To Build a Great Licensing Partnership, Discuss Expectations Early
Join us at Entrepreneur magazine's Growth Conference, Dec. 15 in Long Beach, Calif. for a day of fresh ideas, business mentoring and networking. Register here for exclusive pricing, available only for a limited time.
Angst is normal when entering into a licensing agreement the first time. What does the other party expect from the partnership? How demanding will meeting the deal terms be on our organization? How can I ensure the agreement enables us to achieve our goals?
For the most part, licensors - the brand owners - want their licensees focused on manufacturing, marketing and commercializing approved products as quickly as possible. Licensees - the manufacturers - desire carte blanche use of the licensor’s brand with minimal disruption and meddling.
Related: Licensing Your Product
That lack of alignment often leads to frustrating losses of time and money. The likelihood of a successful outcome is greatly improved when each party understands the other's goals and expectations.
Expectations of licensors. Licensors expect licensees to invest in the category they license by working hard to understand the essence of the brand and developing their licensed product in a way that captures that essence. The licensed products should connect with the consumer both functionally and emotionally. If the licensee does this, the products will be approved without delay or difficulty. This commitment takes time and money. Both parties want to commercialize the category as soon as possible but the licensor expects the licensee to start with building the brand into the product first. That includes:
- Brand enhancement in the licensed category. The licensee should develop products that reinforce the brand’s consumer promise.
- Functional benefit brand connection. The licensee should understand the functional benefits (speed, durability, intuitiveness, etc) of the brand and design the product with these attributes.
- Emotional brand connection. The licensee should understand the emotional benefits (trust, control, happiness, etc) of the brand and design the product to develop these over time.
- Award winning product. The licensee should strive to market great products that will get recognized by organizations such as the International Licensing and Merchandisers Association.
The licensee must ensure staff working on the license is familiar with the contractual obligations to ensure:
- The brand is protected.
- The brand treatment is in compliance with Visual Identification System (VIS).
- Social compliance such as there is no child or slave labor.
- Quality compliance such as no toxic heavy metals are used.
- Audit compliance to protect against unauthorized sales.
- Product approval at each stage from concept to prototype and final production.
- There are no sales of either unapproved product or approved product sold in unauthorized channels or regions.
- The royalties are accurately reported and paid on time.
- There is accurate accounting on all sales of licensed product.
With an approved product in hand, the licensor will expect the licensee to commercialize their products expeditiously. This includes:
- Product on shelf in all authorized channels. Typically, a channel is deemed to be commercialized if there is licensed product in two of the top five retailers.
- Marketing support for the licensed product. The licensee should dedicate a marketing budget to the sale of the product in the category.
- Minimum sales targets achieved by channel. In total, the sale of licensed product within a channel meets or exceeds the minimum sales targets outlined in the licensing agreement.
Finally, the licensor will expect the licensee to meet or exceed the projected sales targets in the category. This will manifest itself in award winning products that meet or exceed annual sales and royalty targets.
Expectations of licensees. Licensees typically, and rightfully, expect licensees to achieve sales growth within existing channels and or the opportunity to enter a new channel or market. To accomplish this objective, licensees expect the brand they are licensing:
- Has a high level of awareness and brand preference.
- Will open doors at new new retail stores and more doors at existing retailers.
- Will help them meet, then exceed, their business objectives.
Licensees expect the licensor, or their agent, will run a simple, straightforward licensing program that will not burden their organization.
Finally, licensees expect the licensor to approach the licensing relationship with a win-win attitude so they move quickly as opportunities present themselves. Because licensing contracts obligate the licensee to specified sales targets and royalties, the licensee's goal will be to meet these requirements as soon as possible. Licensees are looking for:
- Minimal administrative requirements. Licensees typically have lean organizations. Administrative burdens such as weekly, monthly or quarterly meetings or reports can severely hamper their resources.
- Straight forward and timely product approvals. Conflict can arise when a licensee is unable to take advantage of an opportunity because their product does not get timely approval.
- No contractual “gotchas.” Many licensees without in-house attorneys or staff dedicated to contract negotiation may perceive wording in a contract to be limiting or punitive. Therefore, it is important for the licensor to point out any areas where the licensee may not be clear regarding their obligations.
- Sales support. Licensees will look to the licensor for help driving sales, including introductions to new customers, presentation materials, research data and joint calls.
- Brand support. Licensees expect licensors to provide them with market research that helps them market the licensor’s branded product.
- Marketing support. Licensees will expect the licensor to support the brand with marketing budgets. While the licensor will look to the licensee to support the category, the licensee should be aware of how much advertising and promotional dollars the licensor will dedicate to the overall brand.
A good understanding of each party’s expectations ensures the program gets off on the right foot to achieve the success both the licensor and licensee envisioned when they first got together.
Related: Product Licensing Basics