Product Licensing Basics

What does it take to transform your product from a mediocre seller to a megahit? The answer could be as simple as inking a licensing deal.

Without the name of a popular baseball team on it, Bob Diee's baseball cap-shaped computer mouse might have done little more than collect dust in the back of his garage. Fortunately for Diee and his partner, Glenn Luthy, they had a hunch that a computer mouse would sell much better if it had the name of a favorite sports team on it.

For Diee and Luthy, obtaining licenses from both the minor and major leagues, as well as from university baseball teams, has proved to be the key to their product's success--and they expect those licensing agreements to help them achieve $1.5 million in sales for 2007, only their second year selling the device.

So if you, too, would like to slice off a bit of this billion-dollar industry, we're here to help. And a good place to start is with a firm understanding of what licensing is in the first place.

Start at the Beginning
Bear in mind, there's a difference between licensed products and promotional materials. Licensed products are items that people will pay money for, not simply accept as free giveaways. Therefore, your product needs to be targeted at a specific demographic that will pay top dollar to own it. And you'll want to obtain a license that you can tie in to that demographic's lifestyle.

"If you can obtain a license linked to a brand, TV series, sports [team]--something evergreen [that will stay popular] is preferable--that's the route to go," says Meyer Janet, president of Design Plus, an Atlanta-based licensing boutique specializing in brand building, product development and business strategy. "What you don't want to do is pick up a license for something that isn't well-known, thinking 'Well, one license is better than none.'"

Diee and Luthy first approached the NFL when they decided they wanted to put sports teams' names on their computer mouse. The NFL passed. So did the NBA. Next were the minor leagues--and they loved the idea. "Once we had that [license], we went to the major leagues," says Diee, 47, who started Randolph, New Jersey-based MouseSmart Inc. with longtime friend Luthy, 39, in 2004. Initially, Major League Baseball was reluctant: Although the partners had a patent for their mouse, they had no track record, no sales and barely any product samples. But after several months of persistent e-mails and phone calls, they finally won over MLB. Uni-versities followed, though Diee admits it might have been better to start at the university level, where the process is a bit easier and the royalties are lower. (More on royalties later.)

The next step was getting the product into appropriate retail outlets. What really helped Diee and Luthy in that regard was attending the Baseball Winter Meetings trade show in Dallas in December 2005. At the show, the partners got some leads that turned into orders, and they bombarded buyers with samples and follow-up calls. Finally, they got their big break when Champs Sports agreed to carry the computer mouse in its stores. Now it's available in at least a dozen retailers nationwide, including Yankee Stadium, as well as on several websites. They've secured licenses for all of MLB, and they've added 15 university baseball teams so far.

Diee and Luthy's approach was unconventional in that they had no distribution plan before securing licenses. "Under normal circumstances, a licensor will not grant a license to a business that does not have a retail distribution network in place," says Janet.

Diee had to rely on proving himself and his product when approaching licensors--specifically, the account manager for licensing at each organization. Be prepared to demonstrate that you have done your research, that you have the financial capabilities to make the product a success, and that you have a marketing plan to sell the product at retail. "A strong business plan would make an account rep more comfortable with an applicant," says Diee. "Knowledge of the markets, customers and competition also helps. Entrepreneurs should be as skilled at selling themselves and their company as they are at selling their product."

Selling in retail outlets isn't the only option. You can also sell your licensed product on your own e-commerce site. That's the route Jeff Kendall and his wife, Maureen, 32, have taken with most of their licensed infant and toddler apparel, which bears the names and images of popular skateboard brands and punk rock bands. The Kendalls sell about 20 percent of their products in skate shops and children's clothing stores, but they've found the greatest success selling directly to consumers. Explains Jeff, 39, a former professional skateboarder who started San Jose, California-based Little Ruler in 2004, "Consumers are not used to going to skate shops to find this kind of clothing."

Keep in mind, you want your licensed product to not only sell, but also be worthy of selling at a premium. There's a royalty to be paid, and you need to recoup the costs. "If you have an unlicensed T-shirt selling for $10, then you add a license and still sell it for $10, you're losing money and you might as well not do the licensing deal," says Janet.

Little Ruler, which brings in just under $1 million annually, justifies its higher price point with the fact that its licensed products have both the name recognition and the desired lifestyle built right in. After all, how else could you sell a onesie for $18.95?

The Royal Treatment
Speaking of royalties, get a good handle on them. You commonly have both an advance royalty, which is a flat fee paid upfront, and ongoing royalties, which are paid as a percentage of every sale you make. The advance royalty is basically a guarantee that the licensor will get some money even if your product doesn't sell. Then, if and when your product sells, the licensor will get a percentage of the sale--on average, about 5 percent of the wholesale price of each product sold.

The licensor usually decides what the royalties will be, and those rates are pretty firmly set. So make sure you understand what they are and that they're spelled out in your licensing agreement to avoid any surprises later. In fact, that agreement is crucial in determining not only what the licensor receives, but also what rights you get. "Regardless of whom you're licensing from or what you're trying to license, the written licensing agreement [should] spell out what the rights are," says Cami Dawson Boyd, head of trademark and copyright practice at Dallas law firm Munck Butrus PC.

Seek legal advice if you're unclear on any aspect of the licensing agreement. The help you get now can save you money later, or even make you some if you can set yourself up for success with a favorable licensing agreement. And if you're put off by the idea of paying royalties, keep in mind that both parties stand to benefit. For the licensor, the advantage is clear: By granting you a license, it has eliminated the manufacturing and mar-keting costs associated with launching a brand-new product--and the royalties translate directly into profits. And you've added value to your product that will translate into sales.

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Karen E. Spaeder is a freelance business writer in Southern California.

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This article was originally published in the February 2007 print edition of Entrepreneur's StartUps with the headline: License to Profit.

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