licensing101 brand · for example crest extended its brand from toothpaste into whitening. before...

BrandLicensing 101The Basics Every Licensor

Should Know

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Copyright ©2019. Pete Canalichio. All Rights Reserved.

Table of Contents3 INTRODUCTION

5 CHAPTER ONE:

HowBrandPositioning,Loyalty&EquityAffectLicensing

9 CHAPTER TWO:

WhyDoCompaniesLicenseOutTheirBrands?

16 CHAPTER THREE:

WhyDoManufacturersLicenseBrands?

21 CHAPTER FOUR:

THEBRANDLICENSINGPROCESS

39 SUMMARY

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IntroductionHaveyoueverwonderedhowCoca-

Cola,acompanysofocusedonmeeting

yourbeverageneeds,sellsCoca-Cola

brandedteeshirtsorcaps?Orhowdoes

NewellRubbermaidprovideyousucha

rangeofproductsunderasinglebrand

name?Whilecompaniessometimes

manufacturetheseitemsthemselves,at

othertimes,theymaychoosetoallow

amanufacturertoproduceandmarket

theseproductsundertheirbrandnames.

Inreturnfortheuseoftheirbrand,these

companieschargethemanufacturer

afee.Suchanarrangementiscalled

brandlicensingandcanbedefinedasan

agreementthatauthorizesacompany

thatmarketsaproductorservice(a

licensee)toleaseorrentabrandfromabrandownerwhooperatesalicensingprogram(a

licensor)inreturnforaportionofthesalesrevenue(royalty).

Thisguidewillhelpyouunderstandbrandlicensingbetter,aswellasaddresswhy

companieslicensebrands.Wewillalsotakeyouthroughtheprocessofhowtodetermine

thelicense-abilityofabrand,expectationsoflicensorsandlicensees,thebrandlicensing

processandtheroyaltypaymentflow.

ShortlybeforeIjoinedNewellRubbermaid,theRubbermaidbusinesswasconsidering

signinganagreementwithacompanybasedinEdenPrairie,Minnesota.Thecompany

wasTricam,andtheywereexpertsinladdersandgardendumpingcarts.

Tricamwassoinnovativethatmanyoftheirproductsheldvaluablepatentsthatmade

Coca-Cola Products

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theirproductseasiertouse.Inaddition,Tricammaintainedexcellentcustomerservice.

Basedonresearch,Rubbermaidlearnedthatkitchenstepladdersandgardendump

cartswerebothproductsthatconsumersnotonlyexpectedtoseesoldbyRubbermaid,

butthattheywantedtobuyfromthem.

Rubbermaidknewthattheydidnotpossessthecoreexpertisetomakekitchenstep

laddersandgardendumpingcartswiththetypeofinnovationthatTricamwas

using.RubbermaidalsounderstoodthatifTricammanufacturedRubbermaidbranded

productsoftheirbehalf,Tricamcouldoffermanymorebenefitstotheirconsumers

thananythingRubbermaidcouldbuildintosimilarproducts.Thiswasimportantto

RubbermaidasanythingtheymarketedundertheRubbermaidnamehadtomeetor

exceedthebrand’spromisetoitsconsumers.

Tricamwasalsointriguedwiththisrelationship.Theyhadbeensellingtheirkitchen

stepladdersandgardendumpingcartsontheirownforseveralyearswithlimited

success.Tricamknewthatretailerslikedtosellbrandedproductsastheygave

consumersaleveloftrustandcertaintythatcouldnotbeconveyedfromunbranded

products,regardlessofthereturnpolicy.

TricamalsounderstoodthattheRubbermaidbrandwasadmiredandrespectedby

bothretailersandconsumersacrossNorthAmerica.IfTricamcouldpairtheirproduct

innovationandsuperiorcustomerservicewiththeRubbermaidbrand,theycould

convinceretailerstoplaceordersfortheirproductsandsubstantiallygrowtheir

business.

Understandingtheopportunityfacingthem,RubbermaidandTricamenteredintoa

relationshipwhereTricamwouldmanufacture,marketandsellRubbermaidbranded

stepladdersandgardendumpingcarts.Overthenextthreeyears,Tricamsuccessfully

solditsRubbermaidbrandeddumpcartintoCostcoanditsRubbermaidbranded

kitchenstepladderatTargetstores.

ConsumerslovedthequalityoftheRubbermaidbrandedTricamproductssomuch

thattensofthousandsofboththestepladdersandthedumpingcartsweresoldinthe

ensuingmonths.Thispleasedbothretailerscausingthemtoissuemultiplere-orders

forseveralyears.

Ifyouthinkthisstoryisrare,preparetobepleasantlysurprised.

Hundredsofmanufacturersandserviceprovidersselltheirproductseachdayunder

brandnameslikeMr.Clean,Klondike,Coca-Cola,CaliforniaPizzaKitchen,Cinnabon,

andRubbermaid.Byteamingupwithatopbrand,theygainimmediaterecognition

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andcredibilityhelpingthesesavvycompaniestoachievedoubleandeventripledigit

growth.Thistypeofgrowthisdramaticanytime,butespeciallyinadowneconomy.

Tounderstandbrandlicensingbetter,onemustunderstandthetwocomponentparts

separately–brandandlicensing.Let’sbeginwithunderstandingthemeaningofthe

term‘brand.’

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What is a Brand?AccordingtoPhilipKotlerandGaryArmstrong,abrandisdefinedas“aname,term,

sign,symbolorcombinationofthese,thatidentifiesthemakerorselleroftheproduct

(orservice).”

Thebrandoritslegalterm,trademark,affixedtotheproducthelpstheconsumer

understandwhereitwasmanufacturedorproduced.Fromthebrandowner’s

perspective,itdistinguishestheproductsorservicesfromthoseofitscompetitors.

Consumers,inturn,canbeassuredtheproducttheyarepurchasingisexactlywhat

theywant.Basedonitsreputation,abrandwillconveyalevelofquality,reliability,

anddurability.

Theprimaryreasoncompanies

choosetobrandtheirproductsis

todifferentiatethemfromtheir

competitors’products.Forexample,

mostconsumershavenoproblem

differentiatingaCokefromaPepsi.

Bygivingtheirproductsabrand,a

companyorbrandownercanbegin

tocommunicatewiththeirconsumersregardingtheattributesoftheirproducts.Over

time,consumerscanbegintorelyonthebrandtoconnotenotonlyaproduct’svaluebut

alsoitsreputation.Ifconsumerslikewhatabrandrepresentsandtheyhavepurchased

itbefore,thereisahigherlikelihoodtheywillchoosethebrandoftheirpreferenceover

acompetitor.Infact,consumerswilloftenpurchaseabrandforthefirsttimeifithasa

strongreputationorifitisusedbyfriendsorcelebrities.

Brandsalsoleadconsumerstodevelopcertainexpectationsofproducts.Thelonger

theyexperiencepredictable,consistentqualityandperformance,themoretheyexpect

anynewproductssoldunderthesamebrandtohavethesame.Thebrand,therefore,

1Cans of Pepsi and Coca-Cola

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addsvaluetotheseproducts.Forexample,customersexpectnewproductssoldunder

theBMWbrandtobeofthesamequalityastheexistingBMWs.Consumerswill

associateabrandwithacertainpricelevelandstandardofperformance.Ifwelookat

twodistinctwatchbrands,RolexandTimex,oneisassociatedwithahighpriceand

highperformanceandtheotherwithvalueanddurability.Thesesameattributescan

alsobeofbenefittobusinesses.ManyconsumerslooktoUPSfortheirshippingneeds,

andtheypreferdoingbusinesswithcompaniesthatshipviaBrown.UPSaddsvalueto

itsclientcompanies,withareputationformakingshippingsimple,easy,reliableand

effective.

Brand PositioningBrandPositioningisarrangingforabrandedproducttooccupyaclear,distinctive,

anddesirableplacerelativetocompetingbrands/productsinthemindofatarget

consumer.

P&GsellssixbrandsoflaundrydetergentintheUnitedStatesthatcompetewith

eachotherontheshelf,offerdifferentmixesofbenefits,andprioritizebenefits

differently,eachbasedonthedifferentgroupsoflaundrydetergentpurchasers:

Tide:Fabriccleaningandcareatitsbest

Cheer:Protectsagainstfading,colortransferandfabricwearinpowderorliquid,

withorwithoutbleach

Gain:Providesexcellentcleaningpowerandasmellthatsaysclean

Era:Powerfullaundrydetergentthatistoughonstains

Dreft:Speciallyformulateddetergentthatrinsesoutthoroughly,leavingclothes

softnexttoababy’sskin.DrefthasbeentheNo.1choiceofpediatriciansforyears

Ivory:Mildcleansingbenefitsforagentle,pureandsimpleclean

Logo of BMW, Rolex, and TimeX, respectively.

Logos for P&G, Tide, Cheer, Gain, ERA,

Dreft, and Ivory

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Brand LoyaltyWhenconsumersandbusinessesgetintothehabitofbuyingcertainbrands,they

automaticallybuythemagainandagain.Thisreducestheamountoftimeand

promotionneededtomakefuturesalestothoseconsumers.AccordingtoKotler,brand

loyalty,inmarketing,consistsofaconsumer’scommitmenttorepurchaseorotherwise

continueusingthebrand.Thiscanbedemonstratedbyrepeatedbuyingofaproductor

serviceorotherpositivebehaviorssuchaswordofmouthadvocacy.

