Brand Licensing Basics

An easy way to get started on the topic of Brand Licensing is to break the subject into its two component parts – brand and licensing. Let's start with the latter part first. What is licensing? Licensing means nothing more than the renting or leasing of an intangible asset. An example of intangible assets includes a song (Somewhere Over The Rainbow), a character (Donald Duck), a name (Michael Jordan) or a brand (The Ritz-Carlton). An arrangement to license a brand requires a licensing agreement. A licensing agreement authorizes a company which markets a product or service (a licensee) to lease or rent a brand from a brand owner who operates a licensing program (a licensor). Before we move any further, let's discuss what we mean when we use the term brand.

What is a brand?

According to Philip Kotler and Gary Armstrong a brand is defined as “a name, term, sign symbol or combination of these, that identifies the maker or seller of the product” or service. The brand or its legal term, trademark, affixed to the product helps the consumer understand where it was manufactured or produced. In essence, a trademark simply states “I made this”. From the brand owner's perspective, it distinguishes the products or services from those of its competitors. Consumers, in turn, can be assured the product they are purchasing is exactly what they want. Based on its reputation, a brand will convey a level of quality, reliability and durability.

Why do companies brand their products?

The primary reason companies choose to brand their products is to differentiate them from their competitors' products. For example, most consumers have no problem differentiating a Coke from a Pepsi. By giving their products a brand, a company or brand owner can begin to communicate with their consumers regarding the attributes of their products. Over time, a consumer can rely on the brand to connote not only a product's value but also its reputation. If a consumer likes what a brand represents and they have purchased it before, there is a higher likelihood they will choose the brand of their preference over a competitor. In fact, consumers will often purchase a brand for the first time if it has a strong reputation or if it is used by friends or celebrities. Brands also lead consumers to develop certain expectations of products. The longer they experience predictable, consistent quality and performance, the more they will expect any new products sold under the same brand to have the same. The brand, therefore, adds value to these products.

For example, customers expect new products sold under the BMW brand to be of the same quality as an existing BMW. Consumers will associate a brand with a certain price level and standard of performance. If we look at two distinct watch brands: Rolex and Timex, one is associated with a high price and high performance and the other with value through a low price and durability. These same attributes can also be of benefit to businesses. Many companies as well as consumers look to UPS for their shipping needs because Brown has developed the reputation of actually adding value to an organization through its understanding of its customers' needs and its consistent reliability.

When consumers and businesses get into the habit of buying certain brands, they automatically buy them again. This reduces the amount of time and promotion needed to make future sales, and it results in brand loyalty. According to Philip Kotler, brand loyalty, in marketing, consists of a “consumer's commitment to repurchase or otherwise continue using the brand' and can be demonstrated by repeated buying of a product or service or other positive behaviors such as word of mouth advocacy. Brands usually pass through successive stages of brand loyalty, which is the customers’ allegiance to a particular brand. The stronger the brand loyalty, the higher the value of the brand and the greater revenue it will drive for its owner.

Why do companies license their brands?

As we said above, a licensing agreement authorizes a company which markets a product or service (a licensee) to lease or rent a brand from a brand owner who operates a licensing program (a licensor). Companies who know their brands well will have a good understanding of the equity of the brand. A brand's equity is derived from the awareness and image a brand holds with its consumers.

Licensing enables companies whose brands have high preference to unlock a brand's latent value and satisfy pent up demand that exists. After Apple launched the iPod a number of years ago it created an immediate need for accessories; Apple could have chosen to manufacture and distribute these themselves, but decided they were not core to the business and therefore, chose to satisfy the need through licensing. Licensing the iPod brand enabled many companies to produce all kinds of terrific products to make the iPod more user-friendly and enhance the listening experience. Examples include the Bose Sound System with iPod docking station, other products that enable an iPod to be heard through a vehicle's built-in stereo and iPod holding devices that allow users “to take their music with them” when they go running. All these accessories are sold by licensees.

