In our last post, Your IP Gives You Two Business Model Choices, we touched upon the differences between a traditional operating business model and a licensing business model. In that post, we said that in the traditional model, the owner of the intellectual property commercializes a product that is created out of their Intellectual Property.
Alternatively, a licensing model is used when the owner of the IP licenses the innovation to another party in return for royalties. The other party then owns the rights to commercialize the IP by manufacturing and distributing a product based on the IP in accordance with the licensing agreement.
At the end of that article, we promised to address the question “which model is best for you?”
As you may have guessed, the answer to that question depends more on the owner of the IP than on what the IP is and how it is used.
In this post, we will argue in favor of the traditional business model. We will also point out some important responsibilities to keep in mind if you decide to go this route.
In the interest of balance, the third and final post will advocate for the licensing model. You will then be able to compare and contrast both models in order to determine which model is best for you.
Advantages of the Traditional Business Model
Many inventors choose to commercialize their innovations because the traditional operating model offers the following advantages:
- In the traditional model, the owner of the IP has higher earning potential than if they licensed the technology to someone else. Why? Because in a traditional model the owner must invest the capital, do the hard work, and take the risks involved in bringing a unique product to market, rather than just a royalty based on sales.
- In addition, the owner of the IP controls the manufacturing, marketing, sales, and distribution processes. Control of manufacturing translates directly into control of quality. Control of marketing, sales, and distribution drives revenue.
- The entrepreneur is not dependent on someone else’s successful execution.
- The owner of the IP may, in some cases, be able to get the product to market much more quickly than if he is dependent on someone else to go to market.
- The owner of the IP can independently create and build his own brand.
- The owner of the IP has exclusive use of the IP and is able to control his own destiny.
Responsibilities that Come with a Traditional Business Model
It is important to remember that certain responsibilities will accompany the entrepreneur who chooses the traditional model, including:
- The entrepreneur must finance the commercialization of the product because cash will be flowing out long before it begins flowing in.
- The entrepreneur must build a team and then motivate, compensate, and lead the team so that all members of the team are moving in the same direction.
- Managing a business comes with execution risk and not every businessperson is good at tolerating risk.
- The owner must compete with existing, well-financed competitors. There is no such excuse “we have no competitors.”
So, if you consider yourself to be an experienced business person with a high tolerance for risk, and the ability to finance your emerging business and build a great team and then execute on your business plan, then the traditional operating model is for you.
On the other hand, if you do not think that you possess all of those traits, stay tuned for the next post when we will discuss why it might be better to employ a licensing strategy.