Brandsusuallypassthroughsuccessivestagesofbrandloyalty,whichisthecustomers’

allegiancetoaparticularbrand.Thestrongerthebrandloyalty,thehigherthevalueof

thebrandandthegreaterrevenueitwilldriveforitsowner.

Stages of Brand LoyaltyBrandloyaltyhasthreestages.Thefirstisbrandrecognition.Brandrecognitionis

whenconsumersbecomeawareofabrandandknowabitaboutit.Brandrecognition

orawarenessisusuallyreferencedasaidedwhentheconsumerrecognizesabrand

afterhe/sheisgiventhename,andunaided,whichiswhentheconsumermentions

aparticularbrandwhenaskedifhe/sheknowsanybrandsinaparticularcategory.

Unaidedawarenessisseenasahigherlevelofbrandrecognition.

Nextisbrandpreference.Brandpreferenceisachievedwhenconsumerspreferto

purchaseacertainbrandbasedontheirpositiveexperiencewiththebrand.However,if

thatbrandisnotavailable,theconsumerswillpurchaseanotherbrand.

Whenconsumersinsiston“their”brandandwillnotacceptasubstitute,thebrand

hasreachedbrandinsistence.Onlythatparticularbrandwillsatisfycustomersfora

givenpurpose.Mostbrandsnevermakeittothisstageofbrandloyalty.Coca-Cola

isoneexampleofabrandthathasmadeittothebrandinsistencestage.Thereare

manyCokeconsumerswhosimplywillnotdrinkanyotherbrandsofcola.Andwhen

brandsmakeittothebrandinsistencestage,theyalsohaveatendencytodevelopa

competitiveadvantageinthemarketplace.Brandswiththislevelofloyaltyareinthe

strongestpositiontoinstitutealicensingprogram.

Brand Equity and ExtendibilityCompaniesthatknowtheirbrandswellwillhaveagoodunderstandingoftheequityof

eachbrand.Abrand’sequityisderivedfromtheawarenessandimageabrandholdswith

itsconsumers.Oftenbrandmanagerswillleverageabrand’sequitytoenterorextend

theirbrandsintonewproductcategoriestohelpdrivestrategicgrowthforthecompany.

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ForexampleCrestextendeditsbrandfromtoothpasteintowhitening.BeforeProctor&

Gamble(P&G),whoownstheCrestbrand,launchedCrestWhitestrips,theyconducted

researchtounderstandifthebrandhad‘permission’toenterintotheretailwhitening

category,longheldbyestablishedbrandssuchasRembrandtandAquafresh.

P&GwantedtofindoutifconsumerswouldexpectCresttooffera

whiteningproductandifso,purchasethisnewproductbasedontheir

preferencefortheCrestbrand.Asmanyofusareaware,CrestWhitestrips

haveperformedwellinthemarketplace,achievinghighrankingsand

advocacyratings.WhileP&Gdecidedtoenterthewhiteningcategoryby

sourcingtheproductoverseasanddistributingglobally,theycouldhave

choseneithertomanufactureitthemselvesorenterthemarketthrough

licensingandhavetheirlicenseemanufactureanddistributetheproduct.

InthecaseofP&G’sMr.Clean,theirleadinghouseholdliquidcleaner,P&G

discoveredthatconsumersexpectedthecompanytooffercleaningaccessoriesunder

theMr.Cleanbrand.Inthisinstance,P&Gdecidedtoenterthemarketbylicensingthe

categorytoMagla,acompanythatalreadyhadexpertiseandpresenceinthiscategory.

WhenwesaythatP&Genteredthecleaningaccessoriescategorythroughlicensing,we

meanthatP&GallowedMagla,amanufacturerofcleaningaccessories,tousetheMr.

Cleanbrandinexchangeforafee.

What is Licensing?Licensingmeanstherentingorleasingofanintangibleasset.Acompanyownstwo

typesofassets:tangibleandintangible.Tangibleassetsarephysicalholdingssuchasa

factory,machines,buildings,computers,andfurniture.Examplesofintangibleassets

includeasong,suchasNeedYouNowbyLadyAntebellum,acharacterlikeDisney’s

DonaldDuck,aperson’snamesuchasGeorgeClooney,orabrandlikeTheRitz-

Carlton.

Anarrangementtolicenseabrandrequiresalicensingagreement.Alicensing

agreementauthorizesacompanythatmarketsaproductorservice(alicensee)tolease

orrentabrandfromabrandownerwhooperatesalicensingprogram(alicensor).

Crest Whitestrips

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Why Do Companies License Out Their Brands?Companieslicensetheirbrandsforavarietyofreasons.Licensingenablescompanies

withbrandsthathavehighpreferencestounlocktheirbrands’latentvalueandsatisfy

pent-updemand.Throughlicensing,brandownershavetheabilitytoenternew

categoriespracticallyovernight,gainingthemimmediatebrandpresenceonstore

shelvesandofteninthemedia.Let’stakeadeeperlookatthebenefitsthatmake

licensingsoattractivetobrandowners.

The Ability To Test Drive New Businesses Or Geographical Markets With Minimal Risk

Bypartneringwithathird-partymanufacturerorserviceprovider,abrandowner

cantrynewbusinesses,ormoveitselfintonewcountrieswithasmallerupfront

investmentthanbybuildingandstaffingitsownoperations.Sincetheproduct

manufacturinganddistributionarehandledbythelicensee–thecompanywiththe

productexpertise–thereisverylittlelicensorengagementwiththeproductandthere

isnoinventorycommitment.

Collect Royalty Revenue For The Right To Use The BrandWhileusuallynotthemostimportantreason,licensinggeneratesrevenuefroma

minimumguaranteeandthroughroyaltypayments.Guaranteesareusuallydetermined

onanannualbasisandcalculatedasapercentageoftheanticipatedperannumroyalty.

Royaltypaymentsaretypicallycalculatedasapercentageofwholesalerevenue.As

longasthebrandisprotectedandthelicensingprogramisproperlyadministered,no

GeneralManagerwouldknowinglyturnawaythehealthyinjectionthesepayments

bringtohis/herbottomline.

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Expand Their Overall Marketing Support For The Core BusinessInmanyinstances,thelicenseewillberequiredtoprovidemarketingdollarstosupport

thelicensedcategory,whichisimportantforthesuccessofthelicense.Thismarketing

spend,inturn,providesadditionaloverallbrandpresence.Forexample:

• Ifalicenseepromotesitsproductinaweeklycircularandgainsanend-aisle

display,theadvertisinganddisplaynotonlygenerateproductsalesforthe

licensee,theyalsopromotethebrandowner’score

• Anarrayoftoysorappareltiedtoamovie,sittingonastoreshelf,alsohelpsto

promotethemovie

• Asportsfanwhowearsasweatshirtwiththelogoofherfavoriteteam

expressesherenthusiasmabouttheteam,butalsosubtlypromotesthesports,

theleagueandtheteamtoanyonewhopassesherbyonthe

• Thesamegoesforabeerbrand.Seeingastoredisplayofglasswarecarryinga

well-knownbeerlogolikeGuinness,orwalkingintoaneighbor’shomeand

seeingtheglassesonhisbarreinforcesthebrandimage,supportingthebrand’s

overallmarketing.

Achieve A Competitive StrikeForlicensorswhoknowtheirbrandcanenterintoacategorythatiscontrolledbytheir

competitor,licensingcanbeasmartandeffectivewaytocombatarivalinacategory

coretotheirbusiness.Bytakingtheoffensive,thelicensorwillinturntakethe

competitor’seyeoffoftheirowncorebusiness.Forexample,whatifAdidaslicenseda

shoemanufacturertocompetedirectlyagainstColeHaanshoeswithNikeAirTM?

Gain Strategic KnowledgeAsmanylicenseesareexpertsintheirownright,theyofferthelicensoraccessto

intangiblessuchasintellectualproperty(throughlicensinginbound),productdesign

andmarketingexpertise,supplychainmanagement,newcustomerrelationships

andstrategicalliances.Astruepartners,alicensorandalicenseecanholdforumsto

exchangeideasthatnotonlygrowthelicensedcategory,butalsoimproveotherareas

ofbothcompanies’businesses.

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Maintain Control Over An Original CreationForbrandowners(particularlythosedoingbusinessintheglobalmarketplace),

licensingandregisteringthebrandsinmultiplemarketsisawaytoprotectthebrand

frombeingusedbyotherswithoutauthorization.Whenlicensingfirststartedat

Coca-Colaitwasrunbythelegaldepartmentspecificallytoprotectthecompany’s

trademarksinthecategoriestheychosetolicensethroughouttheworld.

DiscussionBylicensingtheirbrands,companiesareabletosatisfy

consumerneedsincategoriesthatarenotcoretotheir

business.WhenApplelaunchedtheiPodanumberofyears

agotheyrevolutionizedthewayinwhichpeoplelistentotheir

music.TheiPodwassosuccessfulthatitsquickacceptance

createdanimmediateneedforaccessoriessuchasarmbands,

adaptersandautochargers.Applecouldhavechosento

manufactureanddistributetheseaccessoriesthemselves.

