Definition: A business arrangement in which one company gives another company
permission to manufacture its product for a specified payment
There are few faster or more profitable ways to grow your
business than by licensing patents, trademarks, copyrights,
designs, and other intellectual property to others. Licensing lets
you instantly tap the existing production, distribution and
marketing systems that other companies may have spent decades
building. In return, you get a percentage of the revenue from
products or services sold under your license. Licensing fees
typically amount to a small percentage of the sales price but can
add up quickly.
For example, about 90 percent of the $160 million a year in
sales at Calvin Klein Inc. comes from licensing the designer's name
to makers of underwear, jeans and perfume. The only merchandise the
New York-based company makes itself, in fact, are its women's
apparel lines. Many large corporations, such as the Walt Disney
Co., generate less significant proportions of their revenue from
licenses. IBM, after energizing its efforts to license its
thousands of technology patents a few years ago, now attributes $1
billion a year of its corporate sales to licensing. The downside of
licensing is that you settle for a smaller piece of the pie. Calvin
Klein-branded products, for example, generate $5 billion in sales a
year, the vast majority of which goes to licensees and retailers.
At the same time, licensing revenue tends to be high-margin, with
almost all the fees from licensing flowing straight to the bottom
line.
On the other side of the coin, you could be the one with the
interest in licensing the high-recognition brand name of another
company. To many, it might seem like the key to a gold mine:
Putting a Notre Dame logo, a Lion King character or a Star Wars
graphic on your product means guaranteed success, right?
For a sure thing, prepare for a frustrating search. But if
you're willing to put some time and effort into making your product
work, buying the licensing rights to a well-known product or name
can substantially increase your chances for success.
Licensing is a billion-dollar retail market worldwide. But a
license isn't a prescription for instant success. It gives you the
borrowed interest of a name that is either unique or has some
consumer acceptance, but it still takes good selling and marketing
to succeed. A license is, in essence, a tool, and when used well,
it's an extremely cost-effective marketing tool.
Licensing offers three major advantages. First, it may mean you
have something unique your competitors don't. Second, it may mean
getting a little better margin because it's unique. And third, it
may mean that 10 percent of the retailers you call on that you've
never been able to sell to will finally take a look because you
have something different. And when that happens, you can sell the
rest of your line.
Who can obtain a licensing agreement? The list runs the gamut
from a multinational conglomerate to a one-person operation. But in
general, a licensor looks for the strongest company in terms of
finances, manufacturing and marketing. The good news for small
business is that strength is not necessarily measured in dollars or
longevity.
Before you tackle the licensing industry, you need to have your
own house in order. Make sure you have or can get financing, ensure
that your manufacturing capacity is up to snuff, and establish
distribution channels. It's also a good idea to try to establish a
sales history for your products. Once this is accomplished, then
decide what licensing products you want to target.
Once you know who you want to target, the next step is talking
to the company or its representative and convincing them of your
product's potential. Large organizations will most likely have
people who oversee licensing and marketing or will have turned
those functions over to a licensing agent. You can determine the
proper person to speak with by contacting the company directly to
ask about licensing opportunities.
Deciding which licensor to approach means evaluating your
strengths. The bigger and more popular the property is, the more
it's going to cost to secure the licensing rights. Beginners should
probably start out small to learn the ropes.
Once you begin approaching companies, many will ask you to fill
out a licensing application, and all will ask for a business plan
detailing how you propose to market the product, who your target
audience is and what you estimate sales could be. Most licensors
will also request product samples.
What happens after the licensor says yes? Most, if not all,
companies will ask for a minimum guarantee of sales covering the
life of the contract paid in advance or in installments, and will
charge royalties as well. Royalties are a percentage of sales paid
by the licensee to the owner of a property or a designated agent,
usually based on the net wholesale selling price. Some licensors
are willing to negotiate these fees; others are not.