Calculating the Economic Value of a Patent
Due Diligence for Patent[1]s – The value of an invention is proportional to the ECONOMIC impact it has on a product or market.
The economic value of an invention is notoriously hard to estimate, but such analysis can be used to compare different inventions to stack rank the inventions – or to highlight the advantages/disadvantages of the invention.
Some inventions do not lend themselves to simple economic analysis. Inventions that change the landscape of a marketplace can have drastic economic effects that are impossible to guess. Inventions that are amenable to these economic analyses include incremental upgrades or improvements to existing products and products with a relatively defined market.
The goal of this analysis is to attempt to quantify the impact of the invention on a product, and these analyses are best used to compare one invention to another, as opposed to calculating the overall value of the invention. At best, these analyses will generate a percentage improvement, which can be multiplied by the number of products sold per unit time (generally a year), to determine an approximate “value”.
The economic value of an invention can be calculated by the cost savings from the invention, the extra amount that a customer will pay for a product that includes the invention, the cost to design around[2] the invention, or some other method – but it depends on the invention. Some inventions will fall into one or more of these buckets, but some may not.
A rule of thumb may be to estimate the market of a product with the patented invention. Assuming that the invention is the major piece of the product, a typical licensing arrangement may be 2-5% of the *wholesale cost* of the product. The value of a license to the patent would be proportional to the license royalties times the yearly sales of the product.
Check out our other posts on Patent Due Diligence.
References
- Patent Due Diligence in Investing in Patents, Ch. 4 (Book) ↩
- Design Around in Investing in Patents, Ch. 2 (Book) ↩