Licensing as a Path to Innovation

White Paper

 By Leigh Ann Schwarzkopf, Project Partners Network

 

As corporations work to assess and enhance their overall growth strategies, many have found licensing to be an effective tool to help them meet their objectives. In particular, licensing can be a route to innovation, both at home and abroad.

Licensing occurs when one company grants another organization the rights to use its intellectual property (often a brand) on specified products or services, for a limited period of time within a defined geographic territory. The company granting the rights (the licensor) retains ownership of the intellectual property and the company being granted the rights (the licensee) pays a royalty on net sales, usually including a minimum guarantee.

In an optimum licensing agreement, both the licensor and the licensee benefit from the transaction. The licensor is able to extend its brands into new areas, often with less risk and less investment than would be required for internal expansion, while capitalizing on the licensee’s manufacturing expertise and distribution network. At the same time, the licensee benefits from the association with a well-known brand, reaping advantages in marketing and exposure that it could not generate on its own.

As part of an innovation strategy, licensors often utilize licensing as a means to test a new product, category, or geographic region. After the licensing deal confirms the viability of the new business direction, the corporation can take the licensed line in-house.

One of our clients here at Project Partners Network, a global company with multiple brands, used licensing as a means of learning about geographic regions where it thought its brands had potential. Its strategy was to license one or more of its brands to a leading category licensee in each territory it wanted to explore, with the intention of acquiring the licensee if the business turned out to be viable.

On the other side of the coin, licensees can innovate by borrowing the equity of an established brand to help launch new products or new technologies. Such a licensing deal often enables the company to move forward faster, with less investment than would be required to launch a brand from scratch.

Another of our clients had a new food-preparation technology and sought our help in securing the rights to a well-known brand. Licensing an established brand would assist consumers in understanding the new concept immediately, give the launch a level of awareness that could not be achieved by a brand-new label, and require a smaller upfront investment in marketing than would be necessary for an unknown brand.

Some licensors are leery of licensing, in large part because they feel they will lose control over their business, and over how their IP is being used, in the category being licensed. Conversely, licensees sometimes fear that the royalty, including the required minimum guarantee, will be an undue financial burden, both in terms of their upfront investment and in the impact on their margins.

These challenges can be overcome, however. Strong licensors maintain control over their IP and business direction through diligent quality control procedures, for example, while licensees often find that associating with a strong outside brand improves their total revenue and profit picture, despite the potential narrowing of margins.

Adequate due diligence and research prior to embarking on a licensing deal is a critical success factor for both licensor and licensee. Both partners need to not only assess each other’s goals, businesses, and other factors, but also determine whether licensing is a good solution at all, given current marketplace conditions and the overall context within which each partner operates. Gaining this knowledge requires discovering, through primary and secondary research, details about the marketplace, the internal strengths and weaknesses of each partner, and the needs and desires of the customer.

Above all, successful licensing deals depend on a good fit between licensor and licensee, with both parties having compatible objectives, strategies, brand images, business models, and employees. It’s also important to remember that licensing is one of many tools that corporations have at their disposal. It may not be a good solution in every case, but it is often a viable option that is worth consideration.

If you want to learn more about licensing, we recommend EPM’s The Licensing Business Handbook (www.epmcom.com/products/item121.cfm). If you would like to discuss how licensing can benefit your company in achieving its growth and innovation objectives, contact Project Partners Network (leighann@projectpartnersnetwork.com).