Instead,Appledecidedthattheseaccessorieswerenotcore

totheirbusinessexpertiseandthereforechosetosatisfythe

needthroughlicensing.BylicensingtheiPodbrand,Apple

enabledatremendousnumberofcompaniestoproduceallkindsofterrificproductsto

maketheiPodmoreuser-friendlyandtoenhancethelisteningexperience.Examplesof

licensedproductsfortheiPodincludetheBoseSoundSystemwithiPoddockingstation,

theNike+runningshoe,autoadaptorkits,armbandsandmanyotherproducts.Allthese

accessoriesaresoldbylicensees.

Somelicensorsseelicensingasanopportunityto“test”theviabilityofanew

categorywithouthavingtomakeamajorinvestmentinnewmanufacturingprocesses,

machineryorfacilities.Inawell-runlicensingprogram,thebrandownermaintains

controloverthebrandimageandhowit’sportrayed(viatheapprovalsprocessand

othercontractualstructures),positioningitselftoreapthebenefitofadditionalrevenue

(royalties)andbrandexposurethroughproductdisplayedthroughnewchannelsand

incrementalshelfspace.Forexample,Rubbermaidgainedadditionalrevenueandbrand

presencebylicensingkittylittercontainersthataresoldinthemasschannelcoreto

Rubbermaid,andinspecialtypetshopscoretoUnitedPetGroup,thelicensee.

Apple’s iPod

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Figure 1: Different Types of Brand Licensing

Similar examples include:• Awell-knownbrandofconstructiontoolssuchasDEWALTlicensedintosuch

areasasworkglovesorworkboots;

• AbrandofbeautyproductslikeNeutroginaextendedintoanewvitaminline

thatpromotesbetterlookingskin;

• ApopularrestaurantchainsuchasTGIFlicensingafrozenfoodmanufacturer

tomarketalineofappetizersunderitsbrand

• AfamousfashionlabelsuchasDonnaKaranlicensingitsnameintosuch

naturalextensionsasleatheraccessories,shoes,fragrancesorhome

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Brandlicensingalsoenablescompaniestotryoutpotentialnewbusinessesor

geographicalmarketswithrelativelysmallup-frontrisk.Bylicensingitsbrandtoa

third-partymanufacturer,alicensorcantrynewbusinesses,ormoveitselfintonew

countrieswithasmallerup-frontinvestmentthanbybuildingandstaffingitsown

operations.

Additionally,manufacturinganddistributionaretypicallymanagedbythelicensee,the

companywiththeproductexpertise.Therefore,licensingrequireslittlebrandowner

engagementwiththeproductandinvolvesnoinventorycommitment.WhenIwasat

Rubbermaid,weusedlicensingtoenterthecookwarecategoryinKorea.

Thisenabledustoassesstheviabilityofthebrandinthatcategorywithoutmuch

financialrisktothecompanyorequityrisktotheRubbermaidbrand.Dependingon

Rubbermaid’sperformanceinthecookwarecategoryinsideKorea,Rubbermaidcould

considerlicensingalineofbrandedcookwareinothermarkets.

Inreturnfortheuseoftheirbrand,companieschargemanufacturersafeeinthe

formofroyaltypaymentsandguaranteesthatconstituteasourceofrevenueforthe

company.Royaltypaymentsaretypicallycalculatedasapercentageofwholesale

revenuewhileguaranteesareusuallydeterminedonanannualbasisandcalculatedas

apercentageoftheanticipatedperannumroyalty.

Thediagramabovehelpsexplaintheflowofroyaltypaymentswithasimpleexample.

Theretailerearnsrevenueonlicensedmerchandisesoldatthemarketprice.

Thelicenseeearnswholesalerevenue,whichincludesthecostofmakingthegoods

plusamarkup.Thelicensorinturnreceivesapercentage(predeterminedinthe

licensingcontract)ofthewholesalerevenueasaroyalty.

Awell-managedlicensingprogramcangenerateasubstantialandgrowingstreamof

incrementalroyaltyrevenuethatwillcomplementacompany’scorebusiness.

The polo shirt licensee pays Disney, the licensor, $500,000 in royalities ($5 million x 10% rate)

Retailers pay the polo shirt licensee $5 million as wholesale cost of the polo shirts (based on 100% markup)

Consumers pay retailers a retail price of $50 per Disney branded polo shirt. A total of 200,000 polo shirts are sold generating $10 million in retail sales.

Figure 2: Royalty Payment Flow

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Brandlicensingalsoprovidesmarketingsupporttothecorebusiness.Inmany

instances,thelicenseewillberequiredtoprovidemarketingdollarstosupportthe

licensedcategory.Thismarketingexpenditure,inturn,providesadditionaloverall

brandpresence.Forexample,ifalicenseepromotesitsproductinaweeklycircularand

gainsanendaisledisplay,theadvertisingandretaildisplaynotonlygenerateproduct

sales,buttheyalsopromotetheoverallbrand.

Anarrayoftoysorappareltiedtoamovie,sittingonastoreshelf,servestopromote

themovieitself.Asportsfanwearingasweatshirtwiththelogoofhisfavoriteteam

expresseshisenthusiasmabouttheteam,whilesubtlypromotingthesport,the

leagueandtheteamtoanyonewhopassesbyhim.Thesamegoesforabeerbrand.

Seeingastoredisplayofglasswarecarryingawell-knownbeerlogo,orwalkinginto

aneighbor’shomeandseeingtheglassesonhisbar,reinforcesthebrandimage,

supportingthebrand’soverallmarketingefforts.

Forbrandownerswhoareconfidentthattheirbrandhaspermissiontoentera

categorythatiscontrolledbytheircompetitor,licensingcanbeasmartandeffective

waytocombatarivalwhereitmattersmost.Bytakingtheoffensive,thebrand

owner-turned-licensorwillforcethecompetitortotakeitseyeoffofitscorebusiness.

Thiscanhaveasignificantimpact.Forexample,whatifadidaschosetolicenseashoe

manufacturertocompetedirectlyagainstNike’sColeHaanbrand?

Manylicenseesareexpertsintheirownright;theyofferthelicensoraccesstotheir

intellectualproperty,productdesignandmarketingexpertise.Moreover,licensorscan

tapintotheirlicensee’ssupplychainmanagementknowledge,retailerrelationships

andstrategicalliances.Overtime,licensorsandlicenseescanholdknowledge

managementworkshopsandforumswheretheycanexchangetechniques,processes

andideasthatnotonlygrowthelicensedcategory,butalsootherareasoftheir

businesses.

Finally,forbrandowners(particularlythosedoingbusinessintheglobalmarketplace),

licensingtheirregisteredtrademarksinmultiplemarketsisawaytoprotectthe

brandfrombeingusedbyotherswithoutauthorization.WhenCoca-Colafirststarted

licensing,thelegaldepartmentmanagedtheprogramspecificallytoprotectthe

company’strademarksincountriesthroughouttheworld.

Quick SummaryWhywouldtopbrandownersagreetoallowthirdpartybusinessestosellproducts

undertheirname?Thesearethetopthree.

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Despite their impressive appearance even the world’s great companies

cannotdoeverythingontheirown.Theyneedthehelpofbest-in-class

manufacturersandserviceproviderstogetmoreandbetterproductsto

consumers.Bypartneringwiththirdpartymanufacturers,brandownerscan

maketheirbrandavailabletomoreconsumerswhowishtobuytheir

Moreover, brand owners can enter new product categories, sales channelsorcountriespracticallyovernight,gainingvaluableshelfspaceandthousandsofadditionalopportunitiestodelight.

Finally, brand owners receive a royalty from the third party manufacturerorserviceproviderfortherighttousetheirbrand.Withlittleinvestmentrequiredbythebrandowner,practicallyallofthisrevenuebecomes

operatingincomehelpingtostrengthenthebrandowner’sP&L.

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Why Do Manufacturers License Brands?Nowthatyouhaveabetterunderstandingofhowbrandownersbenefitbyallowing

theirbrandstobeextendedvialicensing,let’slookathowmanufacturersandservice

providers(licensees)canalsobenefit.Infact,therearetremendousbenefitsto

manufacturersandserviceproviders(licensees),aswell.Thatiswhythisstrategyisso

powerful.

Licenseesborrowtherightstoabrandtobuildintotheirmerchandise,buttraditionally

theydonotshareownershipinit.Havingaccesstomajornationalandglobalbrands,

andtheassociatedlogosandtrademarks,givesthelicenseesignificantbenefitsthey

previouslydidnotpossess.

Themostimportantoftheseisthe

marketingpowerthebrandbringstothe

licensee’sproducts.Buildingabrandfrom

scratchcantakeyears,millionsofdollars

andalotofluck.Thecompanywhich

licensesabrandgainsimmediateaccessto

allthepositivenameandimagebuildingthat

wentbeforeit.