Apart from benefits to licensors, there are benefits to licensees as well. Licensees lease the rights to a certain property for incorporation into their merchandise, but traditionally they do not share ownership in it. Having access to major national and global brands, and the logos and trademarks associated with those brands, gives the licensee significant benefits they previously did not possess. The most important of these is the marketing power the brand brings to the licensee’s products. Building a brand from scratch can take years, millions of dollars and a lot of luck. The company which licenses a brand gains immediate access to all the positive brand and image building that went before it. The licensee also takes with them the reputation of the licensor. Often this “halo” effect can translate into many intangible and immeasurable benefits such as returned calls, an agreement to meet, or simply the benefit of the doubt.

Using licensing to enter new categories

Often brand managers will enter or extend their brands into new product categories to drive strategic growth for the company.

For example, Crest several years ago extended its brand from toothpaste into whitening (Crest Whitestrips). Before, Procter & Gamble (P&G), the owner of the Crest brand launched Crest Whitestrips, they conducted research to understand if the brand had permission to enter into the retail whitening category, long held by established brands such as Rembrandt and Aquafresh. P&G wanted to find out if consumers would expect Crest to offer a whitening product and if so, based on the preference for the Crest brand, purchase this new product. As we know Crest Whitestrips have performed well since their launch in the market and have achieved high rankings and advocacy ratings. While P&G decided to source the product overseas and distribute globally, they could have chosen to manufacturer it themselves and distribute or enter the market through licensing. In the case of P&G's Mr. Clean brand, P&G discovered that consumers expected them to sell cleaning accessories under the Mr. Clean brand. In this case, P&G decided to enter the market by licensing the category to Magla, a company that already had expertise and presence in this category.

The diagram below illustrates the different stages that are a part of the Licensed Product Process Flow:

What are the expectations of Licensors and Licensees?

Licensors expect that the licensee will be committed to investing in the category they license. This means they will work hard to understand the essence of the brand and develop their licensed product in a way that captures that essence. In other words, the licensed products should connect with the consumer both functionally and emotionally. If the licensee does this, the products they develop will normally be approved without delay or difficulty. To achieve this takes time and money. So while both parties want to commercialize the category as soon as possible, the licensor will expect the licensee to start with building the brand into the product first. The licensor will also expect the licensee to be familiar with the contract and to meet the obligations of the contract. That is why it is important for the licensee to ensure all employees in the licensee's organization working on the license are familiar with its contractual obligations. For example, when a product becomes approved, the licensor will expect the licensee to commercialize the licensed product expeditiously in each of the authorized channels. Finally, the licensor will expect the licensee to meet or exceed the projected sales targets for the category as outlined in the contract. When all of these things happen, the result can truly be award winning products that meet or exceed annual sales and royalty projections.

Licensees, in turn, expect that the license they have acquired will provide them with sales growth, and rightfully so. This sales growth may be in the form of growth within existing channels or the opportunity to enter a new channel or new market. To accomplish this objective, licensees expect that the brand they are licensing is as strong or stronger than they believe or have been told, that it will open doors and ultimately help them meet or exceed their business objectives. Moreover, licensees expect that the licensor or their agents will run a simple, straight forward licensing program that will not administratively tax their organization. Finally, they expect that the licensor will approach the licensing relationship with a win-win attitude that will allow them to move quickly to take advantage of opportunities that present themselves. Because licensing contracts obligate the licensee to sales targets and royalties, the licensee's goal will be to quickly achieve sales of licensed product to meet these requirements.

Royalty and Payment Flow

Royalty is the monies that are paid to a licensor by the licensee for the right to use the licensed property. It is calculated by multiplying the Royalty Rate by the Net Sales. Below is an example of how the royalty payments would flow from the retailer to the licensee and ultimately to the licensor. The example assumes a 10% royalty rate.
Brand Licensing is probably one of the least explored methods to enter a new product category by most brands. However, we hope that through this module, we have been able to explain what Brand Licensing is and the numerous benefits that it has to offer both to licensors and licensees.

Needless to say, the entire process is lengthy and time consuming. One must also keep in mind that the goal is not to achieve the license but to make a success of it and the activities that follow the signing of the contract. These processes, if executed well, on the one hand, can ensure huge success of the program. While on the other hand, if either the licensee or the licensor do not live up to their commitments, it can affect sales, and more importantly the reputation of the brand.

Contributed By: Pete Canalichio, Licensing Brands, Inc.

Sponsored By: Brand Aid