Licensing is a contractual agreement whereby a company allows another firm to use its brand name, patent, trade secret or other property for a royalty or a fee. Licensing also assists companies in entering global markets with minimal risk. Essentially, a firm is ‘renting” another brand to contribute to the brand equity of its own product.
A strong brand often has associations that may be desirable in other product categories. To capitalize on this value, a firm may choose to license its name, logo or other trademark item to another company for use on their products and merchandise. Traditionally, licensing has been associated with characters such as Garfield the cat, Barney the dinosaur, and Disney’s Mickey Mouse or celebrities and designers such as Maratha Stewart, Ralph Lauren and Tommy Hilfiger. Recently more conventional brands such as Caterpillar Harley Davidson, Coca-Cola and other have licensed their brands. Licensing can be quite lucrative for the licensor. Licensing has long been an important business strategy for designer apparel and accessories.
The rationale for the license (i.e. company obtaining the rights t o use trademark) is that consumers will pay more for a product because of the recognition and image lent by trademark. The rationale for the licensor (i.e. company behind trademark) relates to profit, promotion, and legal protection. In terms, of profits, a firm can expect an average royalty of about 5% of the wholesale. price of each product, ranging from 2% – 10% depending on the circumstances involved. Because there are no manufacturing or marketing costs, these revenues translate directly to profits. Licensing is also seen as a means to enhance the awareness and image of the brand. Linking the trademark to other products may broaden its exposure and potentially increase the strength, favorability and uniqueness of brand associations. Finally, licensing may provide legal protection for trademarks. Licensing the brand for use in certain product categories prevents other firms or potential competitors from legally using the brand name to enter those categories. For example – Coca-Cola entered from legally using a brand name to enter those categories. Coca-Cola entered licensing agreements in a number of product areas, including radios, glassware, toy trucks and clothes, in part as legal protection. As it turns out, their licensing program has been a successful they have subsequently introduced a catalog sent directly to consumers that offers a myriad of products bearing the Coca-Cola name for sale.
Despite the potential benefits from licensing related to profitability, image enhancement, or legal protection, there are certainly risks too. A trademark can become over exposed if marketers adopt a saturation policy. Consumers do not necessarily know the motivation or marketing arrangements behind a product and can become confused or even angry if a brand is licensed to a product that seemingly bears no relation. Moreover, if the product fails to live up to consumer expectations, a brand name could become tarnished. Another danger in licensing is that manufacturers can get caught up in licensing a brand that might be popular at the moment but, is really only a fad and produces short-lived sales. Because of multiple licensing arrangements, licensed entities easily can become over exposed and wear out quickly.