In order to boost profitability and expand their market reach, organizations typically work together using a variety of organizational structures. When two or more companies license a brand, a mutually beneficial partnership is formed. Gaining an understanding of brand licensing and its advantages will enable you to apply this tactic successfully and guarantee that a business maximizes the benefits of the licensing arrangement.
What is Brand Licensing?
To answer the question, “What is brand licensing?” It alludes to a formal contract that unites two or more entities. The licensee is granted rights to utilize the licensor’s intellectual property (IP) in this agreement in exchange for a predetermined price. It’s possible that this licence is exclusive, meaning that the licensee is the only one allowed to utilize the intellectual property. A non-exclusive license, on the other hand, enables the licensor to simultaneously award its intellectual property rights to many organizations. Usually, trademark owners license their software, characters, patents, copyrights, and trademarks.
Brand owners lease their patents, software, or characters to other companies. Licensees can re-sell the IP at a higher price or manufacture merchandise with the IP on it. Either way, the licensor gets a kickback—as a percentage commission or a one-time fee—as a thanks for granting permission.
One real-world example of a brand licensing deal is Barbie. The global brand is known all over the world and has licensing deals with all kinds of businesses, retailers included. One such retailer is Shopify merchant The Oodie, which sells limited edition Barbie products.
Why Brand Licensing?
Here are some benefits of brand licensing:
- Enhance visibility
One of the major benefits of a licensing relationship is reaching a wider audience. Working with other organizations can grant the company instant access to its audience and customers. A good licensing agreement is mutually beneficial as both the licensee and licensor have the opportunity to expand and grow into new customer demographics or geographical locations, which helps improve sales. In addition, if the company wants to penetrate a new market, you can consider entering a licensing agreement with a company with an established presence in the particular market.
- Build a stronger relationship with customers
Customer demands and expectations tend to grow as a brand grows. As a result, it may be difficult to create a product lineup that keeps pace with the customers’ growing expectations. You can consider using brand licensing to enhance the company’s product design and manufacturing capabilities. For example, a sports organization can allow a clothing company to use its logo for its products to meet the customers’ demand for casual wear. This helps the company drive repeat sales and deliver products that satisfy customers’ needs.
- Create incremental revenue and diversify revenue
The licensor typically receives royalties for licensed products sold in a licensing agreement. Royalties are an excellent way to help the company diversify its income streams and add incremental value. In addition, if you work in a retail store, brand licensing agreements can help you convert seasonal customers to permanent customers.
- Protect the brand from counterfeit products
As the company’s brand grows, others may want to use its brand imagery to capitalize on its reputation. Licensing the company’s brand can help increase the volume of authorized products in the market, which may reduce the sale of fake products using the company’s brand. This helps protect the company’s reputation and ensures that customers can continue to purchase licensed products.
- Experiment with new product categories
Licensing agreements allow businesses to explore new markets with minimal risks. For example, if a small company wants to expand into a newer market, it can license its brand or product to a bigger corporation with a bigger presence in the chosen market. This corporation can help provide funding, experience, and expertise, which helps the company save its resources. In addition, it helps manufacture the goods in larger quantities and advertise them to a larger audience.
Types of Licensing Deals
- Brand and trademark
Businesses can own the rights to use a brand name or logo. These are called trademarks, and they exist to prevent other companies from using a company’s assets.
Companies can give licenses to other brands to use their trademarks. Take Coca-Cola, for example. Independent brands that manufacture fizzy drinks on behalf of Coca-Cola can do so because they have a trademark license. These partnerships drive upward of $1 billion in retail sales for the mega-brand.
A patent is similar to a trademark in the fact that its intellectual property is legally protected from unauthorized commercial use. The only difference is that patents are given to new inventions, not brand names or logos.
Patents can be awarded for new machinery, design (consumer product), or plant inventions. One example is Lollacup. Anyone who wants to use its weighted children’s sippy cup needs a patent license from the brand.
- Character, entertainment, and art
Characters are another type of trademark that brands can license. The most obvious example? Disney. You’ll find Mickey Mouse, Marvel, and Star Wars characters on merchandise all over the world—not just official Disney merchandise. Third-party brands get a license to use Disney’s characters on their clothes, home décor, and mugs.
Read Also: Developing a Brand Positioning Statement
These trademarks pass over into entertainment. Disney also licenses its movies, TV shows, and music. Even footage of its theme parks can only be used by those with a brand license.
If you’re paying to use software, you’re buying a single-user or team license. You’re not allowed to sell access to the software to anyone else—unless you have a multi-user license. This allows third-party companies to re-sell a software company’s code to other people.
The licensed sports merchandise market is big business. It reached a value of $31.3 billion in 2022 according to the Global Licensing Group—a figure predicted to grow at a compounding annual growth rate of 3.5% through 2028.
Sports teams in the NBA, NFL, and European soccer leagues all broker brand licensing deals. Each agreement allows third-party companies to produce merchandise with the team’s logo or player name.
How to License Your Brand
An effective brand licensing strategy ensures that your brand’s assets are safe and protected and that any licenses you hand out will ultimately benefit your brand. Here’s how to get started.
- 1. Protect your intellectual property
Protecting your intellectual property (IP) is one of the most important factors behind licensing your brand. The last thing you want is to accidentally give someone full, unfettered access to your brand assets without getting anything in return.
The best way to protect your brand is to work directly with a lawyer who specializes in intellectual property—and to get started early. Ensure your brand’s assets are trademarked and protected from the very outset. Then you can think about licensing them down the line.
