The Language of Brand Licensing

Regular readers of Branding Strategy Insider know we welcome and answer marketing questions of all types. Today, Bill, a Marketer in Los Angeles writes…

“I have a question regarding brand licensing. Let's say I want to license the brand Dora the Explorer and use the brand image on my product. What are typical licensing terms? i.e. who pays whom, how much and on what schedule?'

Thanks for your question Bill. There are a variety of brand licensing 'deal terms' that are unique to every contract. Having said that you can expect to see these common licensing terms:

Brand - you already answered what brand you wish to license. In case Dora was not available, what other brand might you wish to license? The manufacturer (or licensee) pays the brand owner (or licensor) a royalty to use the brand on their product.

Channels - from a retail perspective, where do you intend to sell your product? Do you intend to sell a Dora branded product in the mass merchandise channel or department stores? Or, will you go to specialty shops? The brand owner typically will grant you channels that you have demonstrated sustained retail success.

Exclusivity - will you be exclusive in your product category, or will the brand owner license the category to a competitor? Many licensor's agreements are non-exclusive, but the licensor practices exclusivity. This keeps the licensee (manufacturer) motivated, but gives eliminates competition which could hurt their sales. If you wish for exclusivity outright, it can cost you 3 times the minimums - if the brand owner is willing to agree to it.

Minimum Guaranteed Royalty - Based on your minimum sales figure, what are you prepared to guarantee in royalty payments? The 'minimums' as they are referred to in the industry are on an annual basis and usually by region. Royalties are paid typically on a quarterly basis. If your sales generate less royalties for the brand owner than you are required to pay in quarterly minimums, you will be required to make up the difference, which can be difficult for many businesses. Therefore, be sure you can meet them.

Royalty Rate - this can vary depending on the strength of the brand, but usually ranges from 5% to 15%. While royalty rate is typically written as a percentage of Net Sales (another important term to understand), it can be based on anything measurable, e.g. cents per unit sold.

Minimum Sales Targets - what sales commitment can you make to the brand owner? This is typically by region and can also be required by channel? You will be asked to project a sales forecast; you will then be requested to agree to minimum sales targets to show your commitment. The minimum sales targets are typically 25% - 40% of your overall projected sales.

Sell Off Period - the length of time the brand owner allows the licensee to sell off inventory after the agreement expires.

Term - how long will your agreement be for in years? This can vary, but licensors (brand owners) usually look for about 3 years as a minimum as any shorter period is not long enough to be effective.

Renewal Period - usually matches the length of the initial term.

Territory - geographically, where do you wish to license the brand, in this case, the Dora brand? Are you requesting the United States, Canada or another territory?

Bill, we wish you the best in your brand licensing endeavors.

Pete Canalichio, Brand Licensing Expert, The Blake Project