Originally published in the World Trademark Review: View the Original Article Here
As brand extension through licensing becomes increasingly popular, the phenomenon of over-licensing has emerged as a potential threat to brand health and longevity
By: Allan Feldman
The benefits of licensing include increased revenue, brand awareness and competitive strength, all of which can make a real different to a brand’s bottom line and in some cases make or break a business’s financial year. However, it is a delicate balance. Licensing too much or in too many product sectors can damage brand equity and erode public trust – sometimes irreparably.
Everyone can think of examples of important brands overexposing themselves, which can be simultaneously laughable and heart wrenching. However, underexposing a brand can be equally damaging. It is all too easy for a brand to get lost in the crowd, which can lead to reduced brand awareness and consumer relevance.
Licensors need to carefully examine the question of how much is enough. While going too far can undermine a venerable franchise, not going far enough can also limit your opportunities in the near term and potentially diminish your brand in the long run. It is about balance and staying clear about your motivations and goals.
Brand and corporate licensing has come a long way in the 30 years since LMCA was founded. Back in the late 1980s, aggregate sales of licensed products (mostly in the United States) amounted to about $3 billion annually. Today, most published estimates are closer to $200 billion, although many professionals believe that this number is too low.
It is estimated that roughly 70% of leading US-based brands now employ licensing in one form or another, with corporate brand licensing the fastest-growing segment of this lucrative and important strategic market.
While most companies are jumping on the licensing train, others are stubbornly staying put – even after 30 years of increasing activity around them. Growth from $3 billion to $200 billion certainly speaks to heightened demand for licensed product. So why do so many managements want to license and why are others holding out?
Common reasons for (and against) licensing
Licensing is not an end in and of itself. It is a business tool which can and should be individually tailored to satisfy one or more of a surprisingly wide range of potential marketing, financial, strategic or legal goals.
Generate new revenue streams: Licensing can produce significant new earnings with minimal associated costs. Westinghouse, the Sharper Image and others have used licensing to keep their brands alive and growing and as a major, if not sole, source of revenue. These examples represent some of the largest licensing programmes in existence today. Westinghouse’s licensed product sales exceeded $3 billion – to put this into perspective, it has fewer than 12 people on its internal licensing staff, while return on asset percentages is off the charts.
Enter lucrative businesses outside your core capabilities or financial thresholds: Brand extension licensing allowed Snuggle – known for its fresh scent fabric softener – to enter the air freshener business. Licensee Airwick brought product expertise and marketing strength to the table, thus providing the iconic Snuggle bear with increased distribution, shelf space and brand awareness. In another example, Sharp Electronics licensed its brand to a third party for smaller-screen televisions because the margins in this strategically important sector were simply too thin to pursue directly.
Test new businesses – often as a precursor to M&A: Licensing can also be an attractive way to learn about a new business before investing too much of your own people, time and money. Three Sixty Group was a licensee of the Sharper Image brand for almost 10 years before it bought the brand from Iconix. A licensing relationship can also be a good way to size up a licensee as a potential acquisition, merger partner or strategic ally.
Reach new consumers and extend into new channels of distribution: Arm + Hammer extended into whole-house heating, ventilation and air conditioning filters, reinforcing the brand’s core odour-removal attributes and extending it into new retail channels and audiences outside the grocery aisle. The licensee provided the necessary product development, manufacturing and sales channel expertise which Arm + Hammer lacked.
Increase brand awareness and brand equity, and expand relationship with existing consumers: Roto-Rooter – the famous US plumbing and drain cleaning service organisation – licensed its brand into a full line of drain cleaning chemicals, which help consumers to unclog early-stage problems. For more advanced problems, consumers can call for a company professional using the toll-free number on the bottle and receive a credit for the original product purchase, making it the only competitive plumbing service or chemical company to offer this comprehensive 360° solution.
Protect against infringement: Companies can strengthen their iconic trademarks by licensing them in classifications where they wish to register and further protect them. Coca-Cola and Harley-Davidson were pioneers of this strategy in the 1970s and 1980s. Crucially, licensees can also act as your eyes and ears against potential infringers in new sectors and in territories around the world. China is a prime example of this.
Managerial drive: Some managers see licensing as a way to expand their career, build their CV, add excitement and diversity to their day-to-day responsibility or establish their worth as an income producer or general manager. In one example, the trademark department of a large multinational which was under pressure to reduce legal staffing costs spearheaded a licensing programme and turned itself from a cost centre into a major profit centre. Similarly, a financial person might use licensing to position himself or herself as a business builder and, as such, a contender for promotion to top management.
With so many seemingly good motivations to license, why then are there hold-outs? The pushback generally stems from lack of awareness and understanding, cultural or control-related issues.
Old-school business mindset and need for control: The notion of a third party making and marketing a product with your name on it might just be too different for management to process. The fact that they, as the licensor, have approval rights over product design, quality, presentation, promotion and distribution is not enough to assuage their fear of the unknown. For some people, licensing veers too far from the historic model where “You work for me, I watch what you do and can fire you at will.” This mindset is especially true for large patriarchal organisations, although it varies considerably from industry to industry based on cultural and market considerations.