- 2. Do your research
Licensing your brand isn’t a one-and-done process. If you’re looking to aggressively pursue brand licensing as a growth engine for your retail business, it’s best to create an overarching strategy that outlines what you’re looking for in a potential licensee. That way, you can make a quick decision about which companies to approach and approve.
It all starts with extensive research. Like any partnership, you’ll evaluate potential licensees to ensure they’re a good fit for licensing your brand. There are a ton of factors that go into brand fit, but let’s boil it down to a few questions you should consider:
- Are your customers interested in this product? If customers frequently ask if you offer a product (and you don’t), that’s a good opportunity to offer someone else a license to produce that product under your brand name.
- Does your brand’s equity translate to this product? Sports teams license their logos and names to apparel companies because fans snap up Red Sox hats like there’s no tomorrow. That fits. It wouldn’t make quite as much sense for Tampax to license their brand to a company that makes breakfast cereal.
- Does the licensee have the operational capacity to add value? You gain the most from brand licensing agreements when the licensed products sell (a lot.) For any potential licensee, ask yourself: Can they produce enough of the licensed product to make the agreement lucrative?
- 3. Set terms and restrictions
Once you’ve found a potential licensee who’s a good fit for your brand and customers, it’s time to draft the licensing contract. As we just touched upon, you should work with a licensing agent or attorney to help ensure your contract includes all the necessary terms and that the agreement is legally binding.
As your agent draws up the license, there are several terms and restrictions you’ll decide on. These lay out the specifics of the partnership and set expectations for both you and the licensee.
A brand licensing agreement covers every aspect of the collaboration between two businesses. For instance, the licensor (the brand being licensed) frequently receives a part of each sale of the licensed goods from the licensee (the business purchasing the rights to license a brand). Here are some items for your agreement to take into account.
- Work with a lawyer
Nobody knows the nuts of bolts of a watertight agreement like a brand licensing lawyer.
Do a Google search to find lawyers experienced with your type of intellectual property—such as patent or software law—as well as your industry. Ask previous clients for reviews. Read case studies of deals they’ve brokered. Make sure you’re clear on what fee they’ll take from the deal before signing on the dotted line.
It’ll take some time to find a lawyer who will make your brand licensing deal fair for everyone involved, but it’s the most important part.
- Define the intellectual property being licensed
Alongside clearly defined roles for both the licensee and licensor, your brand licensing agreement should clearly define what is (and isn’t) included as part of the agreement.
Sanshee is a retail business that manufactures premium merchandise for video game and anime fans. According to Sarah Fetter, the operating manager who brokers Sanshee’s licensing deals, “[You need to specify] licenser deliverables; things like, ‘We agree to promote the item you’ve created for us within X amount of time.’ All of that spelled out in advance is such an amazing thing to have.
“And then, having a full suite of just all of the assets that I could ever hope for, whether it’s a copy of the game or backgrounds on the characters if it’s not out already; any of the artistic stuff or character items. Basically, any of that stuff we need to know [should be] there on the day we sign the license.”
- Consider exclusivity
The majority of brand licensing agreements are non-exclusive. That means you can license your brand to as many competing apparel manufacturers as you choose. Even though non-exclusivity is the norm in brand licensing, it still needs to be outlined in the contract.
In some cases, you may choose to offer a small number of exclusive licenses. Fewer licensees exclusively using your intellectual property gives them a competitive advantage—in which case, you can typically command higher royalties.
- Identify royalties
One of the biggest benefits of licensing your brand is the extra stream of revenue you build. Licensees make money off the back of your intellectual property. So, in your brand licensing agreement, go into extensive detail on the structure of your financial compensation for licensing your business’s IP.
Some common payment structures for brand licensing deals are:
- Initial flat fee. Licensees pay an upfront, flat fee to license your IP. This is typically on a yearly basis.
- Ongoing royalties. Licensees will pay a set percentage of unit price or specific dollar amount for each licensed product sold. If you’re claiming a 10% royalty on licensed products and your licensee sells $500,000 worth, your cheque would be $50,000.
Some brands also choose to include sales monitoring as part of their agreement. In this case, the licensor can request sales data from the licensee to check whether the partnership makes commercial sense to continue.
Conversations around discounting licensed products may also arise throughout this process, especially using the royalty payment structure. In your licensing agreement, clearly state the maximum discount your licensees can offer to their customers. After all, a 10% royalty from a $50 full-price licensed product is dramatically different from a $20 discounted one.
- Think about quality insurance
When you give another company permission to use your name, logo, or likeness on their products, you’re taking a calculated risk.
Your brand is automatically associated with—and to some extent, held accountable for—the quality and content of those products. That’s why it’s vital to include quality assurance terms in your licensing agreement. Your brand identity and reputation are at stake.
Quality assurances might include restrictions for the licensee around:
- Distort images (like your brand logo)
- Changing your brand fonts or colors
- Adding new code to the licensed software
To protect your brand image, in your agreement, clearly define what’s being licensed (i.e., a video game character) and any restrictions on how a licensee can use it. For example: “Licensee cannot use our IP to manufacture or sell alcohol-related products.”
It’s not necessary to have a Mickey Mouse-like figure to engage in brand licensing. Any brand has the option to share intellectual property for commercial purposes, either as the licensor or as the licensee.
Make sure your licensing agreement is flawless by using these pointers. Establish limits on how a licensee can use your intellectual property (IP), especially since their brand name will be combined with yours. Additionally, specify the procedures for quality control and monetary kickbacks.
Although it may seem overwhelming, a trademark licensing lawyer will ensure that your contract is flawless.