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avid Weisman of Minneapolis, Minnesota, observed that teenage girls had problems with broken mirrors. He thought a perfect solution would be to have an unbreakable mirror consisting of a piece of silver mylar film on a thin film of plastic. He envisioned his product, the Mirror Mate, being used for mirrors in school lockers, as premium or promotional items, as a mirror that could be sold at low-cost mall jew-elry stores, and as stickers with designs that could be sold in sticker-dispensing machines. Weisman had just one problem—no money.Weisman decided first to pursue markets where the mirror acted as a decal, attaching to a surface. He found the cheapest way to produce his product was to buy 5-mil.-thick mylar and then place double-sided adhesive tape on the back. The mylar could be attached to any sur-face and become a mirror. Weisman next located a decal manufac-turer with the equipment needed to attach the tape to the mylar.
Unfortunately, without any money, Weisman’s idea appeared to have a limited future. But Weisman approached the company with an offer to sell the Mirror Mate for a 10 percent commission. The benefit he proposed for the manufacturer was that the product could have a huge impact on the company’s sales levels and that Weisman knew and understood the market and could fast-track the company’s sales.
The manufacturer didn’t bite for that offer, but they did offer to give Weisman $1,500 of product that he could pay for once he sold it.
They also left the door open for Weisman’s commission offer if the product sold. Weisman then turned to the distribution channel. He found an advertising specialty products distributor who was willing to add Mirror Mate products to its line and who was willing to have Weisman work on commission to sell his and other products. As I’m writing this book, Weisman has started generating sales for his product, and he hopes eventually to form his own company, but his ultimate success is as yet undetermined.
those benefits are to the consumer aren’t nearly as signifi-cant as the manufacturing costs involved in making it. In addition, it helps if the target market has a small distribu-tion network. The manufacturer will be more apt to believe you can achieve sales success if only a few compa-nies control product distribution and you have already established a relationship with those people.
Your Goals
Quick market entry: Underfinanced inventors often struggle two to three years to get their product out in a major way. Having the product financed by an established company gets the product out quickly and provides the funding needed to expand sales.
Get established in the market: You want to develop market connections if you plan on introducing a series of products. You’ll develop more connections faster if you have the backing of a larger company.
Faster income: You start collecting commissions as soon as you start selling products. On your own, you’d have to pay back start-up and cash-flow loans before you’d start taking home any cash. On your own, you’d also run the risk of spending more than you receive for a year or two before your invention produced income.
Proceed with limited patent protection: Some product ideas can’t get significant patent protec-tion because of earlier
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MARKET REALITY
Inventors/entrepreneurs who get off to a fast start typically have great connections to the distribu-tion channel of their target market. Often they get these contacts by working for a larger company.
Buyers will almost always see a salesperson for an established company if he or she has a new product. You won’t get that same reception as an underfinanced inventor.
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patents obtained by other people or companies. This problem typically kills a licensing agreement, where the scope of protection your product can obtain is important. But it doesn’t mean as much for selling on commission, where the company is just looking to add extra sales revenue.
Other Choices
If you are looking for quick income, the only tactic that works as well as selling on commission is private label marketing (chapters 14 and 15). If your goal is an alliance with a major company to give your product credibility, your other choice would be a joint-venture arrangement (chapters 12 and 13).
Money Matters
The beauty of selling on commission is that the inventor typically doesn’t have to put up any money. The manufac-turer will pay for the patent application, start-up costs, and operating capital required to launch the product. The inventor’s only expenses are defining the product, possibly making a model or prototype, and the cost of making his or her early market connections.
Protection
Manufacturers interested in having you sell on commis-sion are also typically interested in turning a quick profit.
They may not be concerned with going through the entire patenting process. They are also happy to pay you a com-mission if you are producing sales for them. You do, how-ever, run the risk of the manufacturer trying to steal your
idea. Inventors can usually prevent this by simply applying for a provisional patent just before contact-ing potential manufactur-ers. That allows you to state that your patent is pending. You can then agree to assign the patent to the manufacturer if they agree to pay the full patent application and issue fees.
Prototypes
The manufacturer probably won’t make an investment without at least some positive response from customers after seeing a prototype. You probably will be able to con-vince the manufacturer to pick up some, if not all, the expense of producing a prototype. This is especially true if the manufacturers you talk to are already producing simi-lar products.
Research
The key to lining up a selling-on-commission agreement is to know who the key players in the distribution network are, and preferably to have their support for your product idea before you approach a manufacturer. That’s the only way the manufacturer will be convinced that you can actu-ally sell your product. Research trade magazines and attend trade shows to learn who the best contacts are.
Then talk to those contacts to see if they believe your idea will sell. You should be able to get a selling-on-commission agreement if you get these contacts to endorse your
prod-SUCCESS TIP
Manufacturers will often readily agree to give you in-kind services for free to build a prototype for a promising idea, but they don’t like to pay for out-of-pocket or extra expenses. In-kind services are ones that the manufacturer is already paying for, such as the cost of machine time or the services of an in-house model builder. The manufacturer pays those expenses whether or not it works with you.
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uct idea, or better yet, if they let you know they will buy the product if and when it becomes available.
Manufacturing
If your agreement is with a manufacturer, you won’t have to worry about how they will produce the product. If your
INSIGHT
How to Make Their Burden Lighter
So why is it that many manufacturers are so willing to negotiate with you for selling on commission? Why would the big boys care about a small fish like you? Because man-ufacturers make huge profits on incremental sales due to the impact of overhead absorption (which many companies also call burden). Overhead is the fixed costs of a plant, such as rent, utilities, plant management salaries, and other expenses.
