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How Licensing Works
Licensing is delineated as the procedure 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 signed 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 desire to license an entity? Simple answer is to get more sales. A few brands attract such high client 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 make but this is not always the sole reason. Entering into the market could be a bigger issue. For instance, if a new movie is being produced, the producers realize that having plenty of toys or goods related to the movie in shops will help to augment the publicity around launch date therefore leading to a raise in box office takings.
Licensing also provides the licensor a chance to move into related product parts without having to incur the cost of product design or development. They may be hunting to break into new markets for example a US product launching in China but because of limited knowledge of the new market they will wish to test it out first through a relatively low risk inexpensive route akin to licensing. If the new market loves the product, they know they have only hired the brand for a short length of time 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 flourishing, they have still got revenue from leasing the brand but they haven't wasted any money trying an indifferent marketplace.
Obviously the licensor needs to guard their brand first and foremost so there will be extremely 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 simply trade wherever you want. The deal will also stipulate the timeframe the license has been granted for, the stipulations for renewal, the agreed contract price and stipulations of payment - this is generally a percentage of sales subject to a minimum value i.e. you complete paying a specified 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 generally be an agreement over how many licenses will be issued for that particular region i.e. you could have a sole license or be allowed to license more people.
People who wish to take up a licensing contract do so since they think that they have found an ideal market for that product but couldn't finance the operation themselves. Or they may have manufactured a new product that will do much better having been associated with that brand name for even a short period of time. Building status in the business is important, nearly as vital as being 100% sure you comprehend the licensing process and know exactly what you are getting into prior to signing the deal.
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