Monday, September 27, 2010

The High Cost of Marketing and Selling an Invention

Guest post by patent attorney, entrepreneur and author Dale Halling.

Inventors and critics of the patent system often ignore or are ignorant of the high cost of marketing and selling a new product embodying an invention.   I discussed this cost in an earlier post, Invention- A Financial Analysis.  This cost is the variable Mi in the equation I developed as part of the financial analysis.  Another paper that discusses this additional cost that inventors incur in marketing and selling their invention compared to a “me-too producer” is The Nature and Function of the Patent System[1].  Kitch, the author, explains:

_Quote Even in the case of an innovation patented in fully commercial form – as is the case with many relatively trivial patents – the firm must make significant investments to simply distribute and market the invention.  But expenditures necessary to identify the market for the product and to persuade potential customers of its utility can easily be captured by competitive imitations.  Absent a patent on the product, the incentives to provide information to purchasers about their need for a product as opposed to information about the particular characteristics of the seller’s product are limited.  The trademark law protects only the names and symbols identifying the seller’s product; it confers no protection against imitators of the product itself.  Thus competitors can ride on the demand for the product created by the first seller without incurring the expenses necessary to inform buyers of the advantages of the product.  Only in the case of a patented product in a firm able to make the expenditures necessary to bring the advantages of the product to the attention of the customer without fear of competitive appropriation if the product proves successful. 
    This aspect of the cost of introducing innovations is stressed here both because managements find that marketing is a major cost in innovation and to illustrate that even in the case where nothing remains but to make and sell the patented invention, there are significant costs whose return could be appropriated by competitors.  Absent a patent, firms have less than the optimal incentive to invest in providing information about and techniques for using the new technology.
[2]

Inventors need to take these additional costs into account when undertaking a new venture.  There are several strategies that can be used to reduce these costs.  For instance, teaming with an existing company that has a strong market presence (marketing channel partner) in your marketplace.  Another solution is to invent only line extensions to a company’s existing products.  This second solution is common for large companies and is why large companies are not known for inventing revolutionary or disruptive technologies.

Critics of the patent system have to answer why they believe inventors will develop new technologies when it puts them at a cost disadvantage compared to copiers.

[1] Kitch, Edmund W., The Nature and Function of the Patent System, Journal of Law and Economics, Vo. 20, No. 2 (Oct., 1977) pp. 265-290.
[2] Ibid. p. 277

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