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Inventors, Pick Your Industry


The biggest royalties come from the most profitable fields, such as finance, computer software, music, movies, and, uh, tortilla making

Nothing beats "mailbox money" when it comes to boosting your bottom line. That's when you license an idea, innovation, or invention to another company in return for a royalty payment. Each quarter, magically, a royalty check shows up in your mailbox with a gross margin of 100%.

There has never been a better time to be an inventor. Big companies are desperate for your ideas. Procter & Gamble (PG) now gets more than half its ideas for new products from outside inventors. Five years ago, that number was closer to 20%.

But where you focus your creative energy has a huge impact on the payoff you can expect. If your idea is a big wow and highly proprietary—and you can show how to produce it profitably—the fair-market royalty is 25% of the gross profits generated from that idea.

Recently, Greg Lemmon, a mathematician at Eureka! Ranch, set out to find the profit margins in more than 200 industries. Those with the highest margins should provide the most fertile ground for inventors. He based his analysis on 5.5 million business tax returns compiled by Leo Troy, an economics professor at Rutgers University, in the Almanac of Business & Industrial Financial Ratios.

Greg's results remind me of the scene in The Graduate in which Walter Brooke's business executive takes Dustin Hoffman's character aside and says, "I just want to say one word: plastics." Greg has found the "plastics" for inventors—the greatest profit opportunities. Here are the top 10 industries:

Finance, credit, commercial banking, and other financial services head the list, with gross margins topping 50%. Of course, recent events show this may not be a good time to enter the financial-services industry.

• Next on the list are landlords, with a 47% profit margin. Notice I said "landlords," not "slumlords." New ways of leasing and new concepts, such as mini-warehouses, offer great potential.

• Successful companies in the recording and movie industry have margins of more than 40%. Writing lyrics or crafting a melody or script is a challenge, but the payoff can be fantastic.

• Computer software publishing is hot, with 40% margins. It takes massive energy to create breakthrough software, but the profit per unit is enormous, too.

• The old-world industry of specialized manufacturing equipment offers 40% margins.

• Bakeries and tortilla makers have a profit margin of 31%. I guess the Atkins diet doesn't rule after all.

• The so-called sin industries, such as breweries and gambling, report 30% margins. So much for sticking to the straight and narrow.

• Soft drinks offer a 27% margin, which explains all those New Age and energy beverages glutting supermarket shelves.

• Publishing also offers a 27% margin. This goes for both the online and the old-line variety.

• Rounding out the top 10 are the pharmaceutical and health-care industries, with 25% margins.

The dregs of the list include meat and seafood processors at 7%, which also provide some of the most unpleasant work you'll ever find. They tie with automakers and auto parts suppliers. Last, at 5.5%, is the retail industry.

If you're an inventor looking to cash in big, look first to industries with plenty of money to spend—preferably, to promote your idea.

For a collection of Hall's columns, go to businessweek.com/go/sb/doughall

Back to BWSmallBiz October/November 2008 Table of Contents

Doug Hall is author of The Jump Start Your Business Brain book series and founder and CEO of the Eureka! Ranch.

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