Brand Licensing 101

Brand Licensing 101

A General Overview of Brand Licensing

Have you ever wondered how Coca-Cola, a company so focused on meeting your beverage needs, sells Coca-Cola branded tee shirts or caps? Or how does Newell Rubbermaid provide you such a range of products under a single brand name? While companies sometimes manufacture these items themselves, at other times they may choose to allow a manufacturer to produce and market these products under their brand names. In return for the use of their brand, these companies charge the manufacturer a fee. Such an arrangement is called brand licensing and can be defined as an agreement that authorizes a company that markets a product or service (a licensee) to lease or rent a brand from a brand owner who operates a licensing program (a licensor) in return for a portion of the sales revenue (royalty).

This module 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.

To understand brand licensing better, one must understand the two component parts separately – brand and licensing. Let's begin with understanding the meaning of 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. 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.

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, consumers can begin to rely on the brand to connote not only a product's value but also its reputation. If consumers like 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 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 the existing BMWs. 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 and durability. These same attributes can also be of benefit to businesses. Many consumers look to UPS for their shipping needs, and they prefer doing business with companies that ship via Brown. UPS adds value to its client companies, with a reputation for making shipping simple, easy, reliable and effective.

Why do companies license out their brands?

Companies license their brands for a variety of reasons. Licensing enables companies with brands that have high preference 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. Let's take a deeper look at the benefits that make licensing so attractive to brand owners.

By licensing their brands, companies are able to satisfy consumer needs in categories that are not core to their business. When Apple launched the iPod a number of years ago they revolutionized the way in which people listen to their music. The iPod was so successful that its quick acceptance created an immediate need for accessories such as armbands, adapters and auto chargers. Apple could have chosen to manufacture and distribute these accessories themselves. Instead, Apple decided that these accessories were not core to their business expertise and therefore chose to satisfy the need through licensing. By licensing the iPod brand, Apple enabled a tremendous number of companies to produce all kinds of terrific products to make the iPod more user-friendly and to enhance the listening experience. Examples of licensed products for the iPod include the Bose Sound System with iPod docking station, the Nike+ running shoe, auto adaptor kits, armbands and many other products. All these accessories are sold by licensees.

Some licensors see licensing as an opportunity to "test" the viability of a new category without having to make a major investment in new manufacturing processes, machinery or facilities. In a well-run licensing program, the brand owner maintains control over the brand image and how it's portrayed (via the approvals process and other contractual structures), positioning itself to reap the benefit of additional revenue (royalties) and brand exposure through product displayed through new channels and incremental shelf space. For example, Rubbermaid gained additional revenue and brand presence by licensing kitty litter containers that are sold in the mass channel core to Rubbermaid, and in specialty pet shops core to United Pet Group, the licensee.

In return for the use of their brand, companies charge manufacturers a fee in the form of royalty payments and guarantees that constitute a source of revenue for the company. Royalty payments are typically calculated as a percentage of wholesale revenue while guarantees are usually determined on an annual basis and calculated as a percentage of the anticipated per annum royalty.

The retailer earns revenue on licensed merchandise sold at the market price. The licensee earns wholesale revenue, which includes the cost of making the goods plus a markup. The licensor in turn receives a percentage (predetermined in the licensing contract) of the wholesale revenue as a royalty.

A well-managed licensing program can generate a substantial and growing stream of incremental royalty revenue that will complement a company's core business.

Brand licensing also provides marketing support to the core business. In many instances, the licensee will be required to provide marketing dollars to support the licensed category. This marketing expenditure, in turn, provides additional overall brand presence. For example, if a licensee promotes its product in a weekly circular and gains an end aisle display, the advertising and retail display not only generate product sales, but they also promote the overall brand. An array of toys or apparel tied to a movie, sitting on a store shelf, serves to promote the movie itself. A sports fan wearing a sweatshirt with the logo of his favorite team expresses his enthusiasm about the team, while subtly promoting the sport, the league and the team to anyone who passes by him. The same goes for a beer brand. Seeing a store display of glassware carrying a well-known beer logo, or walking into a neighbor's home and seeing the glasses on his bar, reinforces the brand image, supporting the brand's overall marketing efforts.

