LICENSING 101

Benefits

Licensing has become an important marketing tool for an increasing number of companies across all industries and product disciplines. In fact, it has become one of the most powerful contemporary forms of marketing and brand development. When used effectively, Licensing can increase the value of a brand by extending into new, relevant product categories, thereby generating significant ancillary revenues, expanding consumer awareness and reinforcing brand image.  

Merchandise licensing offers opportunities and benefits to both the owners of the properties (licensor) as well as the manufacturers of the licensed products (licensee).

Through the usage of an already established brand name or character image that has been built up successfully over the years, licensing helps the manufacturers of licensed products use the brand identity to create immediate consumer recognition and quickly establish and reinforce brand awareness. This can be accomplished without making an investment that would usually be required for launching and building a new brand. In this way the licensee's products instantly gain the benefits of the brand recognition and the brand image lent by the trademark or copyright, and the consumers are usually willing to pay more for a known, credible brand. Furthermore, the brand benefits are realized instantly whereas for a new brand it could take years until it develops brand benefits similar to those that consumers associate with already well-established brands.

The rationale for the licensor to license a product is linked to brand extension and the enhancement of brand image and goodwill at a consumer level without having to invest in the development, production, or marketing of a new product that may be outside the core competency. Furthermore, the licensor receives legal protection, since licensing a brand for use in certain product categories prevents potential competitors from using the brand name to enter those categories.

Definitions
While licensing is a simple concept, understanding the licensing industry lexicon is an important first step. Licensing basics are provided here to get you started. If you would like more in-depth information, there are several books available on the subject, and you can visit the Licensing Industry Merchandisers' Association website.

Licensing
The process of leasing a legally protected (trademarked or copyrighted) intellectual property. An intellectual property can be a name, likeness, logo, graphic, design, slogan, signature, character, or a combination of several of these elements, in conjunction with a product or a product line. An intellectual property can also be licensed for many non-product purposes, such as for a promotion or a service.

Licensor
The owner of the Intellectual Property.

Licensee
The company/entity who acquires the contractual rights to license the Intellectual Property.

Licensing Contract
An agreement between the licensor and licensee granting legal permission for the licensee to use the licensor’s Intellectual Property. The document includes specific terms and conditions, such as scope of rights, territory, length of term, and financial remuneration to the licensor.

Royalty
The basic component of financial remuneration paid by the licensee to the licensor, ranging anywhere from 3% to 15% (depending upon the product category) of the licensee’s sales of the licensed products. In addition, a guaranteed minimum royalty, or guarantee is typically required, payable to the licensor irrespective of whether the license results in sales. A percentage of the guarantee is normally paid as an advance upon execution of the contract.

The basic component of financial remuneration paid by the licensee to the licensor, ranging anywhere from 3% to 15% (depending upon the product category) of the licensee’s sales of the licensed products.   In addition, a guaranteed minimum royalty, or guarantee is typically required, payable to the licensor irrespective of whether the license results in sales. A percentage of the guarantee is normally paid as an advance upon execution of the contract.