Brand licensing enables a company (licensee) that markets a product or service to lease or rent a brand from a brand owner (licensor) who operates a licensing program, in exchange for royalty payments.
Combining your product with top brands is an incredible way to escalate growth. If you are looking to drive revenue, enter new markets, or reposition your product, brand licensing can lead to dramatic results.
As with any new endeavor, however, pitfalls abound.
The biggest cost to an organization is not just the time or money but the loss of momentum regarding and commitment to the endeavor. What was supposed to have had a positive return on investment becomes a neutral or possibly negative one, which can lead to an untenable situation with contractual strings attached.
Here is a list of the most common pitfalls that I have witnessed or experienced over the past 15 years.
1. Biting Off More Than You Can Chew
Licensors interested in licensing a category to a prospective licensee will ask for sales projections by region and by channel, along with a sales plan.
In trying to "win" the license, the prospective licensee will often provide the licensor with a best-case scenario instead of a more realistic case. When that happens, the licensee ends up accepting sales targets that may not be achievable, ultimately resulting in a breach of contract.
2. Getting in Over Your Head
Prospective licensees often try to negotiate for multiple regions or channels but are banking on just one opportunity to sell the branded merchandise. If that falls through, the licensee will fail to meet sales and royalty targets, and may request royalty relief.
When licensees cannot demonstrate that they are maximizing their rights, however, they will not get royalty relief; moreover, they will also be required to develop a plan to justify their license. If they are unable, they may lose rights to certain channels or regions.
3. Creating Unrealistic Expectations
Licensees may not fully understand the actual strength of the brand the license of which they just acquired. They may overestimate the power of the brand, believing the brand alone will result in acquiring new clients or larger programs with current clients.
When new sales fail to happen, licensees may feel as if they got sold a bill of goods.
A license works best when a great product is combined with a great brand to solve an unmet consumer need.
4. Logo-Slapping
Licensees often do not understand that the licensor expects them to custom-design the brand's attributes into their product, and not just slap on a logo.
The licensor wants the licensed product to be of the same quality as (or better than) the internally developed product. When the licensee doesn't meet the licensor's requirements, the product usually does not get approved and must be reworked, resulting in lost sales opportunities.
5. Failure to Follow the Approval Process
Licensees may not fully understand the approval process designated by the licensor and may not give it proper consideration. Many products are not approved because the licensee has not followed the approval process, resulting in significant delays that can cause the licensee to miss a modular shipment date or consider selling an unapproved product.
6. Not Knowing the Contract
Typically, company presidents or chief financial officers negotiate licensing agreements because they are familiar with the contract terms and the licensor's expectations.
If the people who execute the program on a day-to-day basis aren't familiar with the contract, however, obligations often get overlooked. That places a strain on the relationship and can ultimately lead to contract termination.
7. Not Being Prepared to Invest in the License
A licensee may choose not to invest fully in the newly acquired brand-licensing rights. However, the licensor expects growth in the licensed category and for the licensee to pursue every channel and every category designated.
Without proper investment, the licensee will fail to achieve the results anticipated—but will still be obligated to meet royalty and other contractual obligations.
8. Selling in Unauthorized Channels
The licensee may be tempted to sell a licensed product outside authorized channels or territory to meet contractual sales minimums or guaranteed royalty commitments.
When that occurs, the licensee may put the licensor at risk if the licensor has no trademark rights in the region or if another licensee has exclusive rights to sell in the channel or territory.
For those reasons, licensing contracts come with stiff penalties, up to and including termination.
9. Trusting the Licensor Has Your Interests at Heart
Licensees can get into trouble if...
- A licensor grants them rights to a category that is vacated because of a strained relationship with a retailer or a disappointed consumer base.
- They share ideas with the licensor, who then appropriates those ideas.
- A licensor competes directly with a licensee or licenses the same category to another licensee.
If the licensee is unaware of a licensor's intentions, the licensee may be unable to meet contractual obligations or may suffer costs greater than expected to fulfill them.
10. Not Following the Written Contract
Licensees may be asked to follow verbal directions that conflict with the contract. That can be a difficult predicament, because the licensee may feel pressure to comply with the licensor's request.
To protect themselves, licensees should always insist on getting written approval first, as they may be held liable later for breaking the contract.