Thelicenseealsotakeswiththemthe

reputationofthelicensor.Oftenthis“halo”

effectcantranslateintomanyintangible

andimmeasurablebenefitssuchasreturned

calls,anagreementtomeet,orsimplythe

implicationofquality.Let’stakeacloser

lookateachofthesebenefits:

3

Mickey Mouse and Winnie the Pooh

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Achieve Instantaneous RecognitionConsiderateeshirtmanufacturerwithspecialtyprintingcapabilities.Whiletheymay

haveagoodnetwork,theyarerelativelyunknownbeyondthat.Throughlicensingone

daytheycouldbesellingunbrandedteeshirts;thenexttheycouldbeanofficialDisney

licenseeofMickeyMouseandWinniethePooh.HavingtheDisneylicensemeans

immediateandinstantaneousglobalrecognition.Thevalueofthisrecognitioncannot

bemeasured,butthesalesthemanufacturerwillnowmakecertainlycan.

Enhance Their Authenticity And CredibilityConsiderthevideogamemanufacturerwhohasdevelopedanamazingsoccergame.

Theyhavepresentedtheirgametoanumberofretailers,butallhaveturnedthem

down.If,however,theycanlicensetheFIFAWorldCuptrademarktheystandtogain

immediatelegitimacyandauthenticitytotheirgame.

Infact,manyretailerbuyerswilltellamanufactureriftheyhadarecognized

brand,theywouldissueapurchaseorder.Similarly,amakerofautomotiveparts

oraccessorieswilllicensespecificcarbrandssuchasToyotaorFordspecificallyto

establishintheconsumer’smindthatitsproductswillworkseamlesslywiththecars

oftheparentbrand.Thesearethenpurchasedbyautomotivedistributors,service

shopsandthebrandsownersdrivingsubstantialincrementalrevenue.

Reduce In-house CostsAmanufacturerorserviceproviderwhichacquirestherightstolicenseabrandoften

gainsthelicensor’spreferredpricingbyitssuppliers.Thiscanincludecommodities,

suchasresin,shippingandcreativeservices.Inaddition,theygainaccesstothe

licensor’sstyleguide,whichprovidesthemwithmostoftheimageryandartworkthey

needtodesigntheirproducts.

Havingthestyleguidenotonlyassiststhelicenseewithdesigntime,itstreamlines

theapprovalprocessandensurestheirproductshavethesamelookastheother

manufacturersorserviceproviderswhichhavelicensedthebrand.

Gain Access Into New Distribution ChannelsTakingonalicensecanhelpmanufacturersandserviceprovidersgainaccesstonew

distributionchannels.Forexample,amanufacturermayhaveanestablishedprivate

labelbusinesssellingintothemassmerchandisechannel.Bylicensingtherightstoa

mid-tierbrand,theycouldgainaccessintodepartmentstores(thatwouldn’tcarrythe

privatelabelbrand)anddoubletheirrevenue.

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Enter New RegionsAdoormatmanufacturerbasedinGermanyandsellingitsproductinEuropemaybe

abletoentertheUSmarketbylicensingamajorhouseholdbrandlikeBetterHomes

&Gardens.TheBetterHomes&Gardensbrandcangivethementryintothechannels

theycurrentlyaresellingothercategoriesofproduct.Insomeinstancesthelicensees

pooltheirproductstocreateanintegratedprogram,whichcanbeappealingtosome

retailerbuyers.

Acquire Strategic KnowledgeLicenseesgainaccesstointangiblessuchasthelicensor’ssubjectmatterexpertise

inareaswheretheyarenotproficientsuchasmarketing,supplychainmanagement,

customs,etc.Inaddition,manufacturersandserviceproviderscanbenefitfromthe

licensor’sdatabasesandlibrarieswhichcanincludeavarietyoftopicsincluding

marketresearch,manufacturingandproductdesign.Astruepartners,licensorand

licenseearenotlimitedtotheseareas,butcanidentifywhereeachother’sstrengths

areandtapintothem.

Obtain Other Licenses More EasilyOncealicenseeacquiresonelicensetheywillalmostautomaticallygainapprovalfrom

otherbrandownerswishingtoextendtheirbrandsintonewcategories.Forexample,

apinlicenseeofMajorLeagueBaseball(MLB),willhaveaneasiertimeacquiringthe

rightstotheNationalHockeyLeagueortheNationalBasketballAssociationbecause

thesebrandownersknowthelicenseemeetsthestandardsforMLBandalreadyhasan

understandingofthelicensingprocess.

Add Value To The BusinessGainingtherightsoneoftheworld’sgreatbrandscanaddinstantaneousvalueto

anorganization.Thiscouldbeanimportantconsiderationwhentheownersare

consideringsellingthecompany.Moreandmorebrandownersareawareofthisand

arerequiringtheyapprovethenewmanagementbeforeautomaticallyauthorizing

thecontinuationofthelicense.Inaddition,thebrandownermayrequireapayment

recognizingtheincreaseinvalueuponthesaleofthecompany.

How Licensors and Licensees Come TogetherThediagrambelowillustratesthedifferentstagesthatareapartoftheLicensed

ProductProcessFlow:

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What do brand owners who choose to license their brands expect?Licensorsexpectthatthelicenseewillbecommittedtoinvestinginthecategorythey

license.Thismeanstheywillworkhardtounderstandtheessenceofthebrandand

developtheirlicensedproductinawaythatcapturesthatessence.Inotherwords,the

licensedproductsshouldconnectwiththeconsumerbothfunctionallyandemotionally.

Ifthelicenseedoesthis,theproductstheydevelopwillnormallybeapprovedwithout

delayordifficulty.Toachievethistakestimeandmoney.Sowhilebothpartieswant

tosellproductsinthemarketplaceassoonaspossible,thelicensorwillexpectthe

licenseetostartwithbuildingthebrandintotheproductfirst.

Thelicensorwillalsoexpectthelicenseetobefamiliarwiththecontractandtomeet

theobligationsofthecontract.Thatiswhyitisimportantforthelicenseetoensureall

employeesinthelicensee’sorganizationworkingonthelicensearefamiliarwithits

contractualobligations.Forexample,whenaproductbecomesapproved,thelicensor

willexpectthelicenseetocommercializethelicensedproductassoonaspossiblein

eachoftheauthorizedchannels.

Finally,thelicensorwillexpectthelicenseetomeetorexceedtheprojectedsales

targetsforthecategoryasoutlinedinthecontract.Whenallofthesethingshappen,

theresultcanbethedevelopmentofawardwinningproductsthatmeetorexceed

annualsalesandroyaltyprojections.

What should the licensee expect?Licensees,inturn,expectthatthelicensetheyhaveacquiredwillprovidethemwith

substantialsalesgrowth,andrightfullyso.Thissalesgrowthmaybeintheformof

growthwithinexistingchannelsortheopportunitytoenteranewchannelornew

market.

Licensors picks the product categories to be licensed

Licensor or its agent finds and negotiates a license with best licensees

Licensees develop concepts, prototypes and final production samples and submit to Licensor for approval

Licensor approves licensed products for sale

Licensees sell approved licensed product in authorized channels to retailers

Different Stages of the Licensed Product Process Flow

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Toaccomplishthisobjective,licenseesexpectthatthebrandthey

• Thebrandtheyarelicensingisasstrongorstrongerthantheybelieveorhave

beentold,thatitwillopendoorsandultimatelyhelpthemmeetorexceedtheir

business

• Moreover,licenseesexpectthatthelicensorortheiragentswillrunasimple,

straightforwardlicensingprogramthatwillnotadministrativelytaxtheir

organization.

• Finally,theyexpectthatthelicensorwillapproachthelicensingrelationship

withawin-winattitudethatwillallowthemtomovequicklytotakeadvantage

ofopportunitiesthatpresent

Becauselicensingcontractsobligatethelicenseetosalestargetsandroyalties,the

licensee’sgoalwillbetoquicklyachievesalesoflicensedproducttomeetthese

requirements.

How do you know if your company is ready to benefit from licensing the world’s great brands?Youknowyouarereadyforlicensingwhenyouhave:

• Abusinessunitwithaminimumof$50millionrevenue.

• Best-in-classproductsthatmeetpentupconsumerdemand.

• Productssoldintothechannelsandregionsinwhichyouintendtosellthe

licensedproduct.

• Thecapabilityofbuildingthelicensedbrand’sessenceintoyourproducts.

• Theabilitytoinvestaminimumof3%ofyournetsalesgeneratedfromthe

brandlicensingprogramintomarketingtheproduct.

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• Anorganizationcapableoffollowingtherequirementsofthelicense,i.e.the

approvalprocess,testingrequirements,audits,royaltyreportingandpayments.

Fromhere,beginwithawellthoughtoutbrandlicensingstrategy.

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The Brand Licensing Process

Brandlicensingcanbeverybeneficialforbothbrandsandlicenseesifdoneinastep-

by-stepmanner.Wehavedividedthebrandlicensingprocessintoeightsteps.This

modulewillprovideyouwithanoverviewofeachofthesteps.Latermoduleswilllook

intoeachofthemingreaterdetail.