For brand owners who are confident that their brand has permission to enter a category that is controlled by their competitor, licensing can be a smart and effective way to combat a rival where it matters most. By taking the offensive, the brand owner-turned-licensor will force the competitor to take its eye off of its core business. This can have a significant impact. For example, what if adidas chose to license a shoe manufacturer to compete directly against Nike's Cole Haan brand?

Many licensees are experts in their own right; they offer the licensor access to their intellectual property, product design and marketing expertise. Moreover, licensors can tap into their licensee's supply chain management knowledge, retailer relationships and strategic alliances. Over time, licensors and licensees can hold knowledge management workshops and forums where they can exchange techniques, processes and ideas that not only grow the licensed category, but also other areas of their businesses.

Finally, for brand owners (particularly those doing business in the global marketplace), licensing their registered trademarks in multiple markets is a way to protect the brand from being used by others without authorization. When Coca-Cola first started licensing, the legal department managed the program specifically to protect the company's trademarks in countries throughout the world.

How does the process of brand licensing work?

Brand licensing can be very beneficial for both brands and licensees if done in a step-by-step manner. We have divided the brand licensing process into eight steps. This module will provide you with an overview of each of the steps.

The brand licensing process starts several months prior to the commercialization or launch of the licensed product. The figure below tells us the different steps involved in the brand licensing process. Licensees and licensors should also keep in mind that missing crucial deadlines such as a line review can push the product launch out by up to a year.

Dashboard reviews

On a monthly basis the licensor will review the business estimate against the plan. Thus both the licensee and the licensor should track the actual sales and royalties versus those projected in the annual business plan. Subsequent monthly projections should be laid out with justifications for any increases or decreases relative to the business plan and the most recent estimate. The results of this will be used to maximize opportunities within the calendar year and to develop the business plan for the following year. Similarly, there is a quarterly and an annual review that compare the sales performance with the previous quarter (or year).

Audits

Each licensing agreement provides the licensor with the rights to audit its licensee. These audits include a review of the licensee's financial and product development records, as well as social compliance audits of its approved factories. Social compliance audits are conducted whenever a new licensee or facility is made part of a licensing program. In addition, business audits are performed routinely to ensure the licensee is complying with the terms of the agreement. Typically audits are conducted by approved third parties.

Any discrepancies found in a social compliance audit that can be harmful to the facility's employees must be resolved before the facility can be used. Others may be resolved on an ongoing basis. Licensee business audits that turn up any inconsistencies are reviewed for the seriousness of the error. A discrepancy related to selling unapproved product or selling product in an unauthorized method can result in termination. In addition, there are significant penalties for sales of unapproved or unauthorized product. Royalties related to these sales typically are equal to the sales value themselves. Minor infractions are resolved by correcting the problem in a prudent and expeditious fashion.

Summary

For most brand owners, Brand Licensing is an under-utilized method of entering a new product category. However, we hope that through this module we have been able to illustrate what Brand Licensing is and the numerous benefits that it has to offer both to licensors and licensees, as well as describe the entire brand licensing process as we have seen it work in the real business world.

Needless to say, the entire process is lengthy and time consuming, with efforts starting as early as 24 months before you can see product on the shelf. 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.

This module attempts to give you an overview of the Brand Licensing process. If you think this may help your manufacturing business achieve new heights, or help your brand expand into new categories, we encourage you to try out our other modules that talk about each process in greater detail, including determining product categories for brand extension, prospecting licensees, understanding deal terms and negotiating contracts, orientation and business planning. For the complete Brand Licensing 101 report or to receive a summary of all our modules, click on the URL: http://brandlicensingexpert.com/products

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Pete Canalichio is the CEO of Licensing Brands Inc. ( www.brandlicensingexpert.com) and author of numerous whitepapers, handbooks, and guides on brand licensing. Reach him via pete.canalichio@brandlicensingexpert.com.