Economists like to use analogies since they often find themselves explaining concepts that might be a bit over the head of the average non-economist. They also like to use analogies that involve real estate, since that is a high-value economic transaction that many civilians are familiar with. This was the case last week at the “Best Practices in Patent Monetization” conference when Dr. Ryan Sullivan, president of Quant Economics, Inc., gave a lecture on the best approaches to patent valuation.
He outlined three different approaches to valuation of assets. The first is the “cost approach,” where you form your valuation based on the costs that go into creating something. With a house, it would be lumber and real estate. You consider historical costs and reproduction or replacement costs. In terms of patents, this valuation would be based on the cost to develop the invention or by comparing it to an invention of equal quality. While this strategy works well for a home, it is not best suited to valuing a patent, since there is far more involved in the creation of a patented technology than just the materials that go into it.