Why not spend money on a Patent?

Success rates for new products, including patented ones, are shockingly low. For even the world's largest and most sophisticated companies, the numbers are about 25% - certainly below what most managers and owners would like.

There are several references that give the failure rates for new product introductions. The normal range is typically from 70 to 80%. These sources include:

1. Various studies cited by Advertising Age,[i]
2. A study[ii] by Linton, Matysiak & Wilkes, Inc. of the top 20 food companies reviewing 1935 new products,
3. A Booz Allen Hamilton study[iii] on new product management that claims one out of seven product ideas yields a successful product,
4. Boston Consulting Group vice presidents and directors James Andrew and Kermit King claiming 60 to 85% in an article[iv] titled 'Boosting Innovation Productivity',
5. Some college textbooks[v] claim 80%.

A study[vi] by the Product Development and Management Association titled 'The PDMA Foundation's 2004 Comparative Performance Assessment Study (CPAS)' shows 40% rather than the higher 70-80%. The PDMA figure appears to be based just on the post-commercialization or post-launch failure rate. It does not include all products that go into the development pipeline, rather just those that make it to the launch pad. Including all the steps from idea generation, the PDMA study failure rate is over 80%.

Companies stay alfloat because the products they sell, including new products, rarely rely on patented subject matter. Companies derive about a quarter of their sales and profits from new products, only some of which are patented. The other three quarters of a company's sales and profits come from yesterday's breadwinners that still have years left in their product life cycles.

So what happens if a company stops innovating? In most cases, it will slowly die. Companies operating in a competitive marketplace need to continually introduce new products or products that are better, faster, or cheaper in order to stay in business. They don't need to overdo it with innovations, but there is a need to have something in the works. Companies that are leaders in innovation become the pacesetters for the rest of the industry. The other players are forced to keep up or get knocked out of the never-ending race.

Another factor that stimulates the corporate innovation process is the tantalizing prospect of huge profits from world-beater innovations. For the few innovations that become blockbuster commercial hits, the rewards can be great. Companies that come up with such innovations and exploit them well can end up dominating their industry categories and raking in huge profits.

Does this mean small businesses need to come up with ideas and file patents on them? Let's look a little closer at the numbers as they apply to small businesses rather than Fortune 500 companies.

Only about one quarter (1/4) of the products that go into the development process end up being successful. This is a deplorably low figure that applies across a wide range of industries. The data comes mainly from well-established companies, typically the top ones in the various industries. In other words, one in four successes is currently accepted as the best that can be done in terms of converting ideas introduced to the development process into successful products.

What happens in the case of start-up companies? For these companies which are usually quite small, there is a whole other set of failure rate data involved. U.S. and Canadian statistics reveal that only about one third (1/3) to one half (1/2) of new companies remain in business for at least 3 to 5 years.[vii]^,[viii]. About a third of them make a profit during that time, another third break even and the remaining third lose money. Many of the companies that close their doors within the first few years do so because of business failures. Running a profitable business is obviously not easy.

Let's multiply the survival probability for a start-up company with the new product success probability. This makes the overall likelihood of success for a start-up company successfully developing and commercializing an invention or new product small. The math looks like (1/3 to 1/2) x 1/4 = 1/12 to 1/8 overall likelihood of success. Since the probabilities are not entirely mutually exclusive, the more forgiving 1/8 figure will be used. Determining what influence one of these variables might have over the other is beyond the scope of this article. In any event, a 1 in 8 or 12.5% chance of success seems somewhat risky which is why venture capitalists and finance people generally have a hard time dealing with start-up companies based on a new product idea. However, a well managed start-up company with a highly successful product can generate a phenomenal return.

From these numbers, it appears that the vast majority of patents are not worth the paper they are printed on. Here are five reasons a small business should look twice before calling a patent agent:

1. It usually costs between $5,000 and $20,000 to obtain a patent. These costs include the fees paid to the patent offices in one or more countries and those fees paid to the patent agents, many of whom are attorneys. These do not include the internal costs for having your key people sitting in the patent agent's office or working on the patenting aspects.

2. It normally takes about two or three years to obtain the patent and can take much longer if there are problems. Some innovations become worthless in three years, much less than the 15 to 20 years covered by a typical patent.

3. A patent gives a complete disclosure as part of the requirement for obtaining it. In other words, your competitors know exactly what you are doing and how you are doing it. This is especially so with recent changes to the U.S. patent rules that publicly disclose the entire contents of the applications 18 months after application, regardless of how long it takes for the application to get processed.

4. Most patents don't offer any real protection since they are often narrowly defined and easily circumvented.

5. The patents become extremely expensive when they become litigated. Usually the patent owner is the one who initiates the litigation. This is because, in practice, a patent is little more than a right for the patent holder to sue an infringing competitor. These costs can run into the hundreds of thousands or millions of dollars. After years of expensive and complex litigation, the infringer often does not end up paying much, if anything, to the patent owner.

Spending the same time, money and effort on your up front marketing would be a much better approach for most small businesses. Up front marketing does not include promotional and sales expenses but does include going out to determine what the real market is for the proposed or actual product. It includes focus group testing, trial selling, surveys, tradeshows, etc.

Look before you leap when you have an idea that might be patentable. At least you should do the math first.

Peter Paul Roosen has an engineering background and is co-founder of Atomica Creative Group , a specialized strategic product marketing firm. He has co-authored Overcoming Inventoritis: The Silent Killer of Innovation now available.

