Licensing: basics and background

When people think of licensing, usually sports or entertainment licensing is the first thing that comes to mind but there is far more to the licensing business than that. Licensing is no longer simply the domain of a few specialized people. Nowadays all major companies and the media consider licensing a significant marketing tool. One could even say that it has become one of the most powerful contemporary forms of marketing and brand extension and that it is being used in ever increasingly sophisticated ways (Revoyr, 1995, p. 1). Before clarifying what the business of licensing is all about, there is a clear need for some primary information. Therefore some definitions and basic terms that are being used throughout this thesis will be given and explained at this point.

Terms and definitions

Licensing is the process of leasing a legally protected (that is, trademarked or copyrighted) entity known as property which could be a name, likeness, logo, graphic, saying, signature, character or a combination of several of these elements, in conjunction with a  product or a product line (White, 1990, p. 5). Surely, a property can also be licensed for many non-product purposes as well, as for example a promotion or a service, but as the present thesis focuses mainly on merchandise licensing, these aspects will be ignored here.

Licensing is usually based on a contractual agreement between two business entities: the owner or agent of the property, also known as the licensor and the renter of the rights, and the prospective licensee who is usually a manufacturer. The formal permission to use the owner's property is subject to certain terms and conditions, such as a specific purpose, a defined geographic area, and a finite time period (Raugust, 1995, p. 116). In exchange for granting the rights for a certain property to the licensee, the licensor obtains a financial remuneration. The basic component of this payment is the royalty, which is a percentage of the licensee's sales of products which are incorporate in the property rights. In addition to that, a guaranteed minimum royalty, the guarantee, is usually required (Raugust, 1995, p. 3). The licensee has to pay this guarantee even in the face of total failure of the property. A percentage of this guarantee is normally paid as an advance.

Characteristics

Today there are overwhelming licensing opportunities that did not exist a little more than a decade ago. The availability of licensed merchandise has proliferated over the last decade, and corporate America has finally recognized the value of its brand names developed over decades. Now these invaluable, easily identified marks are licensed as a cost-effective means of brand extension and additional consumer awareness for the primary brand. It is the popularity and familiarity of these marks that help otherwise undistinguished products to stand out from the crowd.

As mentioned previously, licensing is a marketing tool. It generates recognition, maintains ongoing brand awareness and can also reinforce brand image. By bringing the brand and its message into retail environment "a nontraditional venue for publicizing" and by using various other promotional and advertising vehicles, merchandise licensing is primarily a means of multiplying viewer impressions and expanding consumer association (Revoyr, 1995, p. 5). For example, a strong brand often evokes consumer associations that also might be desirable in other product categories. In order to take advantage of this value, a company may license its name, logo or other facets of its brand to another firm for use on their products and merchandise. In this manner merchandise licensing offers opportunities and benefits to both the owners of the properties as well as the manufacturers of the licensed goods. Through the usage of an already established brand name or character image which has been built up successfully over the years, licensing helps the manufacturers of licensed products use the brand identity to create immediate consumer awareness and quickly establish and reinforce brand awareness (Keller, 1998, p. 53). This can be accomplished without making an investment that would usually be required for launching and building up his own brand. This way the licensee's products instantly gain the benefits of the brand recognition and the brand image lent by the trademark or copyright, and the consumers will also be willing to pay more for the licensee's products. Furthermore, the brand benefits are realized instantly whereas for a new brand it could take years until it develops brand benefits similar to those that consumers associate with already well-established brands (Raugust, 1995, p. 11).

The rationale for the licensor to license a product is linked to brand extension and the enhancement of brand image and goodwill at a consumer level without having to develop, produce, or market a new product. Furthermore, the licensor receives legal protection, since licensing a brand for use in certain product categories prevents potential competitors from legally using the brand name to enter those categories (Raugust, 1995, pp. 6-10).

The economic advantage for the licensor lies within the profits from royalty payments. Spoken in financial terms, a company receives from the licensee an average royalty payment of about 5 percent of the wholesale price of each sold product. Due to the fact that there are no manufacturing or marketing costs, these revenues translate directly to profits (Raugust, 1995, pp. 6-11).

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