How Much Do Inventors Make: Everything You Need to Know
What to do after invention of any Product? Patents, Inventors, Sale and Profit sharing ratios. Prepare your legal documents on papers and make your product sale15 min read
How Much Do Inventors Make?
The question "how much do inventors make" does not have one answer. A great invention at the perfect time can earn the inventor millions, a few good inventions can keep the inventor going for years, or inventing can be a money sink that never amounts to anything. However, there are several ways to profit from an invention you should know about.
Invent Smarter, Not Harder
If you want to invent something because you always wanted to do so or because you're passionate about the product, that's perfectly fine. However, you shouldn't expect to get rich just from following your heart. Inventing as a hobby can be great fun, but you'll need to put in a lot more effort if you want to make a profit.
- Curb your enthusiasm. The first thing to do when you try to make money off your inventions is to keep your expectations low. That way you can set realistic goals and the results won't disappoint you no matter what they are. A recent survey showed that 54 percent of inventors think their invention will make over $5 million with another 24 percent expecting at least $1 million.
So, 78 percent of inventors expect to make big bucks, but only 5 percent of patents even go commercial, and fewer than 1 percent generate seven figures for the patent holder. Five or six figures is much more realistic, but that's only if you put in a lot of effort, invest a lot of money, and don't hold out for a jackpot that may never come.
- Research your industry. With over seven billion people out there, one of them might have invented what you want to create already. Even if you don't want to dig through the patent records themselves, you should at least research your competition and see what already exists. This lets you know what to avoid, what to change to make your invention unique, and what to improve to make it better.
- Research your market. Not only should you know about your competition, you should also know whether there's a strong market for your invention. It doesn't have to be a big market if your product is cheap or if there's strong interest in a small market. However, you should have some solid numbers for how much money you can expect to make from your invention before you start investing in patents and marketing. And don't forget that the market is dynamic, and what appeals today could be out of fashion tomorrow. Understanding your invention's life cycle is an important part of estimating its profits.
- Get help. There are inventor resources out there for every step along the journey. They can help you craft your invention, get your patent, and then sell, license, or use it for yourself. These services cost money, but you need to invest a lot into your invention if you want to profit from it later.
However, you should also be very careful whom you trust. Some patent services will connect you to the professionals you need, but others will take your money and do nothing, or even steal your idea. These companies (also sometimes called invention promotion companies) will tell you your invention is just what the market needs, but they'll ask for money up front, claim it's a bargain, and not put you in contact with a patent lawyer. If you end up with anything, it'll be a useless design patent.
You can also make use of friends who are good at inventing, marketing, networking, and running businesses, but make sure you have them sign non-disclosure agreements first.
- Don't give up. Bringing an invention to life and then to market is a long, grueling process, and it may demand you do things you aren't experienced with. You'll also hit a lot of roadblocks and get a lot of rejections. While you shouldn't be so stubborn that you spend all your time on a bad idea, you also won't make any money if you give up halfway through.
- Understand patents. The United States has three major types of patents: utility, design, and plant. Design patents are cheaper and easier to get because they only protect the shape and appearance of an invention. For most inventions, you'll want a utility patent. You'll also want to pay for a professional patent search to make sure you don't infringe on another patent and there's no prior art.
A bad result here is much cheaper than a bad result later, plus you have the chance to alter your invention to make sure it's unique, non-obvious, and specific enough to avoid the other patents. And make sure you search the internet if your professional service doesn't.
Remember that if you publicly sell or use your invention in the U.S., you have 12 months to file a patent or the patent office will consider it "prior art" and not award a patent. However, its design can still be a trade secret. The patent search can also lead you to patents the owners aren't using, and so you can make your profit even if someone else thought up the invention first.
- Use patent law wisely. Provisional patents are a way to add an extra year of patent protection to your invention, and they're much cheaper and easier to get than a regular patent. However, the provisional patent application needs to be as detailed as a normal application. If it isn't and you face a court challenge, you may lose your chance to file for a normal patent. You also need to file the regular application within 12 months of the provisional patent application.