Companies divide this overhead by a number of methods and place an overhead bur-den on each product sold. A product’s cost includes materials, labor, and overhead components, and overhead is often anywhere from 30 to 60 percent of a product’s total cost. At the start of a year’s budget, the company places an overhead burden on each product sold, so that it covers the total overhead. For example, if overhead is $1 mil-lion, and a company plans to produce 1 million units, a $1 overhead burden will be added to each unit.
Now, imagine that you approach that manufacturer with your selling-on-commission proposal. If the cost of materials for your product is $1.50 per unit, and the labor to build the product is 50¢ per unit, the manufacturer will add its $1 overhead burden for a total cost of $3.50. The manufacturer will then add a 20 percent profit margin, or 70¢, and charge you $4.20 a unit. But wait. Didn’t the manufacturer already pay for its over-head with its 1 million units in sales? Yes. The real profit to the manufacture is $1.70.
Manufacturers make huge profits when production levels exceed their budgeted levels.
The result for inventors is that manufacturers will bend over backward to help inven-tors who could add 5 to 20 percent to their production volume.
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agreement is with a distributor, you may need to locate a manufacturer. However, you should find several manufactur-ers who will offer favorable terms if you have a distributor lined up to provide the support you need to sell the product.
Key Contacts
Decision-makers at large distributors or customers are the key to enticing a manufacturer to take on your product and have you sell it. The manufacturer not only needs you but it wants you if you have established connections with impor-tant potential customers. You want to contact those people first and be sure they support your idea, and if possible, get a letter of support from them before approaching manufac-turers. The letter of support just has to say that the person believes your idea has merit and that they would consider selling it when and if the product becomes available.
Pros and Cons
Pros
Requires very little investment by the inventor.
Can be the quickest route to full market penetration.
Provides instant credibility to customers.
Produces reasonably quick income.
Establishes the inventor in the marketplace with key buyers.
The inventor continues to have input into his or her product’s success.
Cons
Inventors don’t always have control of their product.
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Doesn’t establish an inventor’s company or brand.
Requires sales and marketing enthusiasm and expertise.
Works best with products with large customers or a narrow distribution channel.
Up, Up, and Away
Selling on commission pro-vides the contacts you need to branch out and start your own company, but it doesn’t really provide a starting point for a new company. The product will always belong to the com-pany you are selling the product through. It is an ideal tactic, however, for inventors who don’t want the hassle of running or
funding their own company. If your product is a winner, you should be able to continue to introduce new products through the manufacturer.
Key Resources
Your main resources are trade magazines, trade shows, and trade associations. You need to meet and know key people who distribute to your market. You also need to have a firm understanding of the market, how it works, what the pricing is, and how products are sold. The person who will be paying your commission will be paying for your contacts just as much as he or she is paying for your
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BUZZ WORD
A narrow distribution channel means there only a few key target customers who control most of the market. A broad distribution channel has many potential buyers. Products sold to tire dealers for changing tires is a narrow channel because there are only 50 distributors throughout the country selling these types of products. Day spas are also a narrow market because there are only about 10 major distributors in the market.
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idea. Gale’s Encyclopedia of Publications and Broadcast Media, Gale’s Source of Associations, and several trade show directories are available at many larger libraries.
One effective tactic is to contact the writers of articles in trade magazines and ask them who the key players are in a business. Often these articles are written by industry peo-ple, and they will provide you with names of key contacts and often even tell you who the best candidates are to buy your product.
What to Expect
The manufacturer will expect quick results from you.
Be sure to line up customers first before approaching the manufacturer to sell on commission.
The manufacturer won’t automatically print brochures, attend trade shows, or pay for a market-ing program. Be sure to propose a marketmarket-ing pro-gram and get the manufacturer’s approval before signing a contractor agreement.
You will only get paid commissions after customers pay for their product.
You may go three to four months before sales are made. You can ask the manufacturer for an advance against commissions to cover those costs, but the manufacturer won’t be obligated to offer an advance unless it is part of your agreement.
The manufacturer might offer you its standard sales representative agreement, which pays a commission only on the products you sell. Insist on a commission on all your products, including an override (or com-mission payment) of several percent on any of your products sold by other salespeople or independent representatives.
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The manufacturer will want to produce the product as cheaply as possible and may compromise some of the product’s features. You’ll need to monitor closely the manufacturer’s design to prevent this.
The manufacturer will be reluctant to make immediate changes in the product
once it starts produc-tion. Be sure to show a model or prototype to potential customers and get their approval before the manufac-turer finalizes tooling and the manufacturing process.
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SUCCESS TIP
Most manufacturers will want you to be an inde-pendent contractor so they don’t have to pay ben-efits or social security for the inventor. While some salespeople would prefer to be an employee to get those benefits, you are better off as an inde-pendent contractor because then you have the option of working on other projects and the man-ufacturer can’t tell you what to do.
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Selling on
Commission—
Making It Happen
Keys to Success
Own the market: The manufacturer or distributor who hires you on commission is really buying your ability to sell the product. You will improve your chances to land a deal with each additional person you know who is either in the distribution network or a major customer.
Other tactics you can use to generate support include call reports, which you write after you interview key buyers; letters of endorse-ments from those same buyers, and provisional orders. You’ll also have an easier time selling the concept of sales on commission if you have a sales and marketing background.
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