Have you ever wondered how Coca-Cola, a company focused on meeting your beverage needs, sells branded T-shirts or caps? Or how Newell Rubbermaid provide you with such a range of products under a single brand name?
While companies sometime manufacture these items themselves, other times they may choose to allow a manufacturer to produce and market these products under their brand names. In return for the use of their brand, these companies charge the manufacturer a fee. Such an arrangement is called brand licensing and can be defined as an agreement that authorizes a company that markets a product or service (a licensee) to lease or rent a brand from a brand owner. The owner, operating a licensing program, gets a portion of the sales revenue (royalty) in return.
Licensing enables companies whose brands have high preference to unlock its latent value and satisfy pent-up demand. After Apple launched the iPhone it created an immediate need for accessories. Apple could have chosen to manufacture and distribute the accessories, but decided they were not core to the business and therefore, chose to satisfy the need through licensing. Licensing the iPhone brand enabled companies to produce a variety of terrific products to make the iPhone more user-friendly and enhance the experience. Examples include the Bose Sound System with iPhone docking station, products that enable an iPhone to be heard through a vehicle's built-in stereo and iPhone holders that allow users “to take their music with them” when they are on the go.
Licensing enables brand owners the ability to enter new categories, gaining them immediate brand presence on the shelf and often in the media. Additionally, companies license their brands to gain:
1. Royalty revenue. While usually not the most important reason, licensing generates revenue from guarantee and royalty payments. Guarantees are usually determined on an annual basis and calculated as a percentage of the anticipated per annum royalty. Royalty payments are typically calculated as a percentage of wholesale revenue. As long as the brand is protected, no general manager would turn away the healthy injection these payments bring to his/her bottom line.
2. Marketing support. In many instances, the licensee will be required to provide marketing dollars to support the licensed category. This marketing spend, in turn, provides additional overall brand presence. For example, if a licensee promotes its product in a weekly circular and gains an end-aisle display, the advertising and retail display doesn't only generate product sales, but it also promotes the core property.
3. Access to new categories, areas of a store or into new channels. Some licensors see licensing as an opportunity to “test” the viability of a new category without having to make 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 reaps the benefit of additional revenue. It also benefits from brand exposure in new channels or store aisles. For example, Rubbermaid-branded kitty litter containers can be sold in both the mass channel, which is core to Rubbermaid, as well as in specialty pet shops, which are core to United Pet Group, the licensee.
4. Business or market knowledge. By licensing its brand to a third-party manufacturer, a property owner can test new businesses, or move itself into new countries with a smaller upfront investment than by building and staffing its own operations. Because the product manufacturing and distribution are handled by the licensee -- the company with the product expertise -- there is very little licensor engagement with the product and there is no inventory commitment. When I worked at Rubbermaid, we licensed cookware in a small region of Asia to see how well it would perform.
5. A competitive strike. For licensors who know their brand can enter into a category that is controlled by their competitor, licensing can be a smart and effective way to combat a rival in a category core to their business. By taking the offensive, the licensor will in turn take the competitor’s eye off of his or her own core business. For example, what if Adidas had licensed a shoe manufacturer to compete directly against Nike's former company, Cole Haan?
6. Strategic knowledge. As many licensees are experts in their own right, they offer the licensor access to intangibles such as intellectual property (through licensing inbound), product design and marketing expertise, supply-chain management, new customer relationships and strategic alliances. As true partners, licensor and licensee can begin to hold forums where they exchange ideas that not only grow the licensed category, but also the other areas of both companies' businesses.
Brand licensing offers tremendous benefits to both the brand owner and the licensee, but more that, it enables consumers to buy the products and services they want from the brands they love. That is something we can all stand a whole lot more of.
Copyright © 2013 Entrepreneur.com, Inc.