4Step 1Identify Where to Play

Step 4Perform DueDiligence

Step 7ConductOrientation

Step 2Detemine How to Win

Step 5Define LicensingOpportunit

Step 8Establish Business Plan

Step 3ProspectLicensees

Step 6NegotiateContract

1

>

>

>

>

>

Figure 3: The Brand Licensing Process

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Thebrandlicensingprocessstartsseveralmonthspriortothecommercializationor

launchofthelicensedproduct.Figure4belowwillgiveyouatimelineofeachofthe

processeslistedinFigure3.Licenseesandlicensorsshouldalsokeepinmindthat

missingcrucialdeadlinessuchasalinereviewcanpushtheproductlaunchoutbyup

toayear.

STEP 1: Identify Where to PlayAsexplainedintheprevioussections,weknowthatwhenconsumersbecome

delightedbyaparticularbrandexperience,theybegintobondemotionallywiththe

brand.Theybecomebrandloyalistsandadvocates–buyingthebrandmoreoften

andrecommendingittoothers.Thisbehaviorservestobuildthebrand’sreputation.

Consumerswilloftenpurchaseabrandforthefirsttimebecauseofitsreputation.The

brand,therefore,addsvalueandcertaintytoanotherwiseunknownproduct.

Thestrongerabrand’sreputation,thehigherthevalueofthebrandandthegreater

revenueitwilldriveforitsowner.Prospectivelicenseeswanttolicensebrandswiththe

strongestreputation,asthesearethebrandsconsumersdemandandretailersprefer

most.Thestrongerthebrand,thehigherlikelihoodretailerswillbuythelicensed

productsandthattheywillbesubsequentlypurchasedbyconsumers.Brandloyalists

andadvocateslooktotheirpreferredbrandstodelivermoreandbetterproductsyear

afteryear.Whenthisoccurs,thebrandgainspermissiontoextendintocategoriesthat

complementitsoriginaloffering.Thisisknownasbrandextension.

Figure 4: Product Commercialization Timeline

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec JanYr3

Identifywhere to play

Concept Development starts with samplesproduction & shipping

duediligencedefinelicensingopportunity

agree todeal termsD

eterm

inehow

to win

orient

ation

contra

act

signed

line r

eview

po iss

ued

commerc

ializa

tion

prosp

ectlice

nsees

negotia

tedea

l term

s

prototy

peapp

roved

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Forexample,theMr.Cleanbrand,ownedbyP&G,waslaunchedin1963asthefirst

householdliquidcleaner.Overtime,thebrandgainedastrongreputationforitsability

tocleaneffectivelyonavarietyofsurfaces.Bydelightingitsconsumers,Mr.Clean

builtsignificantbrandloyaltyandallegiance.Whenasked,consumerstoldtheMr.

CleanbrandteamthattheyexpectedtheMr.Cleanbrandtoofferadditionalproducts

thatsimplifiedandenhancedthehouseholdcleaningexperience.Tosatisfythese

consumers,Mr.Cleandevelopedalineofbrandedmops,brooms,andbrushes.

Theseproductsweremetwithenthusiasmandeventually,consumersdemandedeven

simplerandmoreeffectivewaystocleantheirhomes.Today,theMr.Cleanbrandcanbe

foundonanexpansivelistofproductsincludingscrubbingtubandshowerpads,Magic

Erasercleaningpads,autodrycarwashsystems,multi-surfacedisinfectingwipes,

rubberglovesandmanyotherproducts.ManyoftheseMr.Cleanproductsarelicensed.

Byowningabrandthatcanbeextendedintonumerouscategories,companiesareable

toattractandretainmultipleprospectivelicensees.Usinglicensingtoaugmentinternal

resourcesactuallyacceleratesacompany’soveralltimetomarket.

Howcanyoudetermineyourbrand’sextendibilityandidentifywhatproductcategories

itcansellin?Ittakesunderstandingyourbrand’svision,architectureandpositioning

Mr. Clean Products

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andthevaluethatthebrandprovides.Kodakisawell-knowncompanyinthecamera

business.Whatwouldbeanaturalextensionforthemfromcameras?Let’slookat

theirbrandarchitecturefirst.Thekeyemotionalbenefitofthebrandisthatitcaptures

preciousmomentsbutthe‘somethingbigger’thebrandprovidesisimmortality.With

thisinmind,thecompanydecidedtoenterthephotographypapermarket.Inthediagram

below,youwillseehowsellingphotographypaperfitsinsoperfectlywiththebrand’s

architectureandpositioning.

Therearesomebrandextensionsthathavenotdonewell,too.Forexample,Bic,a

companythatspecializesinsmalldisposablepocketitemsunsuccessfullyventuredinto

perfumes.

Beforebrandownersextendtheirbrandsintocategoriesinwhichtheyintendtolicense,

theyshouldconductmarketresearch.Thiswouldincludereviewingsecondaryresearch,

holdingfocusgroups,conductinginterviewsandperformingfieldsurveystoclearly

understandwhatconsumersbelieveaboutthebrandandwhattheirexpectationsare.

Oncethisisobtained,brandownerswillbeabletoidentifysuitablecategoriesinwhichto

extend.Eachcategoryshouldthenbeevaluatedontheprominenceofbrandassociations,

favorabilityofassociationsinferredbytheextensionanduniquenessofassociationfrom

thenewcategory.

Oncethelistofpossibleextensionshasbeentrimmed,brandownersshouldthen

conductanindustryandcompetitiveanalysisofthecategory.Specifically,research

Figure 5: Kodak brand architecture

Higher Order Brand Identity

Emotional Benefits

Functional Benefits

Product Attributes

Immortality

Long-LastingImage

HighQualityPaper

CapturesPreciousMoments

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includesthesizeofthemarket,currentcompetitors,industrygrowthrate,and

competitivenature.Thisanalysiswillenablethebrandownertodeterminewhether

itmakessensetoevenenterthecategory.TechniquestouseincludeStrengths–

Weaknesses–Opportunities–Threats(SWOT)analysisoraPorter’sFiveForces

analysis.Thesemethodsarehelpfulinevaluatingabusinessoraprojectfroma

strategicpointofview.Theyinvolvespecifyingtheobjectiveoftheventureand

identifyingtheexternalandinternalfactorsthatarefavorableorunfavorableto

achievingthatobjectiveandtodeterminingtheattractivenessoftheventure.

Strengths• Advantages

• Capabilities

• Resources,assets,people

• Marketingreach,

distribution,awareness

• Innovation

• Geographical

• Processes,systems

Weaknesses• Disadvantages

• Gapsincapabilities

• Reputation

• Financials

• Reliability

• Processes,systems

Opportunities• Marketdevelopments

• Industrytrends

• Technologicaldevelopments

• Globalinfluences

• Tactics

Threats• Political

• Legislative

• Economic

• Technological

• Competitorintentions

• Vitalcontracts

• Financialbacking

Figure 6: SWOT Analysis

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STEP 2: Determine How to WinOncetheproductcategorythatsatisfiesthebrandextensiongoalsandcreatespositive

associationsforyourbrandhasbeenidentified,thenextstepistodeterminehowtogo

aboutexecutingtheextension.Anymarketingactivityrequiressubstantialresources

andbeforeaprojectisbegun,thebrandownermustdeterminewhetherthecompany

hasenoughresourcestocompletetheendeavor.Thereisnothingworsethanstartinga

projectandthenhavingtoterminatemidwayduetolackofresources.

Sohowshouldthebrandownerdeterminethebestwaytogoaboutenteringthe

productcategorythathasbeenselected?Afirststepwouldbetomobilizekey

departmentswithintheorganizationtoconducttheirownduediligence.

Threat of New Entrants

• Barrierstoentry

• Economiesofscale

• Capitalrequirements

• Switchingcosts

• Governmentpolicies

Threat of Substitutes

• Priceofsubstitutes

• Qualityofsubstitutes

• Switchingcosttobuyers

Supplier Power• Supplierconcentration

• Productdifferentiation

• Switchingcosttoanother

input

• Threatofbackwardor

forwardintegration

Rivalry• Numberofcompetitors

• Sizeofcompetitors

• Industrygrowthrate


• Exitbarriers

Buyer Power• Numberofbuyersrelativeto

sellers


• Switchingcosttoanother

product

• Buyers’margins

• Threatofbackwardorforward

integration

Figure 7: Porter’s Five Forces Analysis

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Whencontemplatingenteringanewproductcategory,thefirststepistodetermine

whetherthecompanyhasthecompetencytodesign,produceandmarkettheproduct

withinternalresources.Whenwerefertointernalresources,wearereferringtoeitherthe

company’smanufacturingcapabilitytoproducetheproduct,oritsabilitytosourcethe

productcompetitivelyfromoneofitsthird-partysuppliers.

Onewaytoaccomplishthisistodelegatetheoperationsteamtoevaluatethe

competencyofmanufacturingorsourcingtheproductandthefinanceteamtoconduct

acost/benefitanalysisofmanufacturingversussourcingtheproduct.Iftheanalysis

conferswiththeabilitytoproducetheproduct,thenextstepistodeterminewhether

thereissufficientbudgetandcapabilitytomarkettheproduct.Arethereadequate

resourcestoinvestinproductdevelopment,advertisingandpromotionalactivities?Do

relationshipsexistwithdistributorsandretailchannelsthroughwhichtheproductwill

besold?Istheresufficientpresenceinenoughgeographiclocationstomakethebrand

extensionviable?

