Why License?

The use of licensing as a marketing and brand extension tool has proliferated over the last 30 years. When well-executed, a strong licensing relationship brings benefits to all parties to the deal – property owners and their agents, licensees and their affiliates, retailers and, ultimately, consumers, Each of those parties has its own goals and aims that ultimately adds value to the final product or service.

To maximize the outcome, each participant in the licensing process has certain responsibilities to fulfill. Every agreement between the licensing parties is unique in its specifics, so even these responsibilities vary to some extent.

Licensors

There are many reasons for an intellectual property (IP) owner to grant a license. The most obvious one is to generate revenue from the guarantee and royalty payments. But licensing also can serve a number of other purposes. In some cases, those “other” reasons to license might actually be more important to the licensor than the sheer dollars (or euros, pounds, pesos, won, rupees) that are earned. Among them:

Marketing support for the core business. For a television show, movie, children’s book or sports franchise, the retail display and proliferation of licensed products doesn’t only generate product sales, but it also promotes the core property. An array of toys or apparel tied to a movie, sitting on a store shelf, also helps to promote the movie itself. A sports fan wears a sweatshirt with the logo of her favorite team expresses her enthusiasm about the team, but also subtly promotes the sports, the league and the team to anyone who passes her by on the street. The same goes for a beer brand. Seeing a store display of glassware carrying a well-known beer logo, or walking into a neighbor’s home and seeing the glasses on his bar reinforces the brand image, supporting the brands overall marketing efforts.

Extending a corporate brand into new categories, areas of a store, or into new stores overall. Licensing represents a way to move a brand into new businesses without making a major investment in new manufacturing processes, machinery or facilities. In a well-run licensing program, the property owner maintains control over the brand image and how it’s portrayed (via the approvals process and other contractual strictures), but eventually reaps the benefit in additional revenue (royalties), but also in exposure in new channels or store aisles. Examples might include:

  • A well-known brand of construction tools licensed into such areas as work gloves or work boots;
  • A brand of beauty products extended into a new vitamin line that promotes better looking skin.
  • A popular restaurant chain licensing a frozen food manufacturer to market a line of appetizers under its brand.
  • A well-known fashion label licensing its name into such natural extensions as leather accessories, shoes, fragrances or home textiles.

Trying out potential new businesses or geographical markets with relatively small upfront risk. By licensing its brand to a third-party manufacturer, a property owner can try new businesses, or move itself into new countries with a smaller upfront investment than by building and staffing its own operations.

Maintaining control over an original creation. Licensing represents a way for artists and designers to profit from their creative efforts, while maintaining control over how they are used. For brand owners (particularly those doing business in the global marketplace), licensing and registering the brands in multiple markets is a way to protect the brand from being used by others without authorization.

In addition to giving the licensee the right to use the property, the licensor assumes several responsibilities that need to be met in order to create a successful licensing program. They include:

  • A timely and efficient approval process, so that products can move their way along the development chain in a timely way.
  • Giving guidance (often in the form of a printed or digital style guide) about how the brand, character, logo or other IP can be portrayed within the product, on packaging, or in advertising and promotional materials.
  • Assisting in marketing activities and, in many cases, helping to sell the brand into retail.

An IP owner also has to be aware of the risks involved in licensing. The brand owner has to be careful to make a deal with a licensee that can create and deliver products bearing the licensor’s brand that are of agreed-upon quality; that can service the retailer adequately; whose goals for the brand align with those of the brand owner, and who can serve as a true partner in a relationship that, when well-executed, is a win-win proposition for all involved.

Licensees

Licensees lease the rights to a certain property for incorporation into their merchandise, but traditionally they do not share ownership in it. Nevertheless, licensing provides a number of important functions to them.

Gaining the consumer awareness and marketing benefit of a well-known brand, character, logo, design, etc. The most obvious benefit to a manufacturer or service provider the licenses a brand, character, design or other piece of intellectual property is the marketing power it brings to the product. It can take hundreds of thousands or millions of dollars to build a brand from scratch, and licensing represents a way for a manufacturer to take advantage of all the brand building and image building that has gone on before. A child in a toy store doesn’t seek “an action figure.” He’s generally looking for a particular character he’s fond of. Faced with a choice among several cleaning implements, a shopper might be drawn by one that bears the brand of a well known cleaning fluid, rather than a more generic label. In making the decision about whether or not to take on a license, a manufacturer often weighs the potential royalty payments against the cost of building a brand on its own.

Moving into new distribution channels. Taking on a license might help a manufacturer whose brand has been marketed in, for example, mass merchandise outlets to market a more upscale, high quality line in specialty stores or department stores that wouldn’t carry the lower end products.

Reducing in-house costs. A manufacturer who licenses artwork or designs to be applied to hoe textiles, wall coverings, housewares, or on apparel has less reliance on inhouse art staffs that wold otherwise need to be maintained.

Enhancing authenticity and credibility. The publisher of a car-racing videogame might license a host of well-known automotive brands and car models to lend legitimacy and authenticity to the game. Similarly, a maker of automotive parts or accessories will license the car brand to establish in the consumer’s mind that its products will work seamlessly with the cars of the parent brand.

In taking on a license, a licensee takes on a financial obligation, and also an obligation to adhere to agreements in such areas as submitting products for all necessary approvals, creating a product to agreed-upon standards and marketing the product. The risks that the licensee faces in a licensing program are fewer in number than those of the licensor, but potentially greater in magnitude. The major risk is financial – royalties, guarantees and advances. Even if the products do make it to the market, there is no certainty at all that they will do well, no matter what property a manufacturer chooses.

Agents and Consultants

Licensors often retain licensing agents to manage their licensing programs. These agents assume duties for their clients such as contract negotiations or the product approval processes. In return the agent receives a certain percentage of all royalty revenues. For the licensor the advantage of retaining a licensing agent involves the agent’s expertise and network of contacts. The licensor also weighs the cost of the agent against the cost and time involved in building up an internal licensing department to handle the business.

Manufacturers, on the other hand, may retain a licensing consultant whose duties are equivalent (from the other side) to those of the licensing agent. The licensing consultant supports manufacturers who are largely involved in licensing, but who do not have in-house employees to handle the business. It is the consultant’s responsibility to represent manufacturers in their licensing activities, including the evaluation of properties, the checking of their availability or the development and implementation of licensing strategies. The terms under which licensing consultants are paid vary extensively, but the major percentage is paid in commissions derived from product sales.