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[i] Brock, D. (1997). Getting the most out of your new product introductions. Partners in Excellence. http://www.excellenc.com/articles.htm

[ii] Linton, D.B. (1997, July 1). Market study results released: new product introduction success, failure rates analyzed. Frozen Food Digest 12(5), 76.

[iii] Dean, B. (2005, March 28). Case study: Incorporating focus group research into the product development process. DM News, Article 32310. www.dmnews.com/cms/dm-news/e-commerce/32310.html

[iv] Andrew, J.P. & King, K. (2003, April). Boosting innovation productivity. BCG opportunities for action, April 2003. http://www.bcg.com/publications/publication_view.jsp?pubid=847

[v] Friedman, H.H. (2000). Product policy; new product development. http://academic.brooklyn.cuny.edu/economic/friedman/mmproductpolicy.htm

[vi] Adams, M. & Boike, D. (2004, July). PDMA foundation CPAS study reveals new trends. Visions, XXVIII:3, 26-29; and: The PDMA Foundation’s 2004 comparative performance assessment study (CPAS). PDMA Foundation. www.pdma.org/cpas.php

[vii] Knaup, A.E. (2005, May 1). Survival and longevity in the business employment dynamics data. Monthly Labour Review 128:5, 50-57.

[viii] Baldwin, J., Bian, L., Dupuy, R., Gellatly, G., Statistics Canada (2000, February). Failure rates for new Canadian firms: New perspectives on entry and exit. Minister of Industry / Statistics Canada Catalog no. 61-526-XIE. www.statcan.ca/cgi-bin/downpub/freepub.cgi

Zipper inventors had their profits stuck in their teeth (The Zipper Story)

When someone mentions the word "zipper", what's the first thing that comes to mind? For many people, it's "I wish I had invented it." Zippers can be found almost everywhere on the planet. There are enough being produced each week that if they were joined into a long one, it would go around the world. Yearly production for this $8 billion industry exceeds 15 billion zippers - enough to make it to the moon and back five times.

Many inventors who file patents, including the inventors of the zipper - sewing machine inventor Elias Howe in 1851, Whitcomb Judson in 1891 (patented 1893), and much later again electrical engineer Gideon Sundback in 1913 (patented 1917), fall into the trap of being too far ahead of their time or otherwise being out of tune with the market. The zipper finally started getting good market acceptance after 1930 and is now one of the world's best known products - centuries later. It did little good for its early inventors.

Judson showed his version of the zipper to 20 million (20,000,000) people and sold only 20. If he went from door to door selling zippers and found everyone home, he would have knocked on every door in London, New York, Paris, Tokyo, Vienna, St. Petersburg and Milan to reach so many people. Yet he somehow only managed to sell a handful of these things. This seems like the ultimate case of not listening to the market. Judson had a severe case of inventoritis - being completely out of touch with the market and getting such terrible results.

Persistence only pays off where there is a real market. Judson certainly was persistent and spent the better part of his life working on his zipper. He brought investors into his new Universal Fastener Company, patented his zipper and promoted it at the 1893 Chicago World Trade Fair. He kept working at it for several years. Eventually, Gideon Sundback, who emigrated from Sweden to Canada, came to work for Judson's company. Sundback worked on the zipper designs for years and patented a newly improved version in 1917, years after both Judson's patent and Judson himself had expired. Sundback's new version did not do much better than the original. New machinery was built and over the next few years, production only got up to a few hundred zippers per day. This wasn't enough to make Sundback rich and Judson was already dead and buried long before then in 1909.

Zippers didn't really get their start in the market until after the B.F. Goodrich Company used them on a line of rubber galoshes in the 1920s. Goodrich invented the name "zipper" to replace awkward sounding phrases "hookless fastener", "continuous clothing closure" and "clasp unlocker" used by the various inventors to describe the product. Other players then started entering the market. The companies started by the inventors had a hard time keeping up. This includes the ones that evolved into present day Talon. Mid-1930s Japanese entrant YKK started from scratch with no patents and now commands roughly half the world market while Talon only has a 7% share. German producer Optilon has a similar share to Talon and much of the remaining share is made up of a growing number of Chinese and Korean producers.

Founded in Japan in 1934, YKK was called Yoshida Kogyo Kabushikikaisha, but 60 years later the company changed its company name to match its brand name. The privately held YKK Co. is headquartered in Japan and is made up of about 100 companies and subsidiaries operating 200 facilities in 60 countries.

YKK's success is based on constantly improving the quality of their products, treating their people with respect, lowering product prices and providing excellent service while managing tight delivery schedules. The company also introduced variations in styles, colors and attributes - highly responsive to market needs. Company founder Tadao Yoshida instilled this philosophy that he called a "virtuous circle" of rendering benefits to others so that benefits would return to YKK. His company is the Toyota of zippers.

YKK keeps quiet about its manufacturing process innovations and prefers maintaining trade secrets over patents. The company obscures the details of its improvements in its manufacturing processes. It does likewise for improvements in its supply chain and distribution management methods, custom-made computer software, and special management techniques. What is impossible for the company to keep secret is that it does not have a bad case of inventoritis. YKK has always been in close touch with the market - with excellent results.

The message for inventors is plain and simple. If you are going to do something, do your homework and always be in close touch with your market. Things don't come easily but they do come along to those who are prepared to engage the market constructively. Don't make it so your ideas and inventions end up being tens or hundreds or years ahead of time like those of the zipper inventors were. Fifteen minutes is about the right amount of time. The product could have achieved market acceptance much sooner if the inventors were better marketers. If they had gotten their zippers unstuck, they might have lived to see spectacular results from what has become one of the world's best known products.

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