Over the past fifteen years, I have seen many licensing deals go south because one of the parties fell into a pitfall that could have been avoided. In this article I share the 10 most common pitfalls of brand licensing that I have come across. After reading these, I hope you will let us know if you fell prey to one of these.
If you have experienced another, please let us know what happened. Through your help we can learn from each other and avoid the consequences of making one of these mistakes.
1. Biting off more than you can chew. Licensors interested in licensing a category to a prospective licensee will ask the licensee for sales projections by region and by channel, along with a sales plan. In trying to "win" the license, the prospective licensee will often provide the licensor with a “best case scenario” instead of a more realistic case. These initial projections will then be used by the licensor to develop minimum sales targets and royalties, which will become part of the contract agreement.
Licensees can get into trouble when they agree to just about "any" terms in order to get the license. In this instance, the licensee often ends up accepting sales targets they may not be able to achieve, which ultimately will result in a breach of contract.
2. Getting in over your head. While negotiating their license, prospective licensees often try to secure multiple regions or channels as part of the deal. This may be because the licensee really believes it can take full advantage of all of the rights offered and sell its product into each of the channels or regions.
In reality, the company often has only one opportunity to sell the branded merchandise to a specific retailer. If that one opportunity falls through, the licensee fails to meet its sales and royalty targets and may request royalty relief. This usually leads the licensor to ask the licensee to demonstrate how they are maximizing their rights. When the licensee is not prepared to do so, not only will they get not get the royalty relief they are asking for, they may be required to develop a comprehensive plan on how they intend to fully exploit their license.
If the licensee is unwilling or unable to develop the plan or invest in the license, they may lose rights to certain channels or regions.
3. Creating unrealistic expectations. Licensees may not fully understand the true strength of the brand whose license they just acquired. The licensee may overestimate the power of the brand, believing the brand alone on their product will result in acquiring new clients or larger programs with existing clients.
Even if the licensee has invested in product development and built the essence of the brand into their product, they may not win new business immediately. When new sales fail to happen, the licensee may feel like they got sold a bill of goods.
4. Logo slapping. Licensees often do not understand when signing an agreement that the licensor will expect them to custom design the attributes of the brand into their product, and not just slap the trademarked logo to the licensee’s product.
Licensors often want the licensee to treat the licensed category with the same care they would treat a product category in their own organization. They want the licensee to develop the product following the brand’s style guides carefully and to follow externally a similar protocol to the one that the licensor follows internally. The licensor wants the licensed product to be of a quality that the licensor would be proud to have on a retail shelf next to the internal product.
This results in frustrations on both sides as the product developed may not meet brand and quality expectations. When the licensee doesn't meet the licensor's requirements, the product often does not get approved and/or needs to be reworked and the licensee loses key sales opportunities.
5. Failure to follow the approval process. The licensee expects that approvals will come relatively easily and quickly. Instead, many products are not approved because the licensee has not followed the approval process. This often results in the licensee missing a modular shipment date or selling an unapproved product.
The price of missing a ship date can mean the loss of millions of dollars in sales. The price of selling unapproved product can be even higher. If a licensee were to sell an unapproved product which has a harmful substance such as lead paint, it could be devastating to the licensor's brand. For this reason, the penalties for selling unapproved products are stiff.
6. Not knowing the contract. Typically, licensing agreements are negotiated by company presidents or CFOs, who are the ones familiar with the contract terms and the licensor’s expectations. Obligations could get overlooked if the people who actually execute the program on a day-to-day basis, such as sales, marketing, product development, design, etc., are not made familiar with the contract.
For example, these obligations can include social and quality compliance requirements, a commitment to product design that incorporates the brand identity, a detailed understanding of the approval process, and a willingness to invest in advertising and promotions. If the individuals whose job is to execute these job requirements are not aware of them, it can place a strain on the relationship and can ultimately lead to a termination in the contract.
7. Not being prepared to invest in the license. Without proper investment, the licensee will not achieve the results they or the licensor anticipated when the agreement was made. The licensor who has granted the license expects growth in the licensed category from a sales, marketing and financial perspective throughout the term of the agreement. Moreover, the licensor expects the licensee to pursue every channel and every category designated, not just the low hanging fruit.
Despite this obligation, the licensee may not make the proper investment. There can be many reasons for this including a misunderstanding of the commitment needed, a loss of focus or interest after an expected sale falls through or change in management leading to a new strategic direction for the licensee. Irrespective of these reasons, the licensee will still be obligated to meet the royalty and other financial commitments written in the contract.
8. Selling in unauthorized channels. Sometimes, to meet contractual sales minimums or guaranteed royalty commitments, the licensee can be tempted to sell licensed product outside of their authorized channels or territory, thinking they won't get caught.
When this occurs, the licensee may put the licensor at risk if the licensor has no trademark rights in the region or if another licensee is authorized to sell in the channel or territory. For this reason, licensing contracts come with stiff penalties, up to and including termination, if products are sold into an unauthorized channel or territory.
9. Trusting the other party has your best interests in mind. Licensees can get into trouble when they trust that the licensor has their best interest in mind. A licensor may license a category they are vacating because they have strained a relationship with a retailer or failed the consumer in a category.
Licensees often may share ideas with the licensor only to have them "taken" by the licensor. This can result in a lot of animosity with a long-term negative effect. Licensees are usually granted a non-exclusive license. In some instances the licensor may choose to compete directly with the licensee or pitch one licensee against another.
If the licensee is unaware of the licensor's intentions, the licensee may be unable to meet its contractual obligations or suffer costs greater than expected in order to meet them.
10. Not following the written contract. Licensees can get into trouble when they follow verbal directions that are in direct conflict with the contract. This is a difficult predicament because the licensee may feel pressure to comply with the verbal direction. If they don't get their direction in writing, they can later be held liable for breaking the contract.
I hope you will keep these 10 pitfalls handy and learn from them so that you do not suffer as a result of not knowing. In addition, I hope you will share your story of how you fell into a pitfall and what the impact was to your business and your licensing partner’s. If we pay if forward everyone can benefit.
Related: Product Licensing Basics
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