Eventhoughitmaybepreferredtomanufacturetheproductorsourceitandpriceit

competitivelytoearnahealthymargin,thecompanymaylacktheresourcesorthe

capabilitytomarkettheproducteffectively.Thiscanaffectthedecisionwhetherto

manufacturetheproductinternally.

Ifattheendoftheanalysis,it’sdeterminedthatthecompanyhasthecapabilityto

design,produceandmarkettheproduct,itshouldgoaheadandproceedwithproduct

development.However,ifacompanydoesnotpossessthecapabilitytoproducethe

productinternally,itshouldlookattheotheroptionsavailable.

Onewaytoextendthebrandintothenewcategoryistoacquireamanufacturerof

theproducttomakeitandthenmarketitusingyourownresources.Thisoptionis

oftenharderthanitseems.Foronething,acompanywouldneedextracashflow

tofundsuchatransaction.Also,acquiringnewbusinessesisatime-consuming

proposition.First,potentialtargetcompaniesmustbeidentified.Next,duediligence

mustbecompletedbeforenegotiatingonaprice.Onceacquired,thecompanymust

beintegratedwithintheexistingcompanystructure.Becauseofthelengthyprocess,

criticaltimecanbelostinlaunchingtheproduct.Evenifacompanydecidestogo

withthisoptionandthetimingfits,itstillmaynothavethemarketingbudgetorthe

capabilitytogoforward.

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Figure 8: Different approaches to licensing

Theotherwaytoextendthebrandexternallyistolicensethebrandtoamanufacturer

oftheproductinthesamecategory.Asmentionedinprevioussections,thereare

severaladvantagestolicensingabrand.Tobeginwith,themanufacturer(orlicensee)

notonlypossessesthecapabilitytomanufacturetheproductbutalsotomarketit,

havingdonesoforunbrandeditemsorlesser-knownbrands.Theyalsopossess

thenecessaryrelationshipswithdistributorsandretailerstomakeasuccessofthe

program.Onthedownside,thebrandownerforgoessomecontrolwhentheychoose

tolicensetheirbrand.However,enteringanewmarketvialicensinghaslowerriskin

termsofinvestment.

Youmaydecidetoenteranewproductcategoryvialicensingasyouevaluateyourgo-

to-marketstrategies.Alternatively,yourbrandcouldbesolicitedbyamanufacturer

whobelieveshisproductwouldbeagoodfitforyourbrand.Thiswouldthenstart

theprocessofthebrandmarketingteamevaluatingtheproductcategoryofthe

manufacturerfromabrandextendibilityperspective.RefertoFigure8abovetogetan

ideaofhowtheprocesswouldflow.

EligibleProduct

Categories

Yes No

Solicitation for

Your Brand

Alignmentof

Brand Team

Licensing Process

LicensingProcess

Acquire License

IssueLicense

IssueLicense

License

EvaluateProduct

Category forBrand Fit

Sales & Marketing

Ability

Acquire or License

Manufactureor Source

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STEP 3: Prospect LicenseesOncetheproductcategorythatbestfitsthebrandextensionplanshasbeenidentified

andbrandlicensingisdeterminedtobethemostbeneficialwaytoachievethis

extension,itistimetoscoutforprospectivelicenseeswithintheselectedproduct

category.

Beforeshortlistingthelicensees,itisimportanttoputtogetherabasicchecklistof

parametersinwhichtoevaluatethelicensees.Theseparameters,whichwerecommend

bedefinedbythebrandowner,mayincludethefollowing:

• Sizeofthecompany

• Marketshareintheproductcategory

• Currentorpreviouslicensesheldbythecompany

• Financials

Oncethechecklisthasbeendeveloped,thenextstepistoidentifycompaniesthat

manufacturetheselectedproductcategory.Thesecanbefoundeasilywithsome

research.Themostcommonsourcesofinformationaretradedirectories,trade

magazines,tradeshows,andresearchcompanieslikeHoovers,DunandBradstreet,

Frost&Sullivan,andVaultReports.Anotherwayforthelicensortoidentifyprospective

licenseesistoconductprimaryresearchsuchasstorewalks.Onceacomprehensive

listofprospectsisidentified,thesecandidatesshouldthenbeevaluatedbasedonthe

parameterslistedearlier.Thiswillleavethelicensorwithapoolofqualifiedcompanies

toinvestigatefurther.

Tomakealicensingagreementasuccess,bothpartiesmustbewillingtocommit

equaltimeandresources.Thebestwayofassessingtheirinterestlevelistoaskthem

directly.Thiscanbeaccomplishedbycallingthemoverthetelephoneormeetingthem

inperson.Basedoncomprehensiveinterviews,thelicensorwouldthenshortlistthe

mostqualifiedcandidateswithwhomtheydesiretomovefurtherintheprocess.

STEP 4: Perform Due DiligenceThisisthestagewhenthebrandownerbeginsrigorouslyqualifyingtheprospective

licenseestodeterminewhethertheywillprogresstothenextphase.Thisstage

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involvesconductingacomprehensiveduediligenceontheselectedcompaniesfroma

business,financial,legalandriskmanagementperspective.Themorecomprehensive

thisis,thelesslikelythelicenseewillhaveunforeseenissuesgoingforward.

AgoodfirststepinthisprocessistodevelopaLicenseeApplicationthatrequests

alloftheinformationthatisrequiredfromthelicensee.Theinformationfromthe

applicationwouldsubstantiatewhateversecondaryresearchwasgarneredonthe

prospectivelicensee.ALicenseeApplicationshouldtypicallyincludethefollowing:

LegalCheck:Isthecompanyalegitimatelegalentity?Howlonghavetheybeenin

business?Wherearetheyincorporated?Aretheydoingbusinessunderadifferent

name?Whatistheirstructure?Aretheyashellcorporationordotheyhaveactual

employees,assetsandliabilities?Havetheybeenthesubjectofanymajorlawsuitsin

thelastthreetofiveyears?Ifso,whatwasthenatureofthechargesandhowdidthe

companyresolvethem?

Financialcheck:Tofullyunderstandthefinancialstrengthofanorganizationitis

importanttoobtaintheprospectivelicensees’financialstatementsgoingbackatleast

threeyears.Financialstatementshelpassurethelicensorthatthelicenseehasthe

resourcestocommittothelicensingprogramfromthebeginningtotheendofthe

contract.Manyprospectivelicenseesareprivatelyheldcompanies.Assuch,theywill

bereluctanttosharetheirfinancialstatements.However,itiscriticalforalicensor

tohavethisinformation.Therefore,thisshouldbeanon-negotiableitem.Licensors

shouldalsoconductacreditcheckonalllicensees.Thecreditchecktellsthelicensor

thetimelinessandreliabilityoftheprospectivelicenseetopaytheirbills.Giventhe

systematicroyaltypaymentrequirementsofthelicensingcontract,understandingthe

credit-worthinessoftheprospectivelicenseeiscritical.

Businesscheck:Isthecompanyreputableintheselectedproductcategory?Dothey

possessanyotherbrandlicensesorhavetheyhadtheminthepast?Ifso,whatdo

theircurrentorpreviouslicensorshavetosayaboutthewaytheymanagetheir

licensingprograms?Whatistheirreputationinthemarketplace?Whatdotheircurrent

customershavetosayabouttheirreliabilityandserviceability?Howwellmanaged

isthecompany?Howeageraretheytogettheirlicense?Howcollaborativedothey

seem?Whataretheirestimatedsalesforecastsfortheselectedproduct,aswellassales

history,overthepastthreeyears?

Marketingcheck:Whatistheprospectivelicensee’smarketsharepositioninthe

selectedproductcategory?Howlonghavetheybeensellingtheproduct?Whatistheir

rankbyrevenue,distribution,employees?Aretheyamarketleader?Whatchannelsare

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theypresentin?Howhavetheybeengrowing?Whatkindofproductinnovationshave

theylaunchedinthepast?Whataretheirstrengths?Howwelldotheyunderstandthe

marketplaceandbranding?Howaretheycurrentlypromotingtheirproducts?

Referencecheck:Referencechecksareanimportantcomponentoftheduediligence

process.Licensorsshouldinterviewatleastthreebuyersfromamongtheretailers

thattheprospectivelicenseeintendstosell.Thishelpsthelicensorunderstand

quicklythequalityofcompanyfromadelivery,manufacturing,service,marketing

andsalesperspective.Inaddition,licensorsshouldinterviewuptothreelicensorsif

theprospectivelicenseeholdsotherlicenses.Theseinterviewswillenablethelicensor

tounderstandhoweffectivelytheycanexpectthecandidatetoexecutealicensing

program.

Qualityandcompliancecheck:Doesthelicenseeowntheirownmanufacturingordo

theyoutsourceit?Iftheysourcetheirproduct,howlonghavetheybeenworkingwith

theirmanufacturers?Willtheybeabletomeetthebrand’squalityexpectations?How

havethesemanufacturersperformedonpreviousaudits?Dotheyorcantheymeetthe

socialandenvironmentalcompliancestandardsofthebrand?

