What You Should Know About Licensing

Some may associate licensing as the paperwork you need to fill out to make sure your business meets all the legal requirements for operation. However, licensing is also used as a viable option to help your business grow and expand. It is known as brand licensing. 

Everyone from Disney and Mattel to the NBA and NFL will license out parts of their brand. Designers and artists will license their creative intellectual property (IP), and celebrities like the Kardashians will license their image to expand their revenue streams and boost their brand exposure.

Some of our clients at 10twelve have asked us if brand licensing is a potential method that they can use to grow their companies. There are a few considerations and details to know before deciding to license.

What is brand licensing?

Brand licensing is when a business essentially rents out their name, images and identity to a licensee--another company or manufacturer. Then, the licensee can create and sell products using your trademarked brand name. You aren’t responsible for any of the costs for production, distribution or operation. You may ask for an upfront fee, a percentage of their sales or a combination of both as compensation.

Licensing vs. Franchising

Licensing is not franchising. Although both can be potential avenues to expand your business, there are key differences to know.

Franchising is when you allow independent business owners to use your trademarked name and brand as well as your operating model. It is a common practice for chain restaurants and retail stores. Franchisees--the independent owners--are required to pay a percentage of royalties to franchisors and must follow certain operational standards.

With franchising, businesses have more control over how a franchisee operates. However, it requires more time to oversee franchisees and support them. Licensing doesn’t give you control over how a licensee runs their operations, but the risks, costs and level of responsibility are lower. For startups and small businesses that don’t have store locations or aren’t interested in opening new ones, licensing may be worth considering.

Why is licensing a viable option to grow?

Every time you go to a large retail store, you are exposed to thousands of licensed products--even though you may not have noticed. For instance, Johnson & Johnson Band-Aids decorated with Marvel superheroes, Nestle coffee creamers flavored as Girl Scout cookies, and Nike’s NFL jerseys are just a few examples of licensed products.

There is a reason why brand licensing is so popular. Licensing a brand or product allows you to scale and create new streams of revenue at little to no investment. In fact, depending on your contractual agreement, a licensee may be required to pay you a set fee, regardless of whether or not they are able to sell your licensed products. (Although, the hope is that they do.)

The ROI of Licensing

Brand licensing can also be highly lucrative. (Take a note from the master of licensing--George Lucas.) The Star Wars franchise has made billions over the years, but the majority didn’t come from box office sales. It came from George Lucas’ merchandising and licensing savvy. Licensing was also a huge incentive for Disney to purchase the rights from Lucasfilm for $4.05 billion in 2012

Disney is also one of the biggest licensors of its brand. When you go to your local Walmart, Target or other retail store and buy a Mickey Mouse coffee cup, what are the chances that someone other than Disney produced it? The chances are pretty high. Characters from movies like Frozen, Guardians of the Galaxy, and Avengers were licensed to various retailers and generated a reported 45.2 billion in sales from licensed products worldwide in 2014. 

How can licensing grow your brand globally?

If you want to expand your business internationally, there are several options to consider. If you want to open up your own locations, then it will require a lot of legwork, upfront costs and management on your end.  Trying to enter a new market can be quite difficult. However, licensing is a lower risk and more cost-effective option.

To do it, you’ll need a partner that you trust who distributes internationally. They need to be able to carry your product and sell it to the market in that region. Licensing to a foreign distributor may be a smarter option, because they already have a presence in the local market.

Brand Licensing Considerations

Giving another entity permission to use your brand is a cost-effective way to build your business. However, it takes serious consideration and planning. To successfully license your brand, keep these tips in mind:

Define your brand.

Before you can license out your brand to outsiders you need to have a clear outline of what that entails. Do you have a brand style guide? What are your company values and ethics? What is your suggested retail sale price?

You need to define and document how licensees can and can’t use your brand. You may even want to have a program to train licensee on proper packaging, design and other brand standards. This helps to make sure that your reputation and image aren’t damaged. It keeps your brand consistent, sets ethical standards and keeps your values intact.

Choose the right partners.

Don’t jump into a licensing agreement without researching a potential licensee thoroughly. The partners that you choose should also make sense to your company. Just because Justin Bieber can license his image to create a line of dishware, it doesn’t mean he should. On the other hand, if you are a restaurant, it might make sense to license your brand to a line of frozen food like P.F. Chang’s and Unilever did.

To find a licensing partner that is right for you, start by research companies that sell products and services that are similar to yours. They may have similar audiences or operate in the same market, but aren’t direct competitors. If you want to reach a new customer segment, look for companies that have that audience base.

Make it official.

You need to have a written contractual agreement between licensors and licensees. This covers your back and prevents any confusion or legal nightmares. The agreement should include a breakdown of the licensing fees and payment arrangements. Will it be based on net sales, royalties or guaranteed payments? It should also have guidelines for use and outline behaviors that violate the terms of use.

Monitor your brand licenses.

It is important to check in on licensed products on a regular basis to make sure that they are meeting the guidelines that you’ve set. If you choose the right partners and set the pieces in places, it will be a lot smoother. However, issues may develop later, and it is important to be aware of them and address them as soon as possible.

Brand licensing can produce a large return-on-investment and help build your business. For business owners, licensing can be a cost-effective way to create new revenue streams, but it takes strategic thought and planning. You need to find partners that make sense for your brand and establish guidelines. If you are interested in brand licensing and other ways to grow your business, chat with 10twelve and learn more today.