A company may choose to license its brand(s) when they believe there is strong consumer acceptance for brand extensions or products. For example, when Apple launched the iPod there was an immediate need for accessories such as headphones, charging and syncing stations and carrying cases. Apple decided not to manufacture these products and instead chose to have a licensee make the products. By doing so, Apple could offer branded “Earbud Headphones”, “iPod docking stations” and “iPod socks.” Each is made by a separate company but together offer the consumer an elegant solution. All of these accessories are sold by licensees.
Apart from benefits to licensors, there are benefits to licensees as well. Licensees lease the rights to a brand for incorporation into their merchandise, but do not share ownership in it. Having access to major national and global brands, and the logos and trademarks associated with those brands, gives the licensee significant benefits. The most important of these is the marketing power the brand brings to the licensee’s products. When brand managers enter or extend into new product categories via licensing they create an opportunity for a licensee to grow their company. Below is an example of the licensed product process steps:
- Licensor chooses the product categories to be licensed
- Licensor finds and negotiates a license with the best licensees
- Licensees develop concepts, prototypes and final production samples and submit for approval
- Licensor approves licensed products for sale
- Licensees sell licensed products to authorized retailers
Licensees expect that the license will provide them with sales growth. This sales growth may be in the form of growth within existing market or the opportunity to enter a new market. To achieve this, licensees expect that the brand they are licensing has significant brand preference, that it will open doors and ultimately help them meet or exceed their business objectives. The licensing contract forces the licensee to achieve certain sales targets and royalties; therefore, the goal of the licensee is to quickly meet their business objectives, thereby achieving their contract obligations. Royalties are the monies paid to a licensor by the licensee for the right to use the licensed property. It is calculated by multiplying the Royalty Rate by the Net Sales.