Figuring Out the Financials: Will Your Invention Be Profitable?

profitability will my invention make money

Product development costs time and money, there’s no way around it. There are quite a few costs that an inventor has to incur before their product will ever find its way to store shelves, from product design to prototyping, to manufacturing. The more time and money you’ve put into your project, the easier it to justify putting in even more.

Every inventor hopes that their investment will pay off in a big way and that soon they’ll be on their yacht fondly remembering the days before their Next Big Thing made them a millionaire and changed their life forever. There’s only one problem: everyone hopes that their invention will be the Next Big Thing, but the reality is that most inventions never make it to market at all. Of those that do, many never succeed in recouping the inventor’s initial investment.

This means that, to make it as an inventor, you’ve got to think smart. You need to know which ideas to pursue, and which to leave on the shelf. One of the keys to success is understanding that there is no such thing as too much research. You need to know as much as possible about the market in which you intend to compete as possible, and you need to know it right from the beginning.

The first thing that you should do after being struck by the muse is to look into the potential profitability of your invention. You need to take a look at the money-making potential of your idea before you apply for a patent, before you begin development, and before you’ve developed a prototype. Why?

Why? Because these things cost money, and that could be money wasted unless you’ve established that there’s a reasonable probability of return. That time and money would be better spent working on developing a different invention if it turns out that the current one doesn’t have a realistic chance of succeeding as a commercially viable product.

Estimate The Market Price Point

Of course, market research itself is something that can be costly. Later on down the road, marketing will become an important part of your business plan and a significant part of or your operating budget that sales from your product will have to cover. At this early stage, though, you can do your own guerilla market research. The goal at this point is to come up with rough estimates of the kind of price you’ll be able to charge for your product — the cost that consumers will pay.

To estimate your market price point, go out to stores and onto the internet and look for similar products. What is currently on the market that serves the same or similar function? See the kinds of prices that your would-be competitors are charging, and try to find examples of products that are made from similar materials to what you intend to use. At this stage, this is more art than science, and you’re trying to get as accurate a rough estimate as possible.

Realistically, you aren’t going to be able to charge much more than what people are already paying for similar products. Even if your invention has significant improvements over what is already out there, you have to consider just how much extra customers will be willing to pay for those improvements — especially when there’s a more well-known and better-established alternative already on the market. Be aware that inventors tend to over-value their inventions, which is natural, but that your customers might not see it the way you do. So looking at the price ranges that are already out there will give you a rough estimate of what you’ll be able to sell your product for on store shelves.

The next step is a bit more complicated. Once you have a general idea of the product’s price point, you need to consider how much it will cost to build the thing.

Estimate The Cost of Manufacturing

The retail price paid by the consumer is not just going to be profit going into your pocket. Say your product sells for $10. Assuming that you aren’t going to be selling the product yourself via your own online store, you know that a big part of that $10 sale price is going to go to the retailer. The retailer will buy the product from you for a wholesale price, and then sell it at a higher retail price — this is what is known as markup.

The difference between retail and wholesale price (the markup) varies for different types of products. Generally speaking, the more expensive an item is, the lower the markup as a percentage of the wholesale price becomes. But for cheaper products, you can generally assume a markup of around 100%. So, from that $10 retail price, $5 is going to the retailer.

That leaves $5. This $5 will represent your net profits, the manufacturing costs, plus your operating costs (marketing, rent, salaries, etc). A general rule of thumb is that for most consumer products, the manufacturing cost will be about 1/5th (20%) of the retail cost. For this example, let’s assume that the operating costs are low, coming in at half the manufacturing cost. That leaves us with:

Retail Price: $10
 Wholesale Price: $5

Manufacturing Cost: $2
 Operating Costs: $1
Profit: $2

So in our simplified model, each $10 sale would represent a $2 profit for the inventor. But keep in mind that we’re assuming very low operational costs here. The costs for paying rent, engineering, product design, salaries, and all the other odds and ends that go into running a business can very easily match your manufacturing costs. In our simplistic example, a higher operating cost could easily reduce the inventor’s profit down to $1 per unit sold. That’s a range of 1/10th to 1/5th of the shelf price.

