The Entrepreneurs: Steve Vetorino, 45, founder of Applied
Innovative Technologies Inc. in Fort Lupton, Colorado, and inventor
of the NightStar; electrical engineer Jim Platt, 39, who helped
Vetorino create the design and prototypes; and Todd Brown, 46,
president of AIT, who provided business expertise for the
product
Product Description: The NightStar flashlight uses
magnetic-force charging instead of batteries to power the light.
Users gently shake the flashlight for a charge that lasts up to 30
minutes. Today, the $39.95 product (as well as a compact version
that's $29.95) is sold via QVC, catalogs, hardware stores,
marine stores and more. Customers also include the U.S. military
and distributors serving industrial markets such as mining and
petroleum companies.
Startup: Approximately $10,000, which was spent on
developing operational and marketable prototypes. When AIT received
their first catalog order in 1998, an additional $280,000--raised
by the inventors and by selling stock to family and friends--was
spent to fund patents, tooling and an initial production run.
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Sales: $4 million to $5 million projected for 2005
The Challenge: How should a small company respond when an
almost identical company enters the market and launches a similar
product made by an overseas manufacturer?
Early on, AIT found success when it began selling its NightStar
flashlight to catalogs, hardware stores and retail outlets. Then,
in 2001, a competitor--Daka Corp.--introduced the Forever
Flashlight, a knockoff of the product manufactured in China. The
Forever Flashlight sold for $15 less than AIT's version. Before
long, some of the catalogs decided to switch to the lower-priced
product, and big retailers like Sears also started purchasing from
Daka. Making matters worse, about 10 other suppliers with similar
products have since hit the market. But despite these challenges,
AIT has remained successful, increasing sales year after year. The
following tactics helped these entrepreneurs secure a bright
future.
Steps to Success
1. Compete on price. When the knockoffs first appeared,
the NightStar was being produced in Denver, and AIT just
couldn't compete with the foreign company's pricing. To
lower its price, AIT had to secure an overseas manufacturer. They
soon located a company in China, AWI, which manufactured a lens
they could use in the NightStar. Says Vetorino, "As time went
on, AWI took over 100 percent of the production, which kept our
prices down."
2. Offer a better product. "We had been selling the
product for several years, and we knew how to improve [it],"
says Vetorino. "Once the knockoffs appeared, we implemented
numerous upgrades." The new features included improved light
output, altered housing construction so the flashlight would float,
and more. "We are very happy with AWI. They give us a
high-quality product at a competitive price, and we are able to
easily make design changes to keep us ahead of the
competition."
3. Develop a marketing edge. To emphasize the
NightStar's improved quality, the company sought laboratory
verification from Aero-Nav Laboratories in College Point, New York,
and Hauser Laboratories in Boulder, Colorado. "The Aero-Nav
tests demonstrated that the NightStar can be safely used in
explosive environments containing volatile substances, and the
Hauser tests verified NightStar's durability in chemical baths
of salt water and various acids," says Vetorino. "Hauser
also conducted extreme-temperature, deep-immersion and drop-impact
tests."
The competition didn't conduct any of these tests, leaving
the NightStar the preferred light for military, industrial and
extreme-condition uses. Once AIT completed the laboratory tests, it
approached specialized distributors serving those markets to carry
the NightStar. Industrial buyers can also purchase from the website
(www.appliedinnotech.com).
Lessons Learned
1. Don't expect customer loyalty. Many of the
retailers and catalogs AIT had been selling to immediately switched
to the lower-priced knockoffs when they became available--despite
the fact that the NightStar had pioneered the market. Most
retailers and catalogs are unwilling to carry a higher-priced
product for fear of losing sales to their competitors.
2. Respond to market changes. On the plus side, customers
will often give you some leeway if you respond immediately to a
competitive threat. But you have to notify them of the action
you're taking to keep your product cost-competitive or to offer
improved features. When a low-cost knockoff appears, determine if
you can find a lower-cost manufacturing outlet. If you do, but it
will take several months to receive production, consider selling
your current product at the new, lower price to keep the
competition out.
3. Target the smaller markets where you have an edge. You
may not be able to compete against knockoffs at large, low-priced
retailers. But you may be able to dominate smaller, specialized
markets with unique needs the knockoffs just can't meet.
4. Make quality a priority. There will always be a market
for a top-quality product. Knockoff manufacturers don't have
the inventor's experience and knowledge about features that
need improvement. Upgrade your product for high performance, and
you should find a market at high-end catalogs and stores that shun
the lower-priced imports.
5. Understand that getting a patent doesn't prevent
competition. Patents protect a specific product design. A new
product with minor design changes can often circumvent another
product's patent. In NightStar's case, the product's
main feature--passing a magnet through a coil to create a
current--is a well-known principle that isn't patentable, which
is what allowed the knockoffs to design around Vetorino's
patent.
Protect Your Patent
You have a patent, a great product, and sales are popping--but
suddenly, out of nowhere, somebody introduces a product that
infringes on your idea. Can you afford to sue? With full-blown
patent suits costing $250,000 and up, you might have a problem. One
solution is to check out patent insurance. It's not cheap (it
starts at about $25,000), but it will provide 80 percent of the
money for any suit. And the fact that you have patent insurance may
force the infringing company or person to settle.
Patent insurance is available from many sources, but one to
check out is Intellectual Property Insurance Services Corp.
Don Debelak is author of Entrepreneur magazine's
Start-Up Guide #1813, Bringing Your Product to Market
(www.smallbizbooks.com), and host
of inventor-help website www.dondebelak.com.