. Now the machine is probably worth buying. How much a buyer might pay depends on the cost of running the machine (including maintenance and supplies), aversion to freezing winters in Bismarck and the risk that the price of gold might go down in the future - if lots and lots of people start making gold then gold would cease to be scarce and the price of gold would plummet. Furthermore, the lead and workspace that are free today in this example could become quite expensive tomorrow (not to mention the potential liabilities that come from working with lead).

In valuing a new product, a customer therefore considers both the potential benefits and the costs and risks associated with receiving those benefits. I don't mind spending $15,000 or more on a car if I believe it will run over 100,000 miles trouble free. If I expect the car to need service after 5,000 miles the value of the car goes down considerably. This is why Toyotas sell for more than Yugos. This does not necessarily mean that I would buy the Toyota. At one set of prices I will choose the Toyota. At another set of prices I will choose the Yugo. Cheap enough, the Yugo becomes a better value than the Toyota. Too expensive, the benefits of the Toyota are lost.

Toyotas and Yugos deliver the same primary benefit of transportation. One can be easily substituted for the other to get from here to there and back again (even if the Yugo requires a repair stop for the return journey). If time were irrelevant and the cost of a car (taxi, train, bus etc.) high enough, walking would be an alternative too.

In considering alternatives it is also important to look ahead and consider what will be coming soon. In 1995 it was clear that the Internet could perform many of the same functions as a fax machine. An inventor of an improved fax machine in 1995 would therefore have been wise to consider the Internet as an alternative to his invention.

Here then, is the fifth step:

Consider Present and Future Alternatives.

No matter how good your invention is, a customer can always choose something else. Just because a customer doesn't know the alternative today doesn't mean he or she won't know it tomorrow. When performing surveys respondents should be informed about alternatives to discover how the invention fares in a competitive environment. 

Manufacturing and commercializing a product requires investments that are typically amortized over some or all of the anticipated life cycle of the product. When Boeing sets a price for a new plane, the price includes a portion of the plane's billion dollar cost for development. To keep the price of the plane competitive, Boeing may forecast receiving that portion for each plane sold for a period of ten years or more. Therefore Boeing must forecast the life cycle for the plane before it begins investing in development. Boeing needs to believe that the plane's life cycle will be long enough to recover development expenses (while remaining competitively priced) otherwise Boeing will drop the project.

Inventors of products like the Pet Rock must make similar calculations. The amounts involved are likely to be much smaller. For example, something like the Pet Rock could probably be brought to market for less than $20,000. It's possible that $20,000 could be recovered with the first order. In this case, since amortization is more or less instantaneous, life cycle is irrelevant.

Obviously, the longer the life cycle the more money an invention earns. A longer life cycle reduces the risk of investing in the project.

In general, the biggest threats to a product's life are new technologies and responses from competitors (in the case of fad items like Pet Rock it is the fact of being a fad). To a degree these things can be forecast. Thus the next step in evaluating an invention is:

Estimate the product's life cycle.

Determine if the life cycle is long enough to both recover investment in development and earn a healthy return on effort and risk.

Finally we have reached the point where patents may be relevant. A patent is the right to exclude others from using a specified technology. This can impact the potential responses from competitors and enable higher than normal profits. However, a patent can take several years to issue and enforcement of a patent is not possible until after the patent has issued. Pending patents can not be enforced! 

An inventor may therefore think it wise to wait until a patent has issued before commercializing an invention - unfortunately this means that the invention will probably enter the market two or three years later than if the inventor had not waited for a patent to issue. During that time competitive products may have entered the market, possibly including competitive products that directly violate the pending patent! In a worst case scenario an inventor could see a patent issue just as the life cycle for the invention is ending. In general, therefore, being first to market matters far more than having an issued patent.

One further point about patents should also be understood. Issued patents can be challenged and revoked. A competitor "illegally" utilizing technology claimed in a given patent may claim, upon being sued for patent violation, that the given patent is not valid; the competitor may point to prior art patents in the public domain or to some product offered for sale in Outer Mongolia ten years prior to the patent filing date.

I raise these points to knock some glitter off the patent god that all inventors worship. Nonetheless, patents can be incredibly valuable assets. In fact, most large corporations will not license an invention unless it has the potential for meaningful patent protection. The issue here is what value does the patent add to the invention?

A patent gives the holder the exclusive right to make use and sell a specific implementation of a technology for a period of time. In the United States that period is now twenty years. If the technology protected by the patent is necessary to your invention, and your invention is successful, and your invention has a life cycle of more than a few years, this exclusive right can be quite valuable. An issued patent can help in preventing competitors from copying your specific implementation. An issued patent will NOT prevent someone from copying your idea unless the only way to execute the idea is by using the specific implementation claimed (or found to be equivalent to a claim) in your issued patent (and the patent is held valid in any subsequent legal disputes).  

A patent's value depends directly on one factor: Its ability to create higher profits. Increased profits can come by enabling lower costs (costs of production, safety, environment etc.) or through features and benefits that buyers will pay a premium for. If a patent does not enable higher profits then it is, theoretically, worthless.

As part of the profit consideration the costs of patent enforcement, filing and maintenance should also be considered. What are the chances that another inventor will sue claiming rights to the patent? What are the odds that someone will successfully challenge the patent? What are the costs for filing and maintaining all of the relevant patents in the US and worldwide?

The more successful, the more visible a product is, the more likely that there will be challenges to the patent in one form or another. The cost for filing a relatively simple US patent for a mechanical device is approximately $10,000. Having that patent filed and issued in developed countries worldwide could add another $50,000 - $100,000. Patents can rarely be combined; more often they are broken up into multiple patents. Therefore, the inventor must consider the costs for each patent.

When all of this has been considered the inventor can then a) estimate the total unit sales of the invention over its life cycle; b) multiply the total unit sales by the estimated additional profits a patent will enable; and c) subtract the estimated costs for obtaining and maintaining the patent(s). Now it's time to take the final step in evaluating the invention:

Estimate the value of patent(s).

You may discover that patent protection isn't worthwhile. You might also determine that Sony should gladly pay you $10,000,000 for exclusive rights. Keep in mind that, however you perform your calculation, there is a virtual certainty that third parties will view your estimates as optimistic. Also know that, if licensing is a goal, most large firms have rules about royalty rates. Each industry has its own rules. In the hand tool industry, for instance, royalty rates of 2-4% are common and rates above 5% are pretty much unheard of. 

In addition to making licensing an attractive option, a highly valued patent can be extremely helpful in raising funds to launch a new venture. A strong patent reduces the risk of moving ahead by securing a competitive advantage.

Here is a summary of the steps: 

1. Survey the market. 
2. Estimate the retail price. 
3. Estimate the cost of manufacturing. 
4. Determine if everyone involved can make better than
     normal profits. 
5. Consider present and future alternatives. 
6. Estimate the product's life cycle. 
7. Estimate the value of patent(s).