project economics – The Online Gazette…

This is the fourth of a series of posts to share with you six important lessons we’ve learned through our experiences working with numerous commercial clients in a variety of situations. On the path to your success in developing and commercializing technologies, they will help you avoid common pitfalls, unwarranted assumptions, and other sources of technical and commercial bias that could add up to business failures.

Lesson Four.

Find Out if “New” and “Improved” REALLY MATTER!

In this era of “voice of the customer” and data analytics, coupled with feedback from an eager salesforce, the sheer volume and rate of change of market input to new product development and improved product development activities can be overwhelming. Keep in mind that not everything “new” or “improved” is valuable or useful to your customer.

Lesson Four Case Study:

Client: Global producer and marketer in the graphic arts industry

Situation:

Client goal: 30% of annual sales from new product introductions
Global salesforce suggested over 80 “must have” or “want to have” features for the next-generation graphic arts equipment, whittled down to 25 features after internal review
Resources required to develop and introduce these 25 features: $40 million

Technology Assessment Need: Determine which of these 25 features really mattered to its global customer base

Our approach:

Identify 160 lead users of graphic arts equipment in 7 countries on 4 continents
Developed statistically based array of interview questions to elicit which new product features really mattered to them and why?

Outcome: Our work led to 2 important findings

First: our client’s current generation of graphic arts equipment very closely matched the equipment that was top-rated by our group of lead users. In fact, there were only 2 feature areas where our client’s equipment lagged the ratings of the top-rated competitor.
Second: we learned that the 25+ new “bells and whistles” initially proposed would not position our client well for the future. Customers of our client were positioning themselves to respond to the rapid technology changes associated with digital graphic arts equipment and were changing their ways of managing their capital expenditures in this area.

Based on our findings, our client company decided to allocate a portion of its $40 million product development budget to tackling the two features that customers rated lower than those of its competition. The rest of the development budget was redeployed to related product management activities and exploration of emerging digital technologies, both of which held promise for a sustainable impact on the bottom line.

For more on best practices in moving from lab-to-market, see https://prakteka.com/category/technology-assessment/

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Are you looking for new customers for your existing technologies and products?

Do you have excess manufacturing capacity you’d like to put to use?

Or are you launching a new product and need to understand which end-use applications are the most promising?

We’re ready and able to help you make your decisions with confidence. Contact us at https://www.prakteka.com/contact-us/

or via direct email at mah@prakteka.com

Challenge: You have software and hardware patents that are licensable to as many as a dozen different prospective licensees already established in the industry. You have reason to believe that your patent portfolio could become a standard in the industry. How do you determine a royalty rate to maximize your royalty income ?

Approach:

Think of the adoption of your patented technology as a new commercialization project within each of the prospective licensee companies.
Evaluate each prospective licensee’s projected discounted cash flow resulting from commercial use of the technology.
Include in the financial model a line item for royalty payment.
The maximum affordable royalty rate (MARR) is the value of the royalty payment, expressed as a percent of net sales, that yields a net present value (NPV) of zero for the project.

Lessons Learned from Case Studies:

The maximum affordable royalty rate can vary widely across different companies in the same industry. In one case involving storage area network technologies, the roualty rates ranged from 3% to 20% of the annual revenues of the prospective licensees.
Inputs to the financial model can be based on public information as well as industry expert judgement regarding revenue growth rate, internal discount rates, and the percentage of total company revenues attributed to products embodying the technology
For prospective companies with negative free cash flow, affordable royalty rates can be assumed equal to those of peer companies with positive cash flow

A Strategy to Maximize Income

This usefulness of this technique of financial modeling to arrive at maximum affordable royalty rates company by company is that you now have a starting point for developing and quantitatively assessing various licensing (and sub-licensing) strategies for impact on licensing income. Some discrete scenarios to consider:

Establish your technology as an industry standard via licensing to as many prospective licensees as possible
“Outsource” licensing by allowing sub-licensing to one primary licensee, perhaps the one company that can afford to pay the highest royalty, based on its financial model
Limit the licensees to those companies with the fastest time to market

Use of MARR has been particularly helpful to companies with valuable technology-based IP but little to no experience in licensing. Interested in finding out how MARR can help you, too? Contact us at https://www.prakteka.com/contact-us/

See also: DCF Analyses in Determining Royalty, Daniel Burns, les Nouvelles, Journal of the Licensing Executives Society, September, 1995, accessed November 7, 2018, http://www.danielburnsassociates.com/wp-content/uploads/2011/08/DCFAnalysisInDeterminingRoyalty.pdf

And for more on what matters when you’re working at the technology/business interface, see our content on technology assessment, technology commercialization, technology valuation, and “seeing the future” on our website: https://www.prakteka.com/

Coyright 2018

Category: project economics

Lessons Learned in Technology Assessment…Lesson 4…

Maximum Affordable Royalty Rate – A Useful and Underutilized IP Valuation Method