Patents can help businesses make money through four different strategies. However, the pitfalls of each strategy should be understood so that you don’t waste your money.
So, how do you use patents to make money? The four main strategies for making money with patents are:
- Commercialize your patent rights
- Market your invention as patent pending or patented
- Sell your patent rights
- License your patent rights
These strategies and the pitfalls of each strategy are discussed below.
Let’s dive in.
1. Commercialize your invention
Patents can help you to make more money on a product.
Let’s discuss how?
The basic purpose of a patent is to stop competitors as a barrier to entry from selling the patented product. By limiting the number of companies that can sell the patented product, the patent owner can sell the patented product at a higher price because of the simple law of supply and demand. With a patent, supply for the patented product is very low. You become the sole supplier of the patented product. When supply is low, you can sell the patented product at a higher price.
However, don’t let your expectations be too high. Below are seven pitfalls that explain the limitations of a patent. I recommend that you understand each pitfall so that you don’t make a wrong decision and waste your money.
Pitfall #1: Not a monopoly
A patent is not a monopoly. It is only a monopolistic type right. In particular, a patent gives you an exclusionary right or a right to exclude others from making, using, selling, offering for sale, or importing the patented invention into the United States.
Let me clarify this point a bit more by telling you what a patent does not give to you. A patent does not provide a right to make the patented invention. If a patent gave businesses the right to make, then it would truly be a monopolistic right like the right to distribute electricity or water. The government is not giving you this type of right with a patent.
Many are confused about this basic right that a patent gives to you. If you spend your money on a patent thinking that it will give you the right to make, then you will get disappointed later. For example, when someone sues you for patent infringement, then you will be surprised that you might be liable for patent infringement.
What this means is that even if you get a patent on your invention, you can still infringe someone else’s patent rights. How? Let me explain with an example. If someone else secured a patent on a pencil (e.g., a lead rod with a protective sheath around it) but you improved it by making the lead come out automatically with the push of a button (i.e., mechanical pencil). You can get a patent on the mechanical automation of the pencil, but you would still be infringing on the broad pencil patent.
Pitfall #2: Weak market demand
A patent does not create market demand for your invention. Consumers must want to buy the patented product so much that they are willing to pay for it, and hopefully pay a higher price. If they don’t want the patented feature, then the strongest and broadest patent cannot do anything for you. The patent won’t be worth the paper it’s written on. You will not make any money on your invention.
Yes, a patent can help you to sell your product at a higher price. However, it does not guarantee to do so. Patents themselves don’t make you any money.
Pitfall #3: Small Market Size
The size of the market must be very large. In other words, the number of units of the patented product that you could sell must be huge. It must be so huge that the cost to get a patent should be minuscule compared to the market size. It must be so large that if you were only able to capture a portion of that market, you would be able to make a lot of money.
Pitfall #4: Competitive alternatives
Although the patent gives you the right to exclude others from selling the patented product. Your competitors might come up with different solutions to the same problem that your invention solves. These alternative solutions are not the same as your patented invention.
These competitive products must not be as desirable as your patented invention. Otherwise, consumers would purchase your competitor’s product at a lower price. For example, let’s say your invention saved a manufacturer $1/day, but it cost $100 to purchase your product. If a competitor invented a different solution that saved $0.75 per day but only cost $25, consumers might want to try your competitor’s solution at a lower cost to try it out. This happens all the time. A business introduces the best product in the market at a high price. Their product is packed full of features. Their competitor introduces a lower featured product but at a lower price. At least some of the consumers will purchase the lower cost product from your competitor.
The bottom line is that your competitor stole a sale away from you. Hence, the
Pitfall #5: Weak and narrow patents
Not all patents are created equal. Just because you get a patent does not mean you have a corner on the market.
Now, what is the patented product or patented invention? I’ve been using this phrase without really defining it. The patented product is defined by the claim(s) in the patent. You can find the claims at the back of the patent. The patent might explain a variety of embodiments and aspects of the patented invention. However, the patented product is not what is described in the patent. The patented product is only what is defined by the claims.
If the claims are broad, then the patent protection is broad, and vice versa. If the claims are narrow, then the end result is that competitors can and will go around your patent and offer the same benefit even though they are not offering the same invention. Market demand might exist for the patented product but if the patent itself is narrow, then your ability to exclude others to charge a higher price might not exist. Others might be able to design around your patented invention. By making a simple change, they might be able to offer essentially the same invention with a slight twist which does not affect the functionality of the patented invention.
