Companies extend their brands via licensing 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 can enter new categories practically overnight, gaining them immediate brand presence on store shelves and often in the media. In fact, there are a significant number of benefits that make licensing attractive to brand owners.
By licensing their brands, companies can satisfy consumer needs in categories outside their core business. When Apple launched the iPod a number of years ago they revolutionized how 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 making 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 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, their licensee.
Determining a brand’s extendibility and the product categories in which it can sell takes understanding the brand’s vision, architecture and positioning and the value it provides. Before brands license products into new categories they need to conduct market research, including a review of secondary research, focus groups, interviews and field surveys to clearly understand what consumers believe about the brand and what their expectations are. Each category should then be evaluated on the prominence of brand associations, favorable associations inferred by the extension and uniqueness of association from the new category.
Once the list of possible extensions has been trimmed to those qualified and most lucrative, brand owners should then conduct an industry and competitive analysis of each category to determine the size of the market, competitive set, industry growth rate and competitive nature. This analysis will enable the brand owner to determine whether it makes sense to even enter the category. Techniques to use include a Strengths – Weaknesses – Opportunities – Threats (SWOT) analysis or a Porter’s Five Forces analysis. These methods are helpful in evaluating a business or a project from a strategic point of view. They involve specifying the objective of the venture and identifying the external and internal factors that are favorable or unfavorable to achieving that objective and to determining the attractiveness of the venture.
After this analysis is completed, the brand owner is empowered with a prioritized list of potential categories from which to move. At this point, he should assess whether it is better to execute the product in house or issue a license to a manufacturer which can then take the product to market. We will leave how to select the ideal licensee for a future article.