- Understand the costs. Turning an invention into a profit demands a lot of time and money. You'll have the material cost of the invention process, research costs, legal fees, patent fees, marketing costs, and more. At each step, you should make sure your realistic profit goals are worth the extra investment. You should also work out the manufacturing costs and retail price even if you don't plan on selling your invention yourself.
The 6 Ways to Profit from an Invention
- Sell Your Patent
Every patent holder can sell his or her patent to someone else, including corporations and individuals. If you are one of several names on a patent, you can sell your stake in a patent independently. However, things get complicated quickly if you don't tell the other patent holders first, so many joint inventors will create a small company and invest their patent rights in that. They can then sell the patent all at once and make sure everyone profits equally.
When you sell a patent, you usually get a single lump sum for it. The contract of sale can include royalties for a set amount of time, but that's not common. Royalties let the old patent owner or owners earn money based on how well the product sells or how efficient a process turns out to be. But whether it's one payment or many, you can't renegotiate later because the sale is already complete.
Selling a patent may be best if you prefer inventing over managing a business. It's also a good option if you worry that your invention won't be popular and you won't make much in royalties. You might need a lump sum after investing a lot into your invention.
- License Your Patent
Rather than give up your rights to a patent completely, you can license it out for a set amount of time. Once the time runs out or someone ends the contract early, you get your patent back. Licenses are usually based on royalties, but you can also get a lump sum when you sign the contract. A license agreement can also have set payments that aren't based on the product's success. Sometimes contracts combine these two with a guaranteed minimum income that goes up if sales are good.
The advantage of licensing is that it gives you more leverage over the licensing party. If they don't live up to the contract or you don't like how they use your invention, you can take it back and find a new partner. You can also get more money if your invention turns out to be popular. However, you get less money at first in exchange for that leverage. For instance, a first-time inventor can expect a royalty rate of around 3 percent, and an experienced inventor may see up to 25 percent of the gross profit.
- Invent for a Company
Companies that do a lot of research and development usually have rules in place that let them own the inventions their employees create while on the job. This is called "work for hire." To encourage their employees to invent things, these companies offer bonuses and other rewards.
The biggest advantage to inventing for a company is that the company does all the investing, patenting, and marketing for you. The inventor faces no risks aside from the ones that always come with a full-time job. You don't have to spend your own money and you don't have to worry that no one will use your invention. In exchange, you get less money this way than you would from any other way.
- Sell Your Idea
You can sell your idea to a company as a freelancer, someone who doesn't work for the company directly. This lets you have the company take on the costs of patenting an invention, but it's a very risky option since the company might try to steal your idea or otherwise cut you out. You should definitely consult with a lawyer first to discuss how to approach the company and in what order to do things. A non-disclosure agreement is a good first step, but not every company will want to sign one.
- Go into Business for Yourself
If you have the business sense to succeed in a competitive market or if you have a good friend who can get a company going, you can skip the sale and start your own business. This lets you sell your products directly to the companies and consumers who want them. Doing this demands either a lot of money, a few wealthy investors, or a good crowdsourcing campaign, but you can hire employees and bring on partners who can help you manage the parts of the business you have no experience with.
Going into business is definitely the riskiest option, and it means taking on a lot more work. However, it's also the best way to make a profit on your invention. Just make sure you're ready for the challenge, because starting your own business takes even more research and investment than getting a patent.
By selling your own products, you can avoid getting a patent entirely and keep your invention a trade secret. However, trade secret protections are much weaker than they are for patents, and if someone else invents and patents your creation you're out of luck. Two people inventing or discovering the same thing at the same time is actually very common, so don't think it won't happen to you.
The inventor doesn't have to be the main force behind a company to be directly involved. It's possible to invest your patents in a company in exchange for a share of the company stock. The size of the share depends on the size of the company and how important your patent is to it. This gives you the ability to vote on company policy without having to manage the company yourself. However, you should make sure you have a clear role in the company so you don't get pushed out or lost in the shuffle as the business grows.
