How Licensing Aids
Licensing is defined as the method of leasing a copyrighted or trademarked entity for use with a product or service. It might be any assets from the signature of someone famous to a picture, graphic or logo. A business contract is drawn up between the owner of the trademark or copyrighted material and the person who wants to lease it. These individual are called the licensor and licensee respectively.
Why would anyone want to license an entity? Simple reply is to get more sales. Several brands attract such high customer loyalty that you could sell nearly anything once you have that image or logo or signature on your product.
The licensor is usually motivated by the cash they could earn but this is not all the time the sole reason. Entering into the market could be a bigger issue. For example, if a new movie is being produced, the producers know that having heaps of toys or goods related to the movie in shops will help increase the hype around launch date hence leading to a rise in box office takings.
Licensing also gives the licensor a chance to move into related product parts without having to incur the cost of product design or development. They may be looking to enter into new markets for example a US product launching in China but owing to limited knowledge of the new market they will want to test it out first through a relatively low risk inexpensive route such as licensing. If the new market likes the product, they know they have only rented the brand for a short length of time and are collecting a percentage of sales. Once the time frame is up they can move into that market themselves. If the new market isn't thriving, they have still got revenue from leasing the brand but they haven't wasted any money testing an unresponsive marketplace.
Certainly the licensor needs to guard their brand first and foremost so there will be very strict quality controls put in place to cover this issue. The other ordinary elements to a license will be a specific geographic location i.e. you cannot just buy and sell wherever you want. The deal will also stipulate the time the license has been granted for, the stipulations for renewal, the agreed contract price and terms of payment - this is normally a percentage of sales subject to a minimum value i.e. you complete paying a specified minimum amount even if you don't sell anything. But if your product sales take off, you will pay a certain percentage back to the licensor. There will also normally be an agreement over how many licenses will be issued for that particular territory i.e. you could only have a license or be allowed to license more people.
People who want to take up a licensing contract do so because they think that they have found an ideal market for that product but couldn't finance the operation themselves. Or they may have developed a new product that will do much better having been linked with that brand name for even a short period of time. Building status in the business is important, almost as important as being 100% sure you comprehend the licensing process and know exactly what you are getting into before you sign that contract.
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