Some people claim they have no profit motive — they say they only want others to benefit from their innovations. But when pressed, they admit that they would like to share in the profits… if there are any profits.
Whoa! They are missing the whole point.
I tell these lofty-minded people that everyone else in the chain of development and distribution needs to make a profit, and if they aren’t profit-centric, their idea/invention/project will go exactly nowhere.
Write this in block letters on the inside of your forehead: PROFITS MAKE THE WORLD GO AROUND.
The true test of any idea
When considering an idea or invention (especially if you’re bringing this opportunity to prospective team members or joint venture prospects), the bottom line is this: can this thing be manufactured and sold at a profit?
As one intellectual property attorney told me, “Why go through the patent process if you can’t make a profit? It’s a big waste of time and money if your product can’t be built and sold at a profit.”
To understand profits, and to help predict your profit points, it is necessary to understand markup.
What does markup mean?
Distribution: Markup is the difference in prices at different stages (price points) between a producer and the ultimate buyer.
Pricing: Markup is the amount added to the cost price of an item to cover incidental costs (interest, labor, taxes, utilities) and to provide for profit in the item’s selling price.
(Definitions from http://www.businessdictionary.com/definition/markup.html#ixzz2SMsVp68v )
Let’s take a real life example of this. I invented a pushup product called the Cush-Ups. After a run of manufacturing and selling the product myself, I licensed it to Everlast Fitness, and they carried and sold the product for several years in the mid- to late- 2000’s. The pricing schedule went something like this:
Manufacturing: The manufacturer sold the product to Everlast at $3.65 per unit. The manufacturer’s markup was approximately 20% (in this case, about 50-60 cents per unit), which was built into the $3.65 price to Everlast,
Distributor: Everlast then sold the product to sports and fitness stores/websites for $10.00 per unit, which was a 60% markup (approximately).
Retail: Retails stores and websites then sold the product to customers for $20.00, which was a 50% markup. And because Everlast also sold the product on their website for $20.00, directly to the public, they made a few extra bucks there.
Infomercials run things through a slightly different formula. In the infomercial world, they want to sell a product for 5x (five times) the manufacturer price. Let’s say that an infomercial company buys the manufactured product for $12.00 per unit. They then sell the product to the end-user for $60.00 per unit… with as much shipping and handling (and upgrades and add-ons) that they can talk the customer into when the customer calls in on the phone.
I’ve said it before, and I’ll say it again because it bears repeating: make sure you can say YES to at least one of these questions before pumping any time or money into an idea:
- Are you solving a problem?
- Are you fulfilling a dream?
- Are you inventing to a need?
- Can this thing be manufactured and sold at a profit?
And if you can only answer yes to only ONE one of the above, it better be point number four: Can this thing be manufactured and sold at a profit.