- Win a Lawsuit
A patent gives you the right to stop other people from creating and selling your invention, and it lets you sue them for damages — like the money they made from your product — if they do infringe upon your patent. The government will not do this for you, so you will have to sue them yourself and take on the legal costs until the case ends. This isn't the best way to make money from a patent since you can't be sure someone will infringe your patent, plus the court might rule against you. Still, it's technically a way to make money from an invention.
- Give Your Invention Away
You can't make any money from your invention if you let everyone know how to make it, but it is something you can always do. Maybe you think the world would be a better place if everyone could make and use your invention. Maybe it's a strategic move, because anything you publish becomes "prior art" and can't be patented by anyone. So, if your product uses four inventions you could patent, you can publish three of them to save money and make sure other companies can't stop your product by reinventing part of it and patenting it.
What to Do After You Have an Invention
When it comes to making money from an invention, much of the work comes after the invention is complete and your patent application is in the mail. After all, you won't sell anything if only you and the patent office know about your invention.
Part of the research you should do before you finish your invention should be finding out who will want your invention. This could mean certain kinds of consumers or companies in certain industries, depending on what you're inventing. This lets you decide how to advertise your invention and whom to approach. You should also know whether you want to sell, license, or use your patent so you know whether to market your invention with customers or with the manufacturers that will make your product.
Marketing an invention takes a lot of time and money on its own. You need to contact the right people and create a presentation and a prototype to show interested customers, investors, buyers, and distributors. You also need to practice your presentation so you don't stumble during the meeting. You need hard numbers for costs and market analyses to make your case, and you'll need a business plan if you want to run a business.
Unless you plan to market directly to consumers, keep in mind that businesses care more about profits and efficiency than whether your invention is better than what they already have. You need to compare your invention to the competition and explain why it can make them more money. It can do this by taking up less space per unit, costing less to manufacture, or having a more interesting design or package. It helps if your invention is a better product, but you have to think about more than just that.
The exact amount you can expect for your invention depends on risk levels and who takes on that risk. These questions can help determine the numbers:
- How much did the inventor do, and how much did the manufacturer and distributor help with redesigning the invention for sale?
- Who is spending the most to get the invention to market?
- How unique is the invention compared to the competition?
- What is the expected profit margin for the invention?
The more the inventor does and spends, the larger his or her payment and royalties will be. You can figure some more exact numbers by comparing the gross profit per unit with the expected size of the market and the life cycle of the product. If you know the product won't last long, it helps everyone make intelligent long-term decisions.
A long-term invention is safe for investment, while a short-term invention can be a profitable fad and then disappear — at least if you time things right. Figuring the life cycle is also important when it comes to finding out whether you can expect to make back all the money you invested in bringing your invention to market.
How to Put Numbers on Paper
Some of the hard numbers you should have ready include the retail price and the manufacturing costs. The basic rule is that the manufacturing cost is around one-fifth of the retail price, so a $10 product would cost $2 to make. Of course, the rest of the money isn't pure profit: That goes to employee wages, taxes, rent, insurance, and all the other costs of running a business.
There are plenty of exceptions, of course. Software has a big development cost, but the manufacturing cost is almost nothing, even if you produce a hard copy. Online stores get a better profit margin by having fewer employees and no storefront. Different product types have different profit margins because of the way supply and demand set prices that are out of your control.
Understanding all of this is key to figuring out how much the manufacturer and retailer can spare on royalty payments to the inventor. They also help you show whether everyone gets more money in the long run by switching to your product.
You should also put a price tag on your patent even if you don't plan on selling it. This helps you negotiate a more exact deal, although your business partners will expect you to be optimistic.
