This article is sourced from Episode 10 of Invent Anything with John Cronin. Listen here.
Once your patent is granted, you may wonder what you can do with it. There are a variety of ways to make money with patents, whether you are in management or another supervisory role, or you are an inventor looking to leverage your patent. We will discuss six primary ways to make money from a patent, namely patent litigation, intellectual property licensing, increasing gross margins, monetizing brand and marketing with your patent, contractual value, and pricing in the value of intellectual property to a stock.
Patent litigation costs are often large, and thus patent litigation often risks capital. Patent litigation costs can range anywhere from hundreds of thousands to millions of dollars, and since said litigation can take years, it may take a long time and significant capital to make you money. An additional risk of patent litigation is the possibility of being counter-sued. There are a few novel strategies associated with patent litigation, such as using patent litigation to slow down smaller companies from raising capital. Another novel strategy is micro-litigation: engaging in patent litigation and settling quickly in the half-million-dollar range in order to avoid drawn-out litigation. An additional novel strategy of patent litigation is to litigate in order to see the records of a competitor via subpoena. Patent litigation can help you decide whether your patent has the strength to stand up to copycats or can create pressure on your customer base to stay with your product to avoid a lawsuit, or disrupt the defendant’s company operation and leadership.
Intellectual property licensing can be divided into carrot licensing and stick licensing; carrot licensing is entered into voluntarily, while stick licensing is the result of patent enforcement. Carrot licensing can help you to address opportunities in multiple markets, and to form joint ventures by giving your partner or partners some rights over your patents so that they can produce goods or services using your intellectual property. Stick licensing is used prior to pursuing patent litigation and seeks a license by alleging infringement and raising the threat of litigation. By granting a license, you can generate revenue in markets in which your business does not otherwise participate, whether using either a carrot or stick approach. One novel licensing strategy is to use the process as a trojan horse for acquisition, by approaching an entity with a license and causing them to realize that it is more optimal to acquire your company. Further valuable benefits of licensing can be to establish good press for your company or to gain access to the technology of others. Finally, you can utilize licensing if you intend to change strategic directions and leave a given market but want to continue to generate revenue in that market by licensing your intellectual property.
Gross Margin Enhancements
Your gross margin is the revenue minus the production cost of your product as a percentage of revenue. If your product has almost no cost to make, your gross margin will be close to 100%. Some types of products tend to have higher margins than others; for example, software patents tend to have a gross margin between 80% and 85%. In terms of actually making money with your patent, you want to have room for growth within your gross margin, so a product starting with a lower gross margin is preferable for this strategy. With a lower gross margin product, you have room to leverage your patent to prevent copycat products, and thus have the flexibility to sell your product at a higher margin. Patent protection has been shown to correlate to higher margins compared to non-patented products. The market is often willing to pay higher prices for patented products, either due to perceived quality or due to the cost and aggravation associated with developing an alternate solution that avoids your patent.
A brand is a distinguishing symbol, mark, logo, or the like that a company uses to differentiate its product or service from its competitors. This brand can be used to create brand identity, which has marketing benefits. Patents can be created to further support a brand, by allowing a company to identify itself as an innovator. Companies that use patents to demonstrate innovation are often seen more favorably in the marketplace – a “white hat” or positive characteristic, as opposed to the potentially negative connotation of litigation. The synergy of patents and brand names can work in tandem to make more money. Patents can also help to protect a distinctive design of your product, such as by protecting a recognizable shape or layout of your product that is an identifiable part of your brand (such as a distinguishable soda bottle) through design patents.
Leveraging the contractual value of your patents is an effective way to make money with your patents. In essence, when your company enters into a contractual agreement with a supplier, the supplier must consider the value your patent or patented product contributes to their ability to supply your product The supplier may in fact be dependent on your patent to build your product for you, limiting their margins to be obtained. This results in a lower cost for your product, increasing your gross margins accordingly. Additionally, if your supplier knows of your patents, they cannot supply your competitor the patented technology due to the concern of willful infringement. Further, supplier acceptance of the contract provides your company patent exhaustion, where the sale of the supplier product provides an inherent license and protection against the supplier suing for patent infringement. It is important to note that leveraging contractual value is easier the more patents you have because it is more difficult to invent around more patents.
Pricing on the Value of Intellectual Property to Your Stock Value
Generally, a larger intellectual property portfolio does not necessarily correlate with an increased stock valuation. There are many factors to developing patents that can positively affect stock value, such as high-quality, well-written patents, and supporting know-how. However, successful strategic monetization of patents (such as has been previously discussed) can help to raise the value of your company and stock. In a private company, you can use patents to encourage investors to invest in your company based on the strength of your intellectual property, which in turn raises the value of the company. In a publicly-traded company, the results from leveraging your company’s intellectual property can improve competitive advantage and add revenue streams, which are positive for the valuation of your company. These successes, carefully and thoughtfully messaged to investors and the market, can positively affect stock valuation.
Of course, there are combinations and hybrid strategies of the above monetization approaches. Each company must assess its objectives and build the right “playbook” for your business.