Brand Licensing 101

An introduction to the art of brand expansion and licensing

This guide will help you understand brand licensing better, as well as address why companies license brands. We will also take you through the process of how to determine the license-ability of a brand, expectations of licensors and licensees, the brand licensing process and the royalty payment flow.

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 people understand where it was manufactured or produced. From the brand owner’s perspective, it distinguishes the products or services from those of its competitors. People, 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.

The primary reason companies choose to brand their products is to differentiate them from their competitors’ products. For example, most people have no difficulty differentiating a Coke from a Pepsi. By assigning their products with a brand, a company or brand owner can begin to communicate with their audience regarding the attributes of their products. Over time, the audience can begin to rely on the brand to connote not only a product’s value but also its reputation.

What is Licensing and how does it benefit a company?

Licensing means the renting or leasing of an intangible asset. A company owns two types of assets: tangible and intangible. Tangible assets are physical holdings such as a factory, machines, buildings, computers, and furniture. Examples of intangible assets include a song, such as Need You Now by Lady Antebellum, a character like Disney’s Donald Duck, a person’s name such as George Clooney, or a brand like The Ritz-Carlton.

An arrangement to license a brand requires a licensing agreement. A licensing agreement authorizes a company that markets a product or service (a licensee) to lease, i.e., rent, a brand from a brand owner who operates a licensing program (a licensor).

Companies license their brands for a variety of reasons. Licensing enables companies with brands that have high preferences to unlock their brands’ latent value and satisfy pent-up demand. Through licensing, brand owners have the ability to enter new categories practically overnight, gaining them immediate brand presence on store shelves and often in the media.

Why do Manufacturer’s license brands?

Licensees borrow the rights to a brand to build into their merchandise, but traditionally they do not share ownership in it. Having access to major national and global brands, and their associated logos and trademarks, 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 name and image building that went before it.

Overall, we’ve seen Manufacturers License Brands to:

  1. Achieve instantaneous recognition

  2. Enhance their authenticity and credibility

  3. Reduce in-house costs

  4. Gain access into new distribution channels

  5. Enter new regions

  6. Acquire strategic knowledge

  7. Obtain other licenses more easily

  8. Add value to the business

Licensor to Licensee Process

Brand Owners expect:

Licensors, i.e., brand owners, 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.

Licensees expect:

Licensees, in turn, expect that the license they have acquired will provide them with substantial 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.

Brand Licensing Process

Step 1: Identify Where to Play

Brand licensing can build your Brand’s Equity because it provides a repeatable and scalable strategic platform for growth. When identifying “where to play” the first question you should ask is, “What is the Essence of The Brand”? In simpler terms, what does this brand mean to you, others in your organization, customers, and consumers? Do consumers and customers find the brand differentiated and relevant compared to the competition?

Product Extension Definition

Currently, two types of Brand Extensions exist that will help the brand optimize growth and profits. The first Brand Extension is a “Line” Extensions. Coca-Cola, a favorite beverage of many, offers a great illustration of a Line Extension. Coca-Cola’s Line Extensions include Diet Coke, Cherry Coke, Coke Zero, and a very unusual one, called Clear Coke, for the people in Japan. All of the Line Extensions listed are extensions of a single primary product which comes from the Coca-Cola brand. The extensions are variations of the core brand based on different formulations. They are then given a distinct position in the marketplace.

The second extension is “Category” Extension also known as brand expansion. Category Extensions are typically seen in brand licensing because brand owners like yourself are contemplating different categories that are not core to the business. Therefore, third party manufacturers assist in your endeavor to get the brand into a particular category successfully.

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STEP 2 Determine How to Win:

Once you’ve identified “Where to Play,” you must explore Go-To-Market options. Start by examining your Sales and Marketing capabilities. Look at the organization internally to determine whether it is capable of selling and marketing the extended products. If it is, then figure out a process of how to do this internally by answering the following questions:

If the answers to all of these questions are “yes” then you can choose to market and sell the products yourself. However, you are not required to take this route. There may be several reasons why you would choose one course over another. I go over all of them in Breakthrough Licensing, A Disciplined Path To Profitable Brand Extensions.

STEP 3 Prospect Licensees:

Once a product category that qualifies for brand extension has been identified, and you, the licensor has chosen brand licensing as the preferred method to achieve this extension, then it is time to scout for prospective licensees within the selected product category. Selecting the most suitable licensee can be a daunting task for any licensor to accomplish, but don’t worry, help has come!

Scouting for Playmakers

In this section of my guide, you will learn how to cultivate a pool of qualified companies for further evaluation.

To understand which licensees will help in accomplishing the brand licensing goal the licensor must first understand what makes a best-in-class licensee. Knowing what separates a lousy licensee from one that is best-in-class allows licensors to avoid choosing licensees that will not meet expectations and potentially diminish the brand. Best-in-class licensees are those who: Well, I’m running out of room here, so if you want to find out check out the book!