It’s important to come up with as accurate an assessment of your profit potential as possible. When in doubt, assume the lower amount. Keep in mind that when you eventually pitch your product to retailers and manufacturers, they are likely to view your profit estimates as exaggerated since inventors tend to exaggerate the value of their inventions.

Remember that retailers don’t care very much or at all about what your product is. What they care about is how much profit that product represents on the shelf.

As an inventor, you need to consider how much you think it will end up costing you to develop and market the invention against the potential profits, based on a realistic assessment of the market. And this means having some idea of your product’s longevity.

Estimate the Product’s Life Cycle

We live in the technological age. Innovation drives product design today at a fast pace. While this provides all sorts of opportunities for entrepreneurs and inventors, it also creates a certain set of challenges. Product design and development takes time. At the same time, the value proposition of a new invention is often that it sits right at the bleeding edge of technology. This presents a dilemma: by the time an invention hits the shelves, it might already be outdated. The question you need to ask yourself is: how long will your product be relevant?

In terms of finances, the key concept here is amortization. How long (how many sales) will it take for you to recuperate your investments and start making profits?  If your product has high manufacturing costs, you’ll have to sell more units and will have a longer amortization period.

It’s okay to predict a short product life-cycle if bringing your product to market requires very little upfront investment. If, however, your product will have a high amortization period but a short life cycle, then you’re in for some trouble. If this seems likely, your time and money will be better spent working on a different invention.

Take our example above. Let’s assume the product, which retails for $10, required very little investment to bring to the market — let’s say it cost only $20,000 total to develop. Assuming, again, a high return rate of $2 per item sold to the inventor, that means that 10,000 sales will take you out of the red.

So how long will it take to sell 10,000 units? Well that depends entirely on the nature of the product, and that’s something you’ll have to try to figure out for your specific invention. Analyze the market. Obviously, the larger that market base is for your product, the easier it is to sell more units. If your product is aimed at people who own cats, then you’ll have a broad audience and those 10,000 units could be sold in one or two orders to interested retailers. On the other hand, if your product is specifically of value only to professional aerial dance teams, it could take quite a bit longer to make those 10,000 sales.

To Patent or Not to Patent?

An important consideration to make when analyzing the profitability of your invention is patenting. Patenting can be expensive. For a simple patent, you can expect to pay $7500 or more, including patent filing fees and patent attorney costs.

Those costs may seem high, but patents can be extremely valuable, as well. A patent gives your exclusive rights to make, use, and sell your invention. This can be extremely important, as it prevents anyone else with a more nimble operating structure to swoop in and gain first-mover advantage from you when you initially bring your product to market. It also prevents someone else from acquiring a patent down the road, and thereby preventing you from profiting off of your invention.

While it is not strictly necessary to acquire patent protection before bringing your product to market, it is certainly advisable and grants you much more secure footing from which to launch your product. Patentability is hugely valuable when trying to license your invention, as potential partners will want to know that they will have exclusive rights to your product.

A good strategy is often to at least file a provisional application before bringing your product to market. A provisional application is inexpensive and simple to file, and it grants you one year in which to file the non-provisional application. This can give you some time to start making sales and generating some revenue before having to pay for the patent. A provisional application also allows you to mark your products with the familiar “patent pending” warning to ward off potential infringers.

The purpose of this article isn’t to scare people away from inventing and bringing new products to the world. It is important though for inventors to be realistic about their projects. To be a successful inventor, one has to know which inventions to go for, and which to leave behind. Inventors are like artists: not every idea or project will come to fruition, while others will make you a star. To succeed you need to assess the profitability.

At Cad Crowd, we love helping inventors bring their products to market. We offer a comprehensive range of tools for inventors and entrepreneurs, from product development and industrial design to rapid manufacturing and prototyping. We also offer USPTO patent filing and IP services. Let us know about your project, and get a free quote today.