Business Knowledge

Understanding Brand Licensing Models: A Guide to Growth

Kieran F. Noonan
Brand Management Brand Strategy Licensing Business Models

Summary

Brand licensing is a strategic business practice where a brand owner (the licensor) rents out their brand name, logo, or characters to a third party (the licensee) for use on products or services, in exchange for a royalty fee. It’s a powerful way for brands to enter new markets and generate revenue with minimal investment, and for manufacturers to gain instant brand recognition. This guide explores the common brand licensing models, the benefits for both parties, and the critical steps for creating a successful licensing program.

The Concept in Plain English

Imagine you own a famous cartoon character, “Captain Courage.” You’re great at making cartoons, but you don’t know anything about making lunchboxes. A lunchbox company comes to you and says, “We want to put Captain Courage on our lunchboxes. Kids will love it! We’ll pay you 5% of the sales of every Captain Courage lunchbox we sell.” That’s brand licensing. You (the licensor) get a new stream of revenue and free marketing on every lunchbox, without having to build a factory. The lunchbox company (the licensee) gets to sell more lunchboxes because your famous character is on them. It’s a win-win, but only if the lunchboxes are good quality. If they break easily, it could make Captain Courage look bad.

Common Brand Licensing Models

  1. Character & Entertainment Licensing: The most well-known type. This involves licensing characters from movies, TV shows, or video games for use on merchandise. (e.g., Disney characters on toys, clothing, and theme park rides).
  2. Corporate & Brand Licensing: Using a well-known corporate brand name on products in a different category. This is a form of brand extension where the partner does the manufacturing. (e.g., Caterpillar licensing its name for boots and apparel).
  3. Fashion & Designer Licensing: High-fashion brands often license their names for accessories, perfumes, and eyewear, making the brand accessible to a wider audience. (e.g., Calvin Klein or Gucci licensing their brand for sunglasses).
  4. Sports Licensing: Licensing the names and logos of sports teams and leagues for apparel, video games, and memorabilia. (e.g., The NFL or Manchester United).

How to Apply It: A Step-by-Step Licensing Process

Whether you are a licensor or licensee, a structured process is key.

For the Licensor (Brand Owner):

  1. Assess Brand Strength: Is your brand strong and recognizable enough to be licensable?
  2. Define Licensing Strategy: Which product categories make sense for your brand? What is your brand’s core message that must be protected?
  3. Find the Right Partner: Screen potential licensees for their manufacturing quality, distribution network, and financial stability.
  4. Structure the Deal: Negotiate the key terms: royalty rate (typically 3-12% of wholesale revenue), contract length, exclusivity, and quality control provisions.
  5. Manage and Monitor: Actively manage the partnership. Approve all product designs and marketing materials to ensure they align with your brand standards.

For the Licensee (Manufacturer):

  1. Identify the Right Brand: Which brand has a strong connection with your target audience?
  2. Develop a Compelling Proposal: Show the brand owner you understand their brand and have a solid plan to create a quality product that will enhance their brand image.
  3. Negotiate a Fair Deal: Ensure the royalty rate and minimum guarantees are financially viable.
  4. Execute Flawlessly: Create high-quality products and invest in marketing to make the partnership a success for both parties.

Worked Example: The LEGO and Star Wars Partnership

  • Licensor: Lucasfilm (owner of Star Wars).
  • Licensee: The LEGO Group.
  • The Deal: LEGO licenses the rights to create building toy sets based on Star Wars characters and vehicles.
  • Why it Works:
    • For Lucasfilm: It generates massive royalty revenues and keeps the Star Wars brand front-of-mind for a new generation of kids.
    • For LEGO: It provides access to one of the most beloved entertainment properties in history, driving enormous sales and attracting fans who might not otherwise buy LEGO sets.
  • Management: Both companies work closely on product design to ensure the sets are authentic to the Star Wars universe and meet LEGO’s high quality standards.

Risks and Limitations

  • Loss of Control & Brand Dilution: This is the biggest risk for the licensor. If a licensee produces a low-quality product, it can directly damage the brand’s reputation. Strict quality control is essential.
  • Over-saturation: Licensing the brand onto too many products can dilute its meaning and make it feel less special.
  • Financial Risk for Licensee: The licensee takes on the financial risk of manufacturing, inventory, and marketing, and must pay a minimum guaranteed royalty even if the product doesn’t sell.
  • Partnership Failure: Like any partnership, a breakdown in the relationship between the licensor and licensee can lead to legal disputes and damage to both businesses.
  • Brand Extension Analysis: Licensing is one way to execute a brand extension strategy, but here the manufacturing is outsourced.
  • Intellectual Property: A brand name and its associated logos are forms of intellectual property (trademarks) that form the legal basis for licensing agreements.
  • Royalty Agreement: The legal contract that specifies the terms of the licensing deal, including the royalty rate and payment terms.