The claim scope is the most important aspect of your patent that you need to understand. Talk to your patent attorney if you don’t understand it.
Pitfall #6: Patent litigation is expensive
You must be willing to spend the money and time to enforce your patent. Otherwise, competitors would just infringe on your patent and continue to compete against you. Although de jure (i.e., legally) you have the right to exclude others, de facto (i.e., in effect), you have none because your competitors are operating as if you have no patent. That is, if you don’t enforce the patent.
Now, you might be thinking that the cost to litigate these issues is expensive. Although litigation is very expensive and many inventors and businesses cannot afford it in the beginning, if the patented invention becomes popular, the profits of the business should be sufficient to fund the litigation. Moreover, if your competitors are making a significant amount of money on the patented invention, then you should be able to find a contingency fee patent attorney to help you enforce your patent.
Pitfall #7: Startup costs are high
The downside to the basic strategy is the high cost for manufacturing and selling the invention compared to a simple license deal. When you manufacture and sell products, you have to cut molds, build a website, rent space, hire employees, build a distribution network, etc. These activities cost money and time to implement which increase start-up costs.
2. Market invention as patent pending or patented
One of the basic strategies in using a patent is to use the patent as a marketing tool. You can market the invention as patent pending or patented as the case may be. You’ve seen the advertisements “Patented: Only available here.”
You don’t have to make it look cheesy by splashing it across your website. However, having a reputation for patenting and enforcing your right to exclude others will go a long way. Others will tend to respect that right.
For example, when Steve Jobs introduced the iPhone and pinch technology, he alluded to the strength of the patent they had on it. Steve Jobs debuted the iPhone by saying “Boy have we patented it.” Just the fear of being sued for patent infringement kept competitors away.
3. Sell your patent rights
The next logical progression to making money with a patent is to sell the revenue stream you just built based on the patented invention. If you make and sell a product, you have shown proof of concept and also provided proof of market demand. These are the two things that must exist to make money. You can get more money out of the invention because you built a business with proven market demand. People who create businesses and sell them are called serial entrepreneurs. They don’t like to do one business but rather have their hands in a lot of pots.
Patents are a barrier to entry
Now, you don’t need to be profitable to sell the business or patent. Facebook was not profitable in the beginning. Nevertheless, investors were willing to give them money because of their potential. The same may be true of your invention. However, in general, the further along the route to profitability you can take your idea, the better your chances of selling the business or patent.
Let me explain. If you file a patent application to secure patent pendency, that has some value. You have a priority date that others might need. If you can show a working prototype, then that shows proof of concept. If you can build a profitable business based on the patented invention, then that also shows proof of market demand. You also probably have some trade secret knowledge that makes your business successful. Now, if your patent application matured into a patent, then that acts as a barrier to entry against your competitors and can protect your market segment.
A profitable business has value because it is a revenue stream. However, buyers and owners are always thinking about when competitors will come in to compete and reduce or take away customers. A patent helps to reduce that threat because you can exclude competitors from your market segment.
Growing up, my parents were small business owner-operators. They owned dry cleaner. The greatest fear that they had was whether another dry cleaner would come in across the street dividing the available customers who dry clean their clothes. Your patent gives you the right to exclude or stop your competitor from staring a competing shop across the street speaking figuratively, of course.
Given that the patent is the means by which you can stop competitors from offering the same patented feature or product as you, the above example illustrates the importance of having good patent protection. A patent helps to mitigate the rise of other competitors that would steal your customers away from you.
Unfortunately, as discussed above, there are limits to the patent you might have in terms of breadth of patent protection, etc. In this regard, you need to think of patent protection in broader terms. For example, instead of protecting the primary feature of your product, perhaps, you can protect the product from different angles – method of making, method of using, etc. You would protect these other aspects with multiple patents. Now, we are talking about a patent portfolio to protect multiple features of your product. In this way, although a competitor might be able to go around one patent, it is much harder to go around multiple patents.
When you sell your business, a patent or patent portfolio increases the valuation of the business. As such, although the business by itself might be worth a certain sum of money, each patent might increase the strength of the revenue stream, and thus the value of the business.
Pitfall: Proven patents are more valuable
The common pitfall here is that some inventors think that if they get a patent without building up a business that they can make money. It may be true but that is not the norm. For someone else to buy a patent for any significant amount of money, they would have to see the value of the patent. One way to show the value is to show them gross revenues that you’ve been able to build up.