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Step 4 Perform Due Diligence:

Here we will rigorously qualify the prospective licensees to determine whether they will progress to the next phase. I’ll show you how to create an application form that encompasses every component that you would need to know about your prospective licensees. Evaluation areas you’ll see in-depth include financial, risk assessment, organizational competency and more.

See A Mock Decision Using Four Prospective Licensees

This section shows you all facets of prospecting licensees in a decision-chain scenario with me portraying the brand owner. I evaluated them based on the criteria listed below:

Based on the information provided, I eliminated Prospect A first. Why? And how did I get to the two finalists and then the final selections? What criteria did I use? Find out here and see how you can use the same decision tree for your licensee search.

Step 5: Define Licensing Opportunity

Once the Due Diligence stage is completed, and a qualified licensee has been selected the brand owner must define the Licensing Opportunity.

First, scope or size the Licensing Opportunity. You want to know how much revenue the opportunity will generate and how it will be derived, i.e., the metrics including regions, retailers and SKUs, so that when you define the Deal Terms you will be able to formalize the agreement. The desired outcome focuses on the Product Concepts, Initial Sales Forecast, the Licensees’ Strengths and Capabilities, and the Deal Parameters.


How Will The Prospective Licensee Plan To Use Your Brand?

You have taken intense measures and used a large number of resources to ensure that your brand is perceived the way you want. So, having a clear understanding of how the prospective licensee plans to use your brand is critical.


Put Numbers To The Licensing Opportunity With My Conservative Business Estimator Forecast Tool

After the “Due Diligence” phase has been completed, you are going to ask the prospective licensees to complete a Conservative Business Estimator form that consists of the prospects providing a three-year detailed forecast by region, channel, retailer, SKUs, and annual product innovation. Annual product innovation, also known as vitality, is critical to the long-term success of their program and your brand in that particular category. The sales projections and viability are then compared across all the licensee candidates to see which is going to get chosen to become the licensee in that category.


Getting The Licensee To Come Up With A Business Proposal

Once the Licensing Application and The Conservative Business Estimator are complete, you want the licensees to take all the information that they have compiled up to this point and propose a business plan that assumes that they have received the license. You want them to present the concepts in the channels and in the regions that they requested as stipulated in the license. You want them to tell you why they should earn your business and convince you that this is something that is important to you. Treat this concept review like you are the general manager for this particular category with this particular licensee.

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Get a great introduction to the art of brand expansion and licensing

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Step 6: Negotiating Contracts

Negotiating a contract can often be overwhelming for you especially when trying to license your product to a manufacturer. This is especially true since every organization has different needs and goals to fulfill through the process. Since the value of the Deal Terms will be unique to every licensing contract, they must be negotiated between you, the licensor, and the prospective licensee.

In this part of my guide, you will have an opportunity to learn exactly how to negotiate a contract to create a “win-win” situation for both you and your licensee. You’ll get a complete education on deal terms–what they mean, what values you should negotiate for and how to structure them. In this section I include industry norms and ranges as a guide. For further analysis into negotiations, you can also check out my book Tilt the Deal to Your Favor.

Step 7 Conducting Orientation:

Well done! Negotiations have been made, and the contract has been signed. The execution of the contract signifies the beginning of the relationship. It is, therefore, the licensor’s responsibility to ensure that they provide the licensee with the information they need to be successful. With over 30 years in the business, I can tell you that conducting a formal orientation with a particular emphasis on the approval process is critical to the success of a long-lasting licensing program.

Why? Because it takes a great deal of personnel from both the licensor and licensee side to know what that agreement means and how to execute it.

The licensees are responsible for the most crucial asset of the licensor’s company, which is your brand. Therefore, you want to ensure that the brand is in good hands. You must know that the manufacturer has a deep understanding of the brand. As a brand owner, you also want to know that the manufacturer will build the attributes of the brand into their products, obtain the Approvals in the right way, and follow the guidelines.

Step 8: Establishing a Business Plan

The Annual Business Plan for the licensee is typically developed in the third quarter of the year prior to the plan that’s being built. Click here to see a terrific example/template of a licensing business plan. Some of the key elements include:

I recommend a Monthly Licensee Dashboard showing ties to the Annual Business Plan. It should be updated monthly and provide key information: budget, forecast, sales/royalties by retailer and product, and key dates. You can see an example of it here.

30 Day Money Back Guarantee
$ 9 99

Get a great introduction to the art of brand expansion and licensing

Not available in bookstores. You can only find it here.

Downloads as a pdf to computers, tablet and smartphones. Start reading IMMEDIATELY.

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