TVP – Metric 29 Sales Protected by Proprietary Position

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1. Metric Definition

The value of sales of products protected by patents owned by the company, or the percentage of the company’s sales in a given year of products protected by patents.

The patent may cover a composition, process, or use, provided that it clearly creates (lawful) monopoly or obvious market leadership position for the company. Rigorous review is required to assure that incremental improvement patents are excluded unless clearly leading to market leadership.

The following quotient best describes the metric:

Sales of products in year x protected by patents
Total business unit sales in year x
Foreign sales and patents may be considered if they represent a significant portion of the total. A broader metric encompassing all proprietary positions, for example via licensing, acquisition, joint venture agreement, and trade secret could be used but this approach would likely be much more subjective and much less credible.

2. Advantages and Limitations

The main advantages of this metric include: ease of measuring; high credibility, if used properly; and its quantitative nature.
One disadvantage is this is a lagging indicator, which may measure progress a decade or more old. It may be beneficial to include some measure of remaining years of protection, or to list the patent expiration dates. Another disadvantage is that some businesses or market segments may place more emphasis on trade secrets, or market prowess, than on patents, perhaps making the count more difficult.

3. How to use the metric

Using the formula shown above, all of the previous years’ sales are examined to determine those in which sales were protected by patents. The patent department, if applicable, should participate and corroborate the assessment. Only those patents that clearly give a product a major technological, and hence, market advantage should be included. For example, a composition patent on a “me-too” performance drug for a minor market share probably should not be included. International patents and sales should be included if they are significant, or over 15% of total.

4. Options and Variations

A log of patent expiration dates should be reviewed and discussed along with the metric annually to assure that a precipitous drop in the metric is not imminent. Projections could be made five or so years out to illustrate continuity of the protection.

See also the metric, “Number and Quality of Patents” for additional patent valuations.

5. Champions and Contacts

6. References

Acs, Z.J. and Audretsch, D.B. 1989. Patents as a Measure of Innovative Activity, Kyklos, 42 (2 ), 171-180.
Chakrabarti, K., and Anyanwu, C. L. 1993.  Defense R&D, Technology, and Economic Performance: A Longitudinal Analysis of the U.S. Experience, IEEE Transactions on Engineering Management, 40 (2 ), 136-145 and references therein.
Curtis, C.C., 1994. Nonfinancial Performance Measures in New Product Development. Journal of Cost Management, 8 ( 3 ), 18-26. This article covers the relationship of patent number and patent quality with other metrics.
Griliches, Z., 1990. Patent Statistics as Economic Indicators: A Survey, Journal of Economic Literature, XXVIII, 1161-1707.
Honig-Haftel, S. 1990. The Effect of Reward Systems on the Development of Patents in High Technology Firms Sc.D. dissertation, University of New Haven.