Against Intellectual Monopoly

Folks,

Here is a student exchange, my comments in between the *** ***

On Oct 7, 2009, at 9:00 PM, Jim wrote:

Hi John,

What a terrific first session tonight in your Import/Export class - thank you so much. I can already see that I will learn a great deal over the weeks ahead!

***You are very kind...***

You mentioned perhaps using the product I'm working on as a case example. That would be a terrific learning opportunity for us if this works into the class. In case you are interested, here's a quick background:

***And as a case study, let me provide an alternative universe to the approach, as a compare and contrast...***

A young, creative guy named R came up with the idea of creating a special item. He hand sewed a prototype and found that other dogs owners loved his idea.

***We'll start from the same beginning, and then diverge...***

He patented the design, but lacked the capital to further develop the product. "Invention companies" offered to buy the idea with 1-2% royalties to R - he passed. He met a friend of mine, J, a very savvy women's business coach, while standing in line for a reality TV invention show (they were both passed over). J (also a dog person), loved 's product and asked me (her DVM friend) for an opinion. I, too, was impressed and saw a number of applications to improve safety and convenience. We formed an LLC as equal partners; R contributed the patent, J agreed to act as CEO and provide capital, and I agreed to provide business advice (I also have an MBA), capital, and the DVM "seal of approval."

***R decided not to patent for a variety of reasons:

1. A patent is a monopoly, and does not get you customers. One needs customers to start a business.

2. A patent is quite specific, until we have customers we cannot know exactly what they want. With a patent we run the risk of patenting something nobody wants to buy, or a version nobody cares about. Of the 6 million plus patents issued since 1789 in USA, almost none ever turn into products, and of the extremely few that turn into actual products almost nothing is profitable. WE want customers and profits soonest. We need marketing, not monopoly.

R read AGAINST INTELLECTUAL MONOPOLY by Boldrin and Levine and came to the above conclusions, among many others, on why to never patent.

Since opinions are not orders, R skipped business coaches and reality invention shows, and since money is never the problem in business, no one was cut in for a part of the action. Further we formed no company since the purpose of the company is to serve customers, and until we have identified our customers, we have no need for a company, and in any event have no idea what form it should take. We'll form a company when people are sending us checks. R did work with a DVM for some design improvements, and the DVM is participating on a royalty basis for the designs. This royalty basis is secured in contract law, not in Intellectual Property Rights Law.***

We worked with an award-winning design engineering firm and, after many months, came up with a refined prototype meeting our goals for safety, strength, durability, functionality, and style. We located suppliers for the more complex components (high-tech waterproof retractors and a custom molded-rubber handle). As that was going on, my former MBA marketing professor had two MBA teams in a new products class develop marketing plans for us, which included very promising consumer research on our product. They suggested a price point of $24.99, but felt the product could sell well up to $39.99. We captured the web site domain and trademark name Supercollar. We won a Stevie award as a finalist for "Best new product of 2008" and are a finalist in a competition for entrepreneurial new companies hosted by Inc. magazine (J at work). We are also being considered for the new "Shark Tank" TV series.

*** As to design, since the idea is simple and the critical functions (retractable gear) are standard off-the-shelf components, we found the best place in the world to make our prototype, and found a Japanese company who put together a prototype. We skipped all of the mba teams and tv shows and all of that above, since it does not get us customers or anything else we need. R read FOOLED BY RANDOMNESS by Nassim Nicholas Taleb and decided these groups are self-delusional.***

Our initial goal was to keep our cost below $10 and have the whole item made in the U.S. Unfortunately, our cost is now closer to $20 and we've found that U.S. assembly shops want a ridiculous amount to put the product together. Thus, we're now looking at buying the retractors in the U.S., but having the item made overseas (at lower cost) and then imported in. We have no experience in how to locate and evaluate an overseas supplier. We know we have to drive down our costs for the numbers to work.

***The japanese want $20 each at 1000 pieces, which means we need $20,000. We got the minimum lower in 2 ways:

1. One critical part had a 1000 piece minimum, and cost $2 each. We agreed to pay the $2000 to produce that part, but only employ 250 pieces in our assembly. They will store the other 750 pieces.

