There are few faster or more profitable ways to grow yourbusiness than by licensing patents, trademarks, copyrights,designs, and other intellectual property to others. Licensing letsyou instantly tap the existing production, distribution andmarketing systems that other companies may have spent decadesbuilding. In return, you get a percentage of the revenue fromproducts or services sold under your license. Licensing feestypically amount to a small percentage of the sales price but canadd up quickly.
For example, about 90 percent of the $160 million a year insales at Calvin Klein Inc. comes from licensing the designer’s nameto makers of underwear, jeans and perfume. The only merchandise theNew York-based company makes itself, in fact, are its women’sapparel lines. Many large corporations, such as the Walt DisneyCo., generate less significant proportions of their revenue fromlicenses. IBM, after energizing its efforts to license itsthousands of technology patents a few years ago, now attributes $1billion a year of its corporate sales to licensing. The downside oflicensing is that you settle for a smaller piece of the pie. CalvinKlein-branded products, for example, generate $5 billion in sales ayear, the vast majority of which goes to licensees and retailers.At the same time, licensing revenue tends to be high-margin, withalmost all the fees from licensing flowing straight to the bottomline.
On the other side of the coin, you could be the one with theinterest in licensing the high-recognition brand name of anothercompany. To many, it might seem like the key to a gold mine:Putting a Notre Dame logo, a Lion King character or a Star Warsgraphic on your product means guaranteed success, right?
For a sure thing, prepare for a frustrating search. But ifyou’re willing to put some time and effort into making your productwork, buying the licensing rights to a well-known product or namecan substantially increase your chances for success.
Licensing is a billion-dollar retail market worldwide. But alicense isn’t a prescription for instant success. It gives you theborrowed interest of a name that is either unique or has someconsumer acceptance, but it still takes good selling and marketingto 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 youhave something unique your competitors don’t. Second, it may meangetting a little better margin because it’s unique. And third, itmay mean that 10 percent of the retailers you call on that you’venever been able to sell to will finally take a look because youhave something different. And when that happens, you can sell therest of your line.
Who can obtain a licensing agreement? The list runs the gamutfrom a multinational conglomerate to a one-person operation. But ingeneral, a licensor looks for the strongest company in terms offinances, manufacturing and marketing. The good news for smallbusiness is that strength is not necessarily measured in dollars orlongevity.
Before you tackle the licensing industry, you need to have yourown house in order. Make sure you have or can get financing, ensurethat your manufacturing capacity is up to snuff, and establishdistribution channels. It’s also a good idea to try to establish asales history for your products. Once this is accomplished, thendecide what licensing products you want to target.
Once you know who you want to target, the next step is talkingto the company or its representative and convincing them of yourproduct’s potential. Large organizations will most likely havepeople who oversee licensing and marketing or will have turnedthose functions over to a licensing agent. You can determine theproper person to speak with by contacting the company directly toask about licensing opportunities.
Deciding which licensor to approach means evaluating yourstrengths. The bigger and more popular the property is, the moreit’s going to cost to secure the licensing rights. Beginners shouldprobably start out small to learn the ropes.
Once you begin approaching companies, many will ask you to fillout a licensing application, and all will ask for a business plandetailing how you propose to market the product, who your targetaudience is and what you estimate sales could be. Most licensorswill 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 thelife of the contract paid in advance or in installments, and willcharge royalties as well. Royalties are a percentage of sales paidby the licensee to the owner of a property or a designated agent,usually based on the net wholesale selling price. Some licensorsare willing to negotiate these fees; others are not.
