Licensing can be wishful thinking. I want someone to pay me for the right to manufacture my product. It's not impossible, but it is risky for the manufacturer if I don't have a track record or if my technology is brand new (especially if the manufacturer isn't satisfied that the technology has been sufficiently tested).

My considerations include

• On MY side
  • royalties (this might be a percentage of sales or a smaller percentage plus a flat fee)
  • duration of agreement
  • status of IP rights -- do I still own the idea?
  • design details I provide (e.g. CAD drawings, parts lists, manufacturing plans, etc.)
  • recommended vendors
  • confidentiality agreements (even though a patented device will be public knowledge, the actual manufacturing of this device and the relationship you have with the manufacturer are things you may want to keep to yourself)

  If I want trade secret protection, as opposed to a patent, I have to get a signed nondisclosure agreement from everyone who both knows and understands what I'm doing. [NOTE: This isn't legal advice. Consult with an attorney for the specifics.]

• On THEIR side
  • manufacturing (including methods, tools, and capabilities)
  • marketing (and what portion of this I will be expected to pay for)
  • staffing
  • unit price

Toll Processing

Toll processing may be more common than licensing per se. I would pay for the manufacturer's services and split the marketing costs; they can help with art work, packaging, warehousing, and distribution. There are many plants that will toll a product. Many of those have good distribution networks, as well as pull when it comes to obtaining shelf space.

As long as my name does not appear on the product, as is the case with a licensing agreement, I'm not responsible for quality. If I instead choose a toll arrangement, then I must spell out what defines an acceptable product. And I still am responsible for verifying any test results. My name is on the product, so I'm accountable.

Contract Manufacturing

With toll processing, you would consider whether the manufacturer is able to produce what you need at a reasonable cost. With contract manufacturing, on the other hand, you are actually in a partnership with the manufacturer. The partnership allows the contract manufacturer to provide a variety of "value-added services," such as technological development, marketing ideas, production capacity and expertise, and, in some cases, even distribution and shipping.

References

Alcoa is one major company in the toll processing business.
Ritter, Mitchell, Sarno, and Bopp, "Toll Processing: is it for You?" This article focuses on the powder industry, but it has some general principles.
Walker and Reardon, Your Contract Manufacturing Partner -- Find the Right Fit. This article gives a concise comparison of toll processing and contract manufacturing.