When it comes to negotiating, remember to stick with gross profit figures. You should also remember the term "arm's length transactions." Companies will sometimes sell their products to an associated company to keep the profit low, but an arm's length transaction is when they sell to the real buyer. Royalties should be based on this figure. You should also avoid a deal that puts a cap on royalty payments. Another good contract feature is a minimum production level, which keeps the company from just sitting on your patent to avoid paying royalties.
While gross profit is a good baseline, you should also expect to deal with companies that measure royalties by the size of the net sales price. The net sales price is the number on the price tag, so it's the cost the buyer pays minus taxes. The difference between the two numbers is the manufacturing cost, so if you have that information, converting the two is easy. So, if you have a 10 percent royalty on gross profit for a $10 product that costs $2 to make, you get 80 cents for each product or 8 percent of the net sales price. The percentage goes down, but not your share of the profit.
There's one last thing you should do after you have an invention: keep inventing. If you created the new best thing, it won't be long before someone creates the next new best thing to beat it. If you keep innovating, that next person could also be you.
- Have fun with the process. You'll be spending a lot of time, money, and energy on designing an invention, taking it through the patent office, marketing it to others, and possibly going into business for yourself. If that sounds like more trouble than it's worth, you should consider a different hobby.
- Believe in what you're doing. You should be sure your invention will find a strong market waiting for it, because that belief will keep you going. Just avoid expecting too much and keep in mind that you might be wrong.
- Don't quit your day job. It may take longer when you spend most of your time on a job instead of your inventing, but no invention is sure to make money even after you sign a licensing contract.
- Get used to rejection. You'll get a lot of rejections on the path to selling an invention. They include patent lawyers who won't take your case, the patent office saying your patent doesn't qualify, investors who don't think your invention is worth the money, and companies that don't want to spend money licensing or buying your patent. You can still end up with a big success after a hundred rejections, so don't let them stop you.
- Stay stubborn. It's easy to give up in the face of rejection, but so long as you still believe in your invention, you should see things through to the end.
- If a company or person you contact starts gushing about your invention, take care. There's a good chance it's too good to be true. Before you give a patent services company any money, investigate their online reputation and compare prices to determine whether it's honest or not.
- Do as much research as you can on your own before you start spending money. Doing this will let you learn about good strategies, tips, and resources you can use later. UpCounsel has plenty of resources for would-be inventors, and our site is far from alone.
- Look for government programs, subsidies, prizes, and other ways people help inventors out. It could be what you need for inspiration or financial help.
- Ask your fellow inventors for advice on how to sell your invention. They can also help you develop the invention itself, but make sure everyone signs a non-disclosure agreement first.
- Network with the people who can help you by going to trade and innovation fairs. These personal connections can make a real difference in how far your invention gets.
- If you want something done right, do it yourself. If you need some expert hands with part of your invention, consider learning how to do it yourself instead of hiring someone else. Doing it yourself is cheaper and could be all you need depending on the problem. The "Zulu principle" is where you don't have to work too hard to become an expert in a very narrow field (like the Zulu of Africa).
- Focus on one invention at a time. You might feel a need to tinker with one project after another, but that's not how to develop a working prototype or alpha build you can patent. It can be grueling, but as Edison once said, "Genius is 1 percent inspiration, 99 percent perspiration."
- Start with easy projects and inventions. The harder ideas will become easier once you get some practice.
- Remember that a working prototype is the most important prop at every stage of invention marketing.
- Trust your business partners to handle the parts of selling patents or products that don't suit you. However, you should also be clear on who owns what in your business relationship.
- Think about whether you can build your invention to order at first and whether you can build it in volume later.
- Test your product under all conditions until you're sure about how it works and whether people will want to buy it. Then work on getting your patent.
- Remember trade secrets and giving away invention information are always alternatives to getting an expensive patent. It's not always the best idea, but it helps to keep your options open.
No matter which path you take, expert legal advice from patent lawyers is always good to have, and that's just what UpCounsel provides. We accept only the best of the best lawyers on our site, including Yale and Harvard graduates who work with major corporations like Google and Airbnb. If you need help or advice, post your legal need today.