2. Now, since all the other parts are stock, we just used 250 pieces of the stock parts, and assembled these with 250 out of the 1000 critical special made parts, for a 250 piece minimum. The japanese demanded a premium for a short run, so now our item is $28 each. So our first cost is $28 each, with 250 minimum, or a $7000 order which is easy to self-finance. if we sell the first order out, we can reorder, and we have a backstock of our critical part. Nobody can knock us off without that critical part, so we have effectively a monopoly, for now.

The japanese gave a sample to use in marketing.

We sure are glad we have no patent, since we are flexible in design and most parts are off the shelf.***

Re marketing, we have considered doing initial sales on Home Shopping Network or QVC to get product out there quickly and evaluate early customer feedback, then approaching high-end pet retail boutiques, then perhaps considering big box retailers such as Target (though perhaps not after tonight's discussion!). We lack experience in how to approach distribution and how to best "roll out" our product.

***Our marketing is simple, "PLAN B" approach. We walk into high end retailers, drop the sample on the counter and say "I believe if I import these, you will buy them from me at $60 each, retail $119.00, for your very high end customers... am I right?" We do this to get direct feedback specific to our item from the very people who would or would not buy them. WE expect at best to get a reply such as, "why yes, we'll take two..." which means we need to do this 125 times to cover the minimum. (enter sales reps) If they say no, they will say "no, because..." and they will tell us specifically why they will not order. WE can pretty much be assured price is never the issue, if it is a no, it will be for another reason, one we can fix by changing the design. isn't great we do not have a patent, since we are happy to change the design, and not trapped within the parameters of the patented design?

We know that nobody but QVC and HSN make money on products shown there, and large sales means we have to ramp up for large production and distribution, which means sunk costs we cannot recover if we find a problem with initial runs (which is likely), even if we can come up with the money for a ramp-up. We will get all of the feedback we can stand selling 2 each to 125 stores for our 250 minimum.

Further, as we produce iterations, each getting better, we sell more faster, making our item ever better and so far from our original that we are delighted we never patented it. Each $7000 invested gets us $7000 gross, and we mop up every dollar from high end on down, as our prices drop with volume, leaving not one dime on the table for this concept. We are in business, we are serious about it, and we will not leave one #"(+(!& dime for anyone else to have on our idea. Patents tell everyone what we are doing so they can rip us off one way or another, which leads to lawsuits and stupid waste of time and money. Since our development is customer based, no one can rip us off since they are not talking to our customers as we are. Rip off artists simply have no idea what we are about next. Further, as we improve the item, our customers will recommend new items for us to develop as well, so we'll build a line and have a blast just developing those, making news, enhancing our image and growing the business (as Ogilvy says in OGILVY ON ADVERTISING) like we had on this first item. We'll never sell to big box retailers. By the time the item is that popular, we'll have moved on to better items.******

My primary job is as a veterinarian, but I love learning new things and my experience with the iem has already taught me a great deal. I hope to see the inventor R and my partner J do well on this financially, and we have all agreed to "give back" to benefit pets if this flies. Most importantly, we hope this product will improve pet safety and provide a new level of convenience for pet owners.

***We never took anything that was not ours, so we have nothing to "give back." The fact that we have "improved pet safety and provided a new level of convenience for pet owners" is enough, and any profits we make we'll plow into developing ever more and better innovative items, benefitting the consumer and pets ever more. If anyone ever asks us for a handout, we'll explain this, and ask how come they are not helping out by introducing new products, instead of shaking down hard working people by intimating the hard working people stole something and need to "give back." Further any talk of "giving back" is seen by retailers as emotional blackmail borne of a lack of confidence in the product. It is a kiss of death to ever mix altruism with business, to ever let the right hand know what the left hand is doing in these regards. yes, very many businesses do it, for a variety of reasons, but at the small biz level is is deadly mistake.***

So, probably more than you wanted to know but that's a quick synopsis of the past 2.5 years for the Item! I very much look forward to your class and appreciate any insights you can throw our way.

***We did all of this in eight months, so now by these means we are in year 1.9 of selling supercollars, own a functioning profitable business, and have 24 skus in our line., 500 loyal pet stores, and sales of $750,000 and growing... we are all making money and having a blast developing new ideas... retailers cannot get enough of us.***

Jim,

This is probably more than what you wanted, but you set up the response beautifully... i


John

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