How To Establish A World-Class Corporate Brand Licensing Program: Part Two

Posted by Oliver Herzfeld on July 27, 2017

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A well-functioning corporate licensing program can help a brand to expand into new categories and territories, adapting to new trends and a changing marketplace. However, setting up such a program takes hard work and ongoing care.

In the first installment of this three-part series (available here), I commenced a survey and analysis of the key processes and procedures in establishing a corporate brand licensing program by covering how to get started, strategic planning, and teams, processes and tools. I will continue with a review of licensee selection and negotiation, the license agreement, licensee management and product development.

Licensee Selection and Negotiation

Once a licensing plan is finalized, required teams are assembled and essential systems, materials and tools are in place, the brand owner can commence the process of prospecting for, soliciting and signing-up licensees. A disciplined licensing sales process includes the following elements and stages of development:

  • Category research – research the size of the category, where products are sold, how the category is organized, the category trends, how important brands are in the category and whether licensing is a major force.
  • Identify prospective licensees – find companies in a category through trade show attendance, retail and online store checks, trade publications, industry associations, professional contacts and online tools (g., Hoovers and Thomson Research).
  • Pitch the opportunity: Customize the sales materials as necessary in order to best present the brand and then contact prospective licensees to:
    • identify the brand and category opportunity;
    • highlight the brand’s strengths and unique selling proposition;
    • explain why the licensees should be interested; and
    • solicit business plans from each prospective licensee.
  • Review the proposals – ask each licensee to explain how it arrived at its sales projections and what its assumptions were based on, benchmark proposals against other similar brands and other proposals, and analyse forecasted annual growth.
  • Financial negotiation – although there are usual and customary royalty rate ranges for different product categories (e.g., between 8% and 10% for apparel, between 6% and 10% for toys, between 8% and 12% for publishing, between 3% and 5% for electronics, between 2% and 5% for food), it is preferable to avoid a ‘rate card’ mentality. Instead, try to understand the licensee’s projected gross profit margin and seek a mutually beneficial agreement.
  • Due diligence – to protect the brand owner’s reputation and brand quality associations, all potential licensees must be evaluated to ensure that they are capable of, and committed to, protecting the brand, creating appropriate products, distributing through approved channels and meeting all other licensing program obligations. As an additional filter, potential licensees should be able to demonstrate secured distribution through channels where retailers practice strict quality control.

If a prospective licensee passes the brand owner’s due diligence evaluation, the parties can proceed to the preparation of a deal term sheet and then drafting and negotiation of a definitive license agreement.

The License Agreement

At a minimum, every trademark license agreement should address the following 10 key concepts:

  1. definition of ‘net sales’, including proper limits on different types of discounts, rebates, returns, taxes, shipping and handling costs, costs incurred in manufacturing, selling, distributing, advertising, uncollectible accounts and commissions;
  2. royalty rates (including free on board and distributor rates), advance payment, minimum guaranteed royalties, limits on cross-collateralization, acceleration upon termination, minimum net sales and interest on late payments;
  3. records, reports and audit rights;
  4. approvals and quality control;
  5. distribution channels and marketing requirements, seconds and disposal;
  6. IP protection, registrations, infringement and damages;
  7. warranties and indemnification;
  8. insurance;
  9. term and termination conditions; and
  10. sell-off requirements.

The license agreement form should be customized to address the brand owner’s unique business and legal requirements. Similar to the strategic licensing plan, it should be continuously updated to address the latest commercial and IP laws and legal decisions, licensing industry developments and any lessons learned from the brand owner’s actual licensing experience.

Licensee Management and Product Development

Some people mistakenly believe that once a license agreement is fully signed by both parties, the brand owner’s work is essentially complete. Nothing could be further from the truth. In reality, well-run licensing programs require the brand owner to invest considerable time and effort in ongoing licensee management, including overseeing and supporting licensees’ product development and retail sell-in efforts, and ensuring that all licensed products and collateral materials make a compelling visual impact at point of sale, as well as meeting the brand’s quality, safety and aesthetic standards, technical specifications and strategic vision. Licensees should be treated like teammates, not adversaries; ideally, the relationship should be less transactional and more like a marriage (and sometimes like that between a parent and child).

All new licensees should be provided with a welcome kit to introduce them to the brand owner’s program. The kit should detail the brand owner’s processes and procedures relating to product development and approvals, royalty reporting, business planning and sales projections. The brand owner should also devote time to educating new licensees with regard to the brand’s existing products, licensing vision and program goals and objectives.

Prior to any promotion, sale or distribution of licensed products, licensees must submit all products, packaging, labeling, point of sale materials, trade show displays, sales and merchandising materials, other collateral materials and advertising bearing the trademark to the brand owner for review and approval. When it comes to international licensing, if any of these terms are in a foreign language, licensees must also submit translations, as well as certifications that the translations are accurate. Although approvals can be handled manually, there are many compelling reasons to use a customized online approval portal, which can be developed or licensed by the brand owner.

The approval process operates in four stages: concept, prototype, pre-production and final production. Prior to any production, licensees should submit digital concepts (rough sketches and layout concepts) of the products they are seeking permission to manufacture. The brand owner’s approval team will review the submission to determine whether it complies with the brand’s style guide. If it does not, the licensee will be asked to submit a corrected version. Once the digital rendering is approved, the process enters a second stage where the licensee is required to send a prototype or submit finished artwork for approval, depending on the nature of the submission. Pending approval of the final design, as a part of the third stage of approvals, the licensee must submit a pre-production sample for physical inspection. If the samples receive the brand owner’s approval, the process moves to final production. The brand owner reserves the right to inspect a final production sample before it is shipped to a distributor or retailer. If the final production sample complies with the brand’s guidelines and is of satisfactory quality, the brand owner will approve it, and the licensee is then permitted to manufacture and sell the product. The foregoing approval process is designed to ensure that all licensed products are consistent with the brand’s core values and maintain the brand owner’s quality and other standards. Of course, the process may be modified slightly on a case-by-case basis to address the relevant product category (e.g., apparel, consumer electronics, interactive and digital products), type of submission (e.g., item-based versus full line of products), and licensee and retailer go-to-market deadlines.

The brand owner should also work with both licensees and retailers to develop launch plans and timelines, including open-to-buys, key tradeshows and line reviews. It should continuously communicate with licensees to ensure compliance with projected timelines and forecasts, facilitate optimal performance and share new program developments and announcements. Finally, it should encourage innovation, category expansion and cross-promotions among licensees.

Part Three

In the final installment of this three-part series, I will cover unlicensed products, ongoing program optimization and using an agency.