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