Brand Licensing and how it works

Posted by on Mar 3, 2015 in Blog | No Comments
Brand Licensing and how it works

Brand licensing is in effect a partnership whereby two parties will gain something from coming together which ordinarily they could not achieve on their own. For a brand owner (the licensor) this will often be revenue and exposure to potential new audiences. For the retailer/manufacturer (the licensee) this will often be about creating an exclusive offer for their customers or aligning themselves with a brand that gives them more credibility with a certain customer group and the media; in summary a strategic intent to build the business in a specific way. Of course in most cases the licensee will also be expecting to generate revenue from the partnership.

For any brand partnership to be successful and sustainable there must be a clear sense from the beginning of what both parties will gain from the relationship.

The standard brand licensing model operates in the following way:
a) The licensor owns the intellectual property: the brand and other forms of content such as images or characters.
b) The licensee wants to use this intellectual property in some way on their product or to be associated with their service/offer.
c) Because the licensee believes the brand will add commercial value to their product they agree to pay a fee to the Licensor: the licensing fee.
d) The licensing fee can either take the form of a royalty which can be a % of the trade or retail price or an upfront fee that is not dependent on how many of the products are sold. A combination of these two models is common; for example a royalty rate is agreed then an advance against these royalties is paid followed by a reconciliation based on a % royalty at the end of the financial year. The advance is usually contracted as a guaranteed payment. This means that if the number of products sold does not reach the level of the advance no money is refundable by the licensor.
e) All financial risk for developing, marketing, advertising and trading the product is taken by the licensee. This means that the licensee must be sure that the use of the licensor’s intellectual property will add real value to their business.
f) The licensor retains a contractual right to sign off and approve all uses of their brand by the licensee.

Many brand owners operate this business model to bring widely varying levels of revenue into their organisation. The financial risks are much lower than the brand owner developing and distributing their own product however potential returns are also lower and licensing revenues will often start at low levels. Given time and investment on the part of both licensee and licensor (and often some luck if a consumer trend has helped grow sales) some lines will expand and grow into sustainable commercially viable ventures for both parties.

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