STEP 5: Define Licensing OpportunityAftercompletingtheduediligenceprocess,thelicensorshouldnormallybeleftwith

twotothreequalifiedprospects.Nowit’stimetoassessthesizeandscopeofthe

actuallicenseagreement.Thisrequiresthelicensortoworkwiththeselectedcandidate

licenseestofullyunderstandtheirstrengthsanddeterminewhetherthelicensing

opportunityisviableornot.

Outstandingcandidatelicenseeswillimmersethemselvesinthelicensor’sbrand

sothattheycanfullyunderstanditspositioningandarchitecture.Fromthis,they

shouldproposethelookandfeeloftheproducts.Theywillincorporatethebrand

attributesintothedesignoftheirproducts.Licenseeswillpayparticularattentionto

theplacementofthelogoontheproduct,thematerialfromwhichitisconstructedand

howthelogoisaffixedtotheproduct.Asharplicenseewillrequestthatthelicensor

providethemwiththebrand’sstyle-guidesotheyhavetherequiredinformationtodo

this.

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Simultaneously,thelicensorshouldrequestthatthecandidatelicenseesdevelop

three-yearsalesprojectionssotheycanassessthescopeofthelicense.Thisforecast

shouldbeaconservativeestimateofthesalesthelicenseethinkstheycanachieveand

issegmentedbyregion,channelandStockKeepingUnits(SKUs).Italsoincludesthe

numberofnewproductsthelicenseethinkstheywillintroduceeachyear.

Thesalesprojectionsprovidedbyeachoftheshortlistedlicenseesarecompared

witheachother.Thelicensorthenevaluatestheproposalstoassuretheyareviable,

achievableandmaximizethebrandopportunity.Forexample,aprospectivelicensee

whoisnumberoneintheircategorymayonlywishtodedicateasmallportionoftheir

businesstothelicense,whereasthecompanynumberthreeinthecategorymaybe

willingtoconvertalloftheirsalestothenewlylicensedbrand.Inthiscasethescope

oftheopportunitywithcompanynumberthreemaybemuchbiggerthancompany

numberone.Therefore,fromascopeperspectivethenumberthreecompanymaybe

preferred.However,itmaybedeterminedthatconvertingtheentireproductfromits

currentstatetoabrandstatemaynotbeachievable.Oncethesalesprojectionshave

beenvetted,thelicensorshouldusethesetorankthecandidates.Thesizeofsales

targetscanthenbeusedasaguidewhennegotiatingthefollowingquantifiabledeal

terms:minimumsalestargets,guaranteedroyaltyminimumsandcashadvances.As

Figure 9: LBI Business Estimator

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thesedealtermsarebasedontheforecastsdevelopedbythelicensees,theyshouldnot

onlybefair,theyshouldberobustandachievable.

Withthis,thegroundworkfortheactualcontractisprepared.Thelicenseesandthe

licensorsthengointothenextstep.

STEP 6: Negotiate ContractThebasisofthelicensingopportunityhasbeenpreparedbytheconservativesales

estimatesinthepreviousstep.Itisnowtimetoestablishthecoredealterms.These

parametersdefinethestructureofthecontract,anddefinesuchparametersasthe

termofthecontract,wherethelicensedproductswillbesold,whatroyaltyratewill

bepaidandwhattrademarkswillbeused.Becausethevalueofthesetermswillbe

uniquetoeverylicensingcontract,theymustbenegotiatedbetweenthelicensorand

prospectivelicensee.

Whileeachpartyinherentlywantstoarriveatthemostfavorabletermsfortheirside,

thebestsetofdealtermsarethosethatallowbothpartiestoachieveasuccessful

long-termlicensingprogram.Successfullicensorskeeptheendinmindandpractice

win-winnegotiatingstrategies.Similarly,smartlicenseeswillhaveidentifiedseveral

choicesofbrandsfromwhichtoacquirealicenseandwillsetlimitsonwhatdeal

termstheywillaccept,regardlessofthebrand.Intheseinstancesbothpartiescan

shakehandsonasetoftermstheyknowwillallowthembothtobesuccessful.

Thesetermsincluderightstoterritories,channels,coveredproductsandtrademarks,

workproduct,qualityassurancestandards,thelicensingapprovalprocess,

manufacturingfacilityapproval,royaltyrates,minimumguaranteedroyaltiesandsales

requirements.Understandingthesetermsandthecommitmentsthatwillbemade

iscrucialtoaneffectivelicensingcontractnegotiationandcouldsavethelicensee

hundredsofthousandsofdollarsoverthelifeoftheagreement.Asthedealtermsare

anintegralpartofthecontracttheyshouldbeunderstoodbyallrelevantmembersof

thelicensee’sorganization.

Thedealtermsarereviewedbybothparties,revisedifnecessary,andoncebothsides

arecomfortablewiththeterms,theyareincorporatedintothelicensingcontract.

Becauselicensingcontractsmustenablealicensortoprotecttheirbrandfully,they

tendtobeone-sidedwithsignificantprovisionsfortermination.Inmostcasesthe

standardcontractprovisionsarenotnegotiableandassuch,thelicensingcontractis

finalizedandsignedsoonafterthedealtermsareagreedupon.

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STEP 7: Conduct OrientationThesigningofthecontractmarksthebeginningofarelationship.Itisimportantforthe

licenseetogetfamiliarwiththelicensorandthelicensingprogramasmuchaspossible

anditisthelicensor’sresponsibilitytomakesuretheyprovidethelicenseewithall

theinformationtheyneed.Well-runlicensingprogramsrequireaformalorientation

sessionshortlyafterthecontractissigned.Theorientationprovidesanopportunityfor

keymembersfromthelicensor’sandlicensee’scompaniestomeetandgettoknoweach

other.Attendingfromthelicensor’ssideshouldbemembersfromthelicensinggroup,

thebrandgroup,productdevelopmentandsales.Membersattendingfromthelicensee’s

sideshouldincludethegeneralmanager,productdevelopment,accountmanagement,

salesandmarketing.Thelicensornormallygivesthelicenseeanoverviewofthebrand

architecture,brandpositioningandcategorypositioning.Thelicensoralsotakesthe

licenseethroughtheproductapprovalsprocess,timelinesandkeytermsinthelicensing

agreement.Theorientationsessionalsoincludesareviewofalltestingandauditing

protocols.

Normally,thelicensorwilldeliverabrandlicensingstyleguidetothelicenseeat

orientation.Thestyleguidehelpsdirectthelicenseeonhowtousethebrandlogo

andstyleelementswhencreatingproducts,packagingandmarketingcollateral.Ifthe

licensordoesnothaveabrandlicensingstyleguide,itishighlyrecommendedthat

theydevelopone.Inaddition,theorientationsessionisusedtowalkthenewlicensee

throughtheapprovalprocess.Thelicenseemustbeintimatelyfamiliarwiththe

approvalprocessiftheywishtogettheirproductsapprovedquicklyandefficiently.

Figure 11: Sample Approval Process

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DATEOFSUBMISSION:_____/_____/_____

LICENSEENAME: CONTACT:

LICENSEEPHONE: FAX:

EMAIL:

LICENSEEADDRESS:

PRODUCTNAME: STYLE/SKU:

PRODUCTDESCRIPTION:

SUGGESTEDUNITRETAIL:$ AVERAGEUNITWHOLESALE:$

MATERIALSUPPLIED:qPRODUCTqADVERTISINGqPOP/POSqPACKAGINGqOTHER

TYPEOFSAMPLE:qCONCEPTqPROTOTYPEqPRODUCTIONqCONTRACTUALqOTHER

HASTHISSAMPLEBEENSUBMITTEDBEFORE:qYES qNO

DATEOFPREVIOUSSUBMISSION: _____/_____/_____

PREVIOUSCOMMENTS: _____/______/_____

DOESTHESAMPLENEEDTOBERETURNED:qYESqNO

BYDATE: _____/______/_____

LICENSING,CREATIVEANDLEGALCOMMENTS:

qAPPROVEDqPROCEEDWITHCHANGESqRESUBMITWITHCHANGESqNOTAPPROVED

DATE:_____/_____/_____ SIGNEDBY:

TOBECOMPLETEDBYLICENSOR/BRAND

TOBECOMPLETEDBYTHELICENSEE

Figure 10: Sample Submission Form

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STEP 8: Establish Business PlanNowthatyou’vesignedacontractandhavemadesurethelicenseehasagood

understandingofthebrand,itisimportanttogivethelicenseetherighttoolstobe

successful.Monitoringthelicensee’sbusinessandensuringthattheysetachievable

targetsenablesthemtomakethemaximumuseofthelicense.

Thelicenseeshouldbeginwithdevelopingaone-yearbusinessplan.Thebusinessplan

shouldstartwithafirmunderstandingofthelicensor’sbrandandcategorypositioning

statements.Keytargetstakenfromthelicensingcontractshouldalsobecitedinthe

businessplan.Theseinclude:

• Minimumsales

• Minimumguarantees

• Royaltyrate

Thebusinessplanshouldalsocontainaclearunderstandingoftheproduct

development/commercializationtimeline,theSKUstheyplantosellincludingany

newproductsthattheyplantodevelop,andthekeyretailerswherethelicenseeplans

toselltheirlicensedproductoverthenextyear.Thesalesplanshouldbebuiltby

month,byretailer,andifapplicable,byregion.Projectedroyaltiesshouldbecalculated

basedonthesalesprojectionsandreviewedagainstminimumroyaltiestoassessthe

robustnessoftheplan.Onthenextpageisasnapshotofwhatsuchaplanshould

contain.

