How Licensing Works

Licensing is defined as the process of renting a copyrighted or trademarked entity for use with a product or service. The property could be anything from the signature of somebody well-known to a picture, graphic or logo. A business contract is signed between the owner of the trademark or copyrighted material and the person who wants to lease it. These people are termed as the licensor and licensee respectively.

Why would anyone want to license an entity? Simple answer is to get more sales. Some brands catches the attention of such high client loyalty that you could sell almost anything once you have that image or logo or signature on your product.

The licensor is generally motivated by the cash they could earn but this is not always the sole reason. Market penetration might be important. For instance, if a new movie is being produced, the producers know that having stacks of toys or items which have picture of that movie on it in shops will help increase the hype around launch date thus leading to an increase in box office takings.

Licensing even provides the licensor a chance to move into related product areas without having to incur the price of product design or development. They may be looking to break into new markets for illustration a US product launching in China but due to inadequate information of the new market they will wish to test it out first via a comparatively minimum risk inexpensive route such as licensing. If the new market loves the product, they know they have only leased the brand for a short period and are collecting a percentage of sales. Once the time limit is over they can move into that market themselves. If the new market isn't successful, they have still got profits from leasing the brand but they haven't wasted any money testing an unresponsive marketplace.

Obviously the licensor needs to protect their brand first and foremost thus there will be extremely strict quality controls put in place to cover this issue. The other common elements to a license will be a particular geographic location i.e. you cannot just trade wherever you wish. The contract will also specify the timeframe the license has been granted for, the conditions for renewal, the decided contract price and terms of payment - this is usually a percentage of sales subject to a minimum value i.e. you end up paying a particular minimum amount even though 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 usually be a contract over how many licenses will be issued for that particular territory i.e. you could have a sole license or be allowed to license additional people.

Individual who wish to take up a licensing contract do so because they believe that they have found a right 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 associated with that brand name for even a short period of time. Building reputation in the business is vital, nearly as important as being 100% sure you understand the licensing procedure and know exactly what you are getting into before you sign that contract.

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How Licensing Works

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