4. License your patent rights
Some people think that if you patent your idea then you can make a lot of money by licensing your patented idea. To implement this strategy, you would first secure a patent then either sell or license your patent rights to another.
People have made money in this way. However, it is not easy to make money with this strategy.
Many gurus today pitch this idea. However, what they aren’t telling you is that it takes a lot of work to make money this way with patents. You have to have more than just an idea. For example, you may need a portfolio of patents, specialized know-how or connections to sell your idea. However, this discussion is beyond the scope of this article.
Patent licenses do occur for a single idea or a singular patent without more. However, in my experience, license deals like these are not the norm. Rather, licenses typically arise out of litigation or some other business need.
The following are four (4) ways that license deals generally come about.
Route 1: Police the market
One way that a patent license arises is when the patent owner notices a competitor offering the same patented invention at a trade show, on the internet or from a customer. The patent owner would send a cease and desist letter. Put simply, they are asserting their right to exclude granted by the patent. If the cease and desist letter does not get the infringer to stop, then litigation ensues. Through the monetary and time pressures of litigation, a license might arise where the infringer agrees to pay the patent owner a royalty. The bottom line is that competitors don’t want to pay you a royalty unless they must or unless it is beneficial to them. Through litigation, once they see that it is a losing cause, they will enter into the license agreement because they don’t want to pay their attorneys and you when they lose, that is if you are okay with them continuing to sell the patented invention.
Some patent owners have in the recent past been aggressive with their enforcement efforts. They are usually described as a patent troll. They take a generous view of the breadth of the patent protection afforded under their patent portfolio. Plus, they offer a settlement that is cheaper than fighting the litigation. To me, instead of using a pejorative term for these entities, I like to say that they have patent trollish behavior.
For example, they might assert a large number of patents against an individual and offer a low settlement fee so that the cost to settle the fee is less than the cost to investigate whether the claim of patent infringement is valid. Nevertheless, these types of activities do exist, they do make money and you can engage in them but they are frowned upon by a majority of patent attorneys. Hence, you would have to look for patent attorneys that would take on your case should you choose to enter down this route.
Route 2: Cross license deals
A cross-license is a license where each of the parties offers a license to their patent portfolio to the other party. Cross licensing deals arise in a variety of situations. For example, they may arise out of litigation. A patent owner sues its competitor for patent infringement. The competitor looks through its portfolio of patents and sues the plaintiff for patent infringement on its own patent. Instead of litigating the issue and potentially having both parties annihilate each other, both parties agree to peacefully cross-license each other’s technology to each other so that both can co-exist in the marketplace. This is one of the ways that the cross-license arises.
The party that was initially sued for patent infringement had looked through its own patent portfolio. In this regard, its patent portfolio could be considered as a defensive measure. It functioned to threaten and thus reduce its own exposure to patent infringement liability.
Route 3: Actively license or sell your patent
Some companies have an idea submission process. You would submit your idea and if it is of value to the company, they would offer to buy or license your idea from you. However, these companies typically do not sign nondisclosure agreements. This would be the cheapest way to disclose your idea to a potential buyer. However, many companies that have a formal procedure of considering other people’s ideas will tell you to file a patent application on your idea. They don’t want to be subject to a breach of contract claim should you think that they somehow stole your idea. After all, your idea could have been independently derived by their engineering team and have been in the works already.
If you think that you will make money by offering a license to your patent, then you will probably fail. The reason is that a mere patent license by itself is probably not a significant benefit to the licensee. The patent gives you the right to exclude others. The patent license is merely a promise not to sue them to exclude them from the marketplace. However, if the prospective licensee wanted to get around your patent, he or she could design around your patent, attack the validity of your patent, etc. The prospective licensee will always try to get around your patent first before giving you royalties for your patent. Patent licenses are normally borne out of a need such as a settlement agreement.
The costs involved in making money with securing a patent then licensing it is too high while the probability of having a winning idea is very low. In the meantime, you have to spend money to secure the patent going further in the red. Most people are not able to withstand the cost to get a patent. Hence, this notion that you will be able to secure a patent and make a lot of money off of it is not suitable for most people.
Route 4: License outside of our vertical market
Some patents are written in a way that it claims something broader than the direct market that the inventor is in. In this case, the patent could be licensed to others in a different vertical niche market than that of the inventor/patent owner.