DashboardReviews:Onamonthlybasisthelicensorwillreviewthebusinessestimate

againsttheplan.Thusboththelicenseeandthelicensorshouldtracktheactualsales

androyaltiesversusthoseprojectedintheannualbusinessplan.Subsequentmonthly

projectionsshouldbelaidoutwithjustificationsforanyincreasesordecreasesrelative

tothebusinessplanandthemostrecentestimate.Theresultsofthiswillbeusedto

maximizeopportunitieswithinthecalendaryearandtodevelopthebusinessplanfor

thefollowingyear.Similarly,thereisaquarterlyandanannualreviewthatcompare

thesalesperformancewiththepreviousquarter(oryear).

Audits:Eachlicensingagreementprovidesthelicensorwiththerightstoaudit

itslicensee.Theseauditsincludeareviewofthelicensee’sfinancialandproduct

developmentrecords,aswellassocialcomplianceauditsofitsapprovedfactories.

Socialcomplianceauditsareconductedwheneveranewlicenseeorfacilityismade

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partofalicensingprogram.Inaddition,businessauditsareperformedroutinelyto

ensurethelicenseeiscomplyingwiththetermsoftheagreement.Typicallyauditsare

conductedbyapprovedthirdparties.

Anydiscrepanciesfoundinasocialcomplianceauditthatcanbeharmfulto

thefacility’semployeesmustberesolvedbeforethefacilitycanbeused.Others

mayberesolvedonanongoingbasis.Licenseebusinessauditsthatturnupany

inconsistenciesarereviewedfortheseriousnessoftheerror.Adiscrepancyrelatedto

sellingunapprovedproductorsellingproductinanunauthorizedmethodcanresult

intermination.Inaddition,therearesignificantpenaltiesforsalesofunapproved

orunauthorizedproduct.Royaltiesrelatedtothesesalestypicallyareequaltothe

salesvaluethemselves.Minorinfractionsareresolvedbycorrectingtheproblemina

prudentandexpeditiousfashion.

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Figure 12: Annual Business Plan template

Annual Business Plan

Licensee Name Licensee #1 Year 2 Licensor Budget: 3,000,000

Submission Date: Year 2 Year 2 Licensee Budget: 350,000

Royalty Rates (%): 5, 7.5, 10 Licensee Contribution: 12%

Minimum Guarantees: 100,000

Year 2 Licensor Estimate: 3,500,000

Year 2 Licensee Estimate: 375,000

Licensee Contribution: 11%

Retailer Summary Goal

Year 1 Year 2

Retailer Sales Royalties Sales Royalties % of Estimate

Wal-Mart 658,000 65,800 770,000 77,000 21%

Target 475,000 47,500 573,000 57,300 15%

The Home Depot 378,000 37,800 425,000 42,500 11%

Lowe’s 299,000 29,900 411,000 41,100 11%

SAM’s Club 108,000 10,800 379,000 37,900 10%

Costco 107,000 10,700 368,000 36,800 10%

SEARS 97,000 9,700 320,000 32,000 9%

Kmart 75,000 7,500 144,000 14,400 4%

Kohl’s 55,000 5,500 110,000 11,000 3%

Other 248,000 24,800 250,000 25,000 7%

Total 2,500,000 250,000 3,750,000 375,000 100%

Product Summary Goal

Year 1 Year 2

Product Sales Royalties Sales Royalties % of Estimate

A 658,000 65,800 770,000 77,000 21%

B 475,000 47,500 573,000 57,300 15%

C 378,000 37,800 425,000 42,500 11%

D 299,000 29,900 411,000 41,100 11%

E 108,000 10,800 379,000 37,900 10%

F 107,000 10,700 368,000 36,800 10%

G 97,000 9,700 320,000 32,000 9%

H 75,000 7,500 144,000 14,400 4%

I 55,000 5,500 110,000 11,000 3%

J 248,000 24,800 250,000 25,000 7%

Total 2,500,000 250,000 3,750,000 375,000 100%

Sales & Royalty Summary Goal

Year 1 Year 2 Comparison

Yr 1 Actual vs. Yr 2 Budget vs.

Actual Budget Estimate Yr 2 Budget Estimate

Sales 2,500,000 3,500,000 3,750,000 40% 7%

Royalites 250,000 350,000 375,000 40% 7%

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Figure 12: Annual Business Plan template (continued)

Sales & Royalty Summary Stretch

Year 1 Year 2 Comparison

Yr 1 Actual vs. Yr 2 Budget vs.

Actual Budget Estimate Yr 2 Budget Estimate

Sales 2,500,000 3,500,000 3,750,000 40% 7%

Royalites 250,000 350,000 375,000 40% 7%

Retailer Summary Stretch

Year 1 Year 2

Retailer Sales Royalties Sales Royalties % of Estimate

Wal-Mart 658,000 65,800 1,000,000 77,000 21%

Target 475,000 47,500 700,000 57,300 15%

The Home Depot 378,000 37,800 450,000 42,500 11%

Lowe’s 299,000 29,900 425,000 41,100 11%

SAM’s Club 108,000 10,800 379,000 37,900 10%

Costco 107,000 10,700 368,000 36,800 10%

SEARS 97,000 9,700 320,000 32,000 9%

Kmart 75,000 7,500 144,000 14,400 4%

Kohl’s 55,000 5,500 110,000 11,000 3%

Other 248,000 24,800 250,000 25,000 7%

Total 2,500,000 250,000 4,186,000 375,000 100%

Product Summary Stretch

Year 1 Year 2

Product Sales Royalties Sales Royalties % of Estimate

A 658,000 65,800 900,000 77,000 21%

B 475,000 47,500 573,000 57,300 15%

C 378,000 37,800 425,000 42,500 11%

D 299,000 29,900 500,000 41,100 11%

E 108,000 10,800 379,000 37,900 10%

F 107,000 10,700 468,000 36,800 10%

G 97,000 9,700 320,000 32,000 9%

H 75,000 7,500 144,000 14,400 4%

I 55,000 5,500 227,000 11,000 3%

J 248,000 24,800 250,000 25,000 7%

Total 2,500,000 250,000 4,186,000 375,000 100%

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SummaryFormostbrandowners,BrandLicensingisanunder-utilizedmethodofenteringa

newproductcategory.However,wehopethatthroughthismodulewehavebeenable

toillustratewhatBrandLicensingisandthenumerousbenefitsthatithastooffer

bothtolicensorsandlicensees,aswellasdescribetheentirebrandlicensingprocessas

wehaveseenitworkintherealbusinessworld.

Needlesstosay,theentireprocessislengthyandtimeconsuming,witheffortsstarting

asearlyas24monthsbeforeyoucanseeproductontheshelf.Onemustalsokeep

inmindthatthegoalisnottoachievethelicensebuttomakeasuccessofitandthe

activitiesthatfollowthesigningofthecontract.Theseprocesses,ifexecutedwell,

ontheonehand,canensurehugesuccessoftheprogram.Whileontheotherhand,

ifeitherthelicenseeorthelicensordonotliveuptotheircommitments,itcanaffect

sales,andmoreimportantlythereputationofthebrand.

ThismoduleattemptstogiveyouanoverviewoftheBrandLicensingprocess.Ifyou

thinkthismayhelpyourmanufacturingbusinessachievenewheights,orhelpyour

brandexpandintonewcategories,weencourageyoutotryoutourothermodulesthat

talkabouteachprocessingreaterdetail,includingdeterminingproductcategories

forbrandextension,prospectinglicensees,understandingdealtermsandnegotiating

contracts,orientationandbusinessplanning.

More Books by Pete Canalichio

35 Case Studies Of Brands That Successfully Entered New CategoriesWith35casestudiesallinoneplaceyou’llsavehoursofsearchingonGoogle.WithanalysisbybrandlicensingexpertPeteCanalichio,you’llgetabetterunderstandingoflicensingstrategiesandthewaybrandsinotherindustrieshavesucceeded.

Breakthrough Licensing: A Disciplined Path To Profitable Brand ExtensionsTakesyouthrougheverystageoftheprocessfromidentifyingstretch-readybrandstoimplementinggo-to-marketstrategies.Findouthowtoprospectlicensees,performduediligence,negotiatecon-tracts,andmore.

Is You’re Brand Ready To Stretch Into New CategoriesUseaprovenscoringsystemtodecideifyourbrandisreadytostretch,avoidcatastrophicfailures,knowhowtogetyourbrandreadytoexpandandextendifitscoresbadlyandbuildonyourbrand’sstrengthsifit scoreswell.

Learn More

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https://petecanalichio.com/brand-extension-examples-product-licensing-case-studies/

https://petecanalichio.com/brand-extension-product-expansion-stretching/

https://petecanalichio.com/brand-extension-strategies-and-product-line-stretching/

licensing101 brand · for example crest extended its brand from toothpaste into whitening. before...

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