What Is the Difference Between Contract and Licensing Manufacturing?

Do you know how big is India’s electronic contract manufacturing industry? It was about USD 23.5 billion in 2020 and is predicted to reach USD 152 billion by 2025. Companies of all sizes choose third-party manufacturing because it allows them to focus on other business activities.

If you run a small business or are planning to start one, you are probably considering outsourcing over manufacturing the goods. The next dilemma is whether to go for contract manufacturing or licensing. Often, people confuse both concepts and end up making the wrong decision.

In this article, we will explain both of them so that you will better understand their differences and make the right choice.

What Is Contract Manufacturing?

Usually, small businesses do not have the resources and skills to manufacture items on a large scale. They have a good product design and the necessary skills and resources to market and sell their products. Contract Manufacturing is part of contracting a third-party manufacturer to manufacture your product. 

You can learn all about the process of contract manufacturing here. Let’s see the benefits and risks of opting for contracting.

Benefits Of Contract Manufacturing

1. You save a lot of money on the capital required to set up a manufacturing plant. You don’t have to invest in a building, manufacturing tools, or staffing. Additionally, you save time and money on training and labour costs.

2. You can manufacture your products on a large scale with little investment. Even assembly is less expensive.

3. You can manufacture and sell your products in other locations with minimum cost. This enables you to grow and take your company global without raising extra funds.

4. Outsourcing the production frees up your time and capital to concentrate on other business operations like product design, sales and marketing. It is easier to bring new products and distribute them to a larger market.

Risks Of Contract Manufacturing

1. The quality of your product is not something you can directly influence. As a result, it’s possible that your contract manufacturer won’t adhere to the production methods and quality standards you’ve established. This results in significant quality issues with the finished product, which could damage your brand’s reputation.

2. Your manufacturer might share the concepts for your product with your rivals or create a variant of it under their brand. Before you sign the agreement, be sure to have an attorney help you establish a solid legal contract. Here’s a guide on choosing the right outsourced manufacturer for IoT devices.

What Is Licensing?

An inventor is an individual or a company that invents a unique product or a solution but may not have the ability, necessary skills and resources to manufacture and market the product. In such a case, you can agree with another company to manufacture, market and distribute your product for a fee called royalty. This process of giving access to another organisation (called a licensee) to your patents, technology and other secrets is called licensing. 

Advantages Of Licensing

1. You can help your product reach consumers with little to no investment. You neither need to set up a manufacturing plant nor spend time and money on marketing.

2. In addition to the royalty, you also receive a percentage of the sales without exerting any effort. As the sales increase, so does your pay cut, thus increasing your passive revenue. 

3. You don’t need to spend much time on post-invention activities like product development, research, and marketing. You may use that time to concentrate more on developing new products or solutions.

Disadvantages Of Licensing

1. You have very little control over the production and marketing of your invention. Your licensee may change the name, appearance or even pricing as per their wish. 

2. There is a greater chance of clashes regarding royalty payment, adherence to standards, record maintenance and so on. 

3. The inventor could waste time and money during the contract talks if they don’t have the right advice and market understanding. So it’s best to seek the assistance of a qualified attorney.

Differences Between Contract And Licensing Manufacturing

Contract manufacturing and licensing are two ways to manufacture your product from another company without involving yourself in the process. It is the manufacturer’s responsibility to procure the raw materials for production. Now, let’s understand the key differences.

Contract Manufacturing	Licensing
You have complete ownership of your product.	You may or may not have complete ownership of the product.
You are more involved as you handle marketing and sales.	You are less involved as your Licensee manages the sales and marketing.
You decide how many units to manufacture, and you will also bear the costs.	The licensee can manufacture as many units as they like, and they will bear the costs too.
More risk as you bear the loss if your products sell less and don’t generate enough revenue.	Less risk on you since your manufacturer decides the number of units to produce. In case of low sales, they will incur a loss.
You receive all the revenue generated through sales.	You will receive only a percentage of the revenue made from sales.
Since you are handling the marketing, sales and distribution, it is more of an active income.	You can make a passive income from your invention. If the sales of your product increase, so does your income.

Both methods reduce your manufacturing costs and free up your time to focus on other business activities. But the million-dollar question is what you should choose.

What Should You Choose?

Contract manufacturing may be a suitable choice if you are familiar with the details of running a business and are capable of handling marketing and sales.

Licensing is a better choice if you’re more of an inventor and want to avoid the hassles of production, promotion, and sales.

Either way, get legal counsel and carefully review the contract conditions to ensure that your manufacturer won’t turn out to be your direct competitor.Suppose you are looking for a reliable contract manufacturer specialising in creating cutting-edge automation products and providing a wide range of services. In that case, Oatker is the right partner for you. Also, our products are 100% made in India. Contact us to know more.