Have you considered launching your own product lines such as furniture, lighting, wallcovering, etc.? Many successful designers have this desire but tend to confuse the high-margin, low-overhead model of product licensing with the inventory-heavy risk of in-house manufacturing. If you have been thinking along these lines, then it is important to first do a comparative breakdown. Take the time to do an evaluation of licensing your intellectual property to established manufacturers vs. self-funding an in-house product line directly to consumers.
So you want to expand revenue
When successful design firms begin scaling past the $1M – $2.5M+ mark is often when principals begin to think about how to expand the firm’s revenue beyond design service hours. This is the point where many think about developing a branded product line. But there are totally different business models between product licensing and in-house manufacturing.
As a firm’s success grows, there is a realization that client design/service fees and procurement markups lead to an operational ceiling on income and time freedom. There are a limited number of hours in the day and a limit to realistic markups. An increase in design hours and/or clients means additional team members, which increases operational costs. Will those additional costs actually translate to higher revenue? And what effect will that have on your time freedom? There is a point where you reach the ceiling.
When considering product design, many designers are attracted to the idea of “passive income” and see that as a definite advantage. Neither licensing nor in-house product development is entirely passive. But there is a considerable difference in overhead, risk, and asset leverage.
To create and build a successful, profitable product expansion, firms need to match their cash reserves, brand equity, and operational structure to the right business model. Firms need to leverage intellectual property through licensing or develop full margins through self-funded production. The key is to decide which direction is best for you and your firm – licensing your product designs or in-house product design. Let’s explore the differences.
What is involved in the licensing model?
In the licensing model, you are designing collections for established manufacturers. They handle production, warehousing, marketing, distribution, and fulfillment. In exchange, you receive royalty fees, which are typically 3%-8% of net wholesale sales.
The advantages of the licensing model include your having zero inventory liability. Your firm has no cash tied up in physical stock, warehousing, or freight management.
You also have built-in distribution with instant access to the manufacturer’s global showroom network, sales reps, and customer base.
In addition, your firm’s name will be affiliated with leading industry manufacturers. This connection elevates your market reputation.
Of course, where there are advantages, there can be disadvantages that should be weighed. The manufacturer will own the final production, timeline, and customer service experience. There can also be a long development period with contract negotiations, prototype samples, and final market launch. This development can take 12 to 24 months before you see the first royalty check. Your product will need to prove that it will attract buyers and be able to hold that market to acquire favorable contract terms.
What to consider with in-house lines
With in-house lines, you design, fund, manufacture, stock, and sell your own product line directly to your clients or trade partners. The most obvious advantage with in-house vs. licensing is the elimination of the middleman, creating the opportunity to capture 100% of the retail or wholesale margin. You also retain complete control over materials, craft quality, packaging, and brand messaging. You also own the end-client relationship as well as email lists and purchasing behavior data.
There are concerns you need to be prepared for, though. There will be a high upfront investment for raw materials, minimum order quantities, prototyping, and warehousing to start. You will also have operational changes as you start dealing with logistics. Your firm will need to manage inventory holding costs, damages, returns, and specialized e-commerce support. Suddenly, your firm will be directly exposed to the challenges of supply chains. You will have full exposure to freight tariffs, customs delays, factory defaults, and unsold stock.
Direct Comparison: Licensing vs In-House
When comparing product licensing vs. in-house product lines, it’s important to consider the risk, capital, and execution. It can be helpful to lay out a spreadsheet to compare the advantages and challenges and then decide which is the best fit for your firm.
On the positive side, the product licensing model offers zero inventory liability, built-in distribution, and aligning your firm’s name with premier manufacturers. But on the negative side, your firm loses quality control, can run into long contract negotiations, and doesn’t have full control over launch timing. Also, your brand must continue to attract customers and sell well to hold the market.
With an in-house line, you are selling directly to the customer. That offers the maximum profit margin potential, complete control of aesthetics, and full customer data, creating a direct relationship between your firm and the customer. You are also able to start small and create a niche for your product line without the need for immediate high sales volumes. The challenges include heavy capital expenditure and switching from a creative firm to a logistics business operating inventory, damages, returns, etc. You will also have to deal with supply chain challenges directly.
Making the choice
When evaluating which option is best, you will first need to assess your firm’s readiness. Does your firm have the excess capital to absorb the inventory risk and still be able to make payroll? If not, then you will need to build up the capital to do so.
Evaluate whether your team can handle the additional bandwidth required. Your team will need to handle e-commerce customer service and shipping logistics while still being able to efficiently handle your high-margin design clients. Consider if additional employees need to be part of the equation.
Measure your brand equity and ask if your market influence is strong enough to negotiate a licensing deal vs. building a more local, boutique, in-house product line.
Once you have completed these evaluations and feel you are ready to move forward, review these final considerations:
- The Small Start: Launch a small, limited-edition in-house product line. There is low inventory risk in this approach, and you will be able to prove market demand before approaching major licensing partners with high-volume categories such as lighting, rug collections, or casegoods.
- Protect Your Brand: Ensure that your product expansion will complement, not distract from, your primary high-ticket service offerings. If interior design is your primary passion, don’t let the products take over.
- The Next Step: Take action and audit your firm’s present operational ability and cash reserves on hand. Determine whether your brand is positioned to approach key manufacturers or to build an in-house production engine.