The economics of successful licensing

Referring to who are the players, they mainly comprise the Licensor and the Licensee, where the former is the giver of the rights and the latter is the renter of the rights. We can classify the Licensor under the headers like Owner of the Property, the Living Celebrity, the Deceased Celebrity, Sports Star, Movie Star, the TV Show or Movie, etc. On the other hand a Licensee can be classified under the headers like a Manufacturer, a Department Store, a Fast Food Chain, an Airline, etc.

Coming together

These two players – Licensor and Licensee, come together to create a partnership with a view to enhance sales. The Licensor wants to be paid generously for the use by a Licensee of an image or name (the trademark). The Licensee wants to pay as little as possible to the Licensor because of the upfront cost of research and development, marketing, production and distribution. The next step is the Contract Negotiation which consists of royalty rate, up-front payment (advance) and minimum guarantee.

Common question

The following question invariably will be asked: “What is the real value of the property, and what should we pay or receive for the right to use it?” It is difficult to properly determine the royalty rate or minimum royalties for a licensed property without a solid understanding of the economics involved in supporting the brand or character. Without this information, it is difficult for the licensor to know whether or not it has entered into a profitable agreement. A formal valuation can help the licensor evaluate the financial aspects of the agreement and provide the information nec-essary to negotiate beneficial deal terms.

The final agreed upon Guarantee is based on future sales and performance of the licensed product at retail. The payments can be made in various ways: Monthly, Quarterly and Yearly.  If payments are late, there are penalties in the form of interest, loss of products or complete termination.  A Licensor also has the option to perform an audit on a Licensee. This is a good business practice to instill in a licensing programme approximately once per year. During this process, the Licensor or Auditors should visit the office, the stores, and the manufacturing facility along with reviewing the books, all financials, the approval process and confirming that all obligations with the contract are being met.

LICENSOR                                                         EXAMPLE
Owner of the Property                            PepsiCo,
City of Beverly Hills, Heineken
The Living Celebrity                                 Donald Trump
The Deceased Celebrity                         Marilyn Monroe
Sports Star                                                      Harbhajan Singh
Movie Star                                                       Denise Richards
The TV Show or Movie                            Tin Tin,
                                                                                Men In Black,
                                                                                Top Gear











The outcome

The outcome of a successful licensing programme is a quality programme. The Licensee needs to be able to effectively take the logo and produce a product with that mark in a way that entices consumers to buy the item. For instance, with our Beverly Hills programme, we have a Licensee that has used the logo to create a high-end line of perfumes, set to launch this September.              

The author is the President, Bradford License India   

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