The brand licensing industry has experienced tremendous growth over the last few decades, in part, because it has evolved from a fun marketing tactic into a proven growth strategy that can separate a brand from its competitors and define its voice in the marketplace. While the idea of extending a brand with new products and experiences may be exciting to both licensees and brand owners, it is important to remember that it isn't free or easy. To launch a licensing program successfully, all parties should understand the financial factors they will encounter. Below, find a list of a few financial concepts crucial to the brand licensing process.
As soon as you decide to license your brand, you should seek out a lawyer that specializes in licensing or IP protection. If you don't formally protect your IP, you leave the door open for others to gain unrestricted access to your brand, likeness, and assets, without getting anything in return. The best thing you can do is seek out an intellectual property lawyer and file the correct paperwork as early as possible. Ask about trademarks, copyrights, and more to make sure your brand is protected before a single product hits store shelves. The cost of finding an intellectual property lawyer can vary depending on where you live and the scope of your portfolio. In New York City, for example, lawyers charge $750 an hour or more.
Licensing a product is no easy process, in fact, the most successful licensed products have undergone significant research and development trials to ensure success at market. Market research will help you determine if there is an interest in your product, where your products will perform best (i.e., high-end department store vs. local dollar store) and how much you can expect to profit from the project. Licensing agents with insider knowledge of a given market can help answer those questions. However, you may want to conduct more thorough tests such as producing samples, organizing focus groups, or more, all of which will come at a cost.
Setting the price for your products can be complicated, with factors including uniqueness, function, and competition impacting rates. The amount of money you choose to sell your product for will ultimately affect the overall profitability of the program, and factors such as royalty rates and more. While you may be inclined to set prices as high as the market will allow, keep in mind that products improperly priced may turn off consumers and items priced too low may send the wrong message about your overall value or exclusivity.
In an ideal world, products would hit the market and sell without the need for advertising. In reality, if a brand owner wants their new product to be successful, they’ll have to be willing to shell out a decent amount of money to an in-house or outside agency to generate buzz around their new product. Traditional marketing methods include TV and radio ads, while newer tactics include influencer marketing and pop-ups.
Though less tangible, it is crucial that you think of time as a financial factor in the brand licensing process. The amount of time it takes your lawyer to draft paperwork, the time needed for research and development, the time it takes to source materials for manufacturing and, the time it takes for products to hit store shelves will all determine how much profit you make on a given product. Some good take three years to develop, would that long of a waiting period adversely affect your business? Ask yourself how long you can fund a project and identify tools that will help you save time and maximize profits.
Licensees may have to pay an “all-in” cost to purchase a brand’s IP or assets. The fee may cover marketing materials, commissions, discounts and sales costs. In certain cases, the all-in fees may save the licensee the hassle of cutting royalty checks if the product turns out to be successful. Though less common, more successful manufacturers may offer an equity stake in their business.
Royalties are usage-based payments that are made to brand owners for the ongoing use of their IP or assets. This payment is either a variable or fixed amount and depends on the percentage of gross revenue gained by the owner's assets. For a brand owner, signing a royalty agreement may help the brand expand into a new market or innovate in an existing category, and help a licensee access branding it may not have the means to purchase outright. All royalty agreements should clearly outline the duration of the terms, provisions for termination, and conditions required for renewal.
The minimum guarantee is the number you promise to pay the company that is licensing its property, regardless of sales. The minimum guarantee must be paid, no matter what and is calculated based on predicted sales. Ten percent of your estimated revenue is typical, and you must work to determine your capacity for sales accurately.
While you want to be positive, overestimating can leave your business in danger and turn brand owners off from doing business with you. The payment of the minimum guarantee can be spaced out over an established amount of time. However, most companies will expect an advance, typically around 25 percent.
An informed company will request that you provide a "letter of credit" from your bank. In turn, the bank will then reserve your pre-determined minimum guarantee in a separate account that you cannot access for the duration of the contract. By doing so, a company guarantees that it will receive payment without having to take legal action if things are to go south. The letter of credit, however, may cost you to be established. If your company is exceptionally well established and has an excellent financial record, a letter of credit may not be required.
Licensing your brand comes at a cost, but don't let that deter you from expanding your brand. The monies invested will return to you if you protect your assets early, seek adequate legal counsel, establish minimum guarantees, royalties and prices, and manage your time wisely.
"Often companies see licensing as an inexpensive business model to expand and internationalize their business, but it definitely comes at a cost, “ says Timo Olkkola, CCO, Flowhaven “Licensing is a relationship model, where the brand owner has to be in charge of the brand's cohesion and saturation. This requires a person or licensing team inside the company to create and nourish those relationships. Brand licensing is also a supportive model and should always piggyback existing brand awareness."