Licensing is indeed a departure from the traditional business model, but successful new business models will not be shelved for long – especially when competitors start to use them against you.
Lack of any established corporate home: Licensing is a relatively new business tool and people with experience in the field have been in short supply. Early adopters came from the film studios and then from the promotions departments of large beverage companies such as Anheuser Busch. For these and similar organisations, licensing focused on novelty and giveaways. It was a way to offload the cost and effort of tooling, inventory and working capital onto the vendor. However, as licensing has evolved, it has not always been clear where it fits. Who is responsible and to whom does this function report? Such questions have taken time to figure out and, even today, many are still works in progress. Some programmes are spearheaded by legal, some by marketing, some by finance and others by corporate or business development. It is usually interdisciplinary, with touchpoints in engineering, quality control, legal and marketing.
What goes wrong?
Most cases of over-licensing stem from focusing on one motivation over all others.
Fashion designer Pierre Cardin is considered an early king of licensing. In his heyday, he had a smorgasbord of over 900 licensees, including boxer shorts, water, perfume, sardines, toilet paper, key chains and pencil holders. However, product quality was a consistent complaint and distribution was a hodgepodge, often down-market and off-price. Cardin explained his licensing strategy thus: “Why not… I’ll give you my name if you’ll give me your money… I don’t want to end up like Balenciaga and die without a nickel – then, 20 years after I’m dead, see others make a fortune from my name.” If his interest was purely financial and his timeframe focused on the remaining years of life, then it could be argued that Cardin’s approach to licensing was the right one – although it took no account of his legacy.
Most licensors, though – especially if they are organisations – take a longer-term view. A range of other highly visible examples – including tool company Stanley, Polaroid and the Sharper Image – have gone to unusual lengths with their licensing programmes. Each has gone through major organisational changes and come to a point where it is fighting for financial survival. Fortunately, many are beginning to take a more disciplined and cautious approach to licensing, presumably with an interest in and appreciation of what it takes to keep their brands alive.
Television manufacturer Sharp is an example of how the pendulum can swing in both directions. Because of its high manufacturing costs, Sharp was losing money and market share in the important but highly competitive US market for smaller (26 inch and below) televisions. It thus licensed US-based retail chain Best Buy to source and sell all small-screen televisions in the United States. While this strategy made sense on one front, it also carried the substantial risk of alienating all other retailers in the market. Compounding the problem, about one year later, Sharp licensed Hisense for all other sized televisions in the United States. In other words, over two years, Sharp converted its entire US television business to a licensing model. The company was consequently sold to Taiwan-based Foxconn – an organisation with low manufacturing costs, deep pockets and a keen interest in penetrating the North American market for televisions. Unfortunately for Foxconn, it seems that Hisense has no interest in giving up its exclusive Sharp licence, which has brought Sharp licensing activity to an abrupt halt. Other examples parallel such extreme and unfortunate swings in behaviour. They also provide important insights into how to build a successful long-term brand licensing programme – and what mistakes to avoid.
Ego-related issues can also contribute to ill-conceived, overblown licensing programmes. CEOs can be surprisingly flattered at third-party requests to use their brand. Who these licensee prospects are and what they want to use the brand on are secondary: leaders sometimes see their name in lights and those lights can sometimes be blinding. Sound unlikely? Not as much as you would think, although such behaviour tends to date back to earlier days of licensing. Today, there is greater awareness of trademark licensing and its benefits and potential pitfalls.
In addition to the examples discussed, there are several fundamental ways that over-licensing can land you in trouble.
First, too many licensees can lead to a loss of control, making product design, performance, quality and market positioning much harder to coordinate. The same is true of promotion, pricing and distribution. Managing a licensee family of between 15 and 20 is challenging – imagine what happens when it gets to 900. The danger of confusing consumers and, in turn, undermining the brand grows exponentially.
Second, which brands can logically extend into 900 different products, or 100 or even 30? Most programmes we manage usually cap out at between six and 10 different product categories, with the largest in 12 categories, with a total of 30 licensees throughout the world. For brand owners to reap the benefits of licensing effectively, programmes need to be carefully thought through and have a strong strategic foundation. Licensed products must be in sync with the brand imagery and its marketing and communication objectives. Programmes must at least support and preferably enhance those objectives. Does cologne make sense for the Vespa (scooter) brand or the Zippo (lighter) brand? Is Vespa about fragrance? Does it really want to call attention to exhaust fumes? Muhammed Ali shoe polish? Cheetos lip balm? Arizona (iced tea) cheese dip? The Supremes’ (pop musicians) white bread? Shaq (basketball player) soda?
How much is too much?
Gauging the number and type of extension categories is relatively straightforward. Consumer research, both quantitative and qualitative, should help to zero in on that question pretty quickly. However, if one of the licensor’s key objectives is to contemporise or otherwise modify or change its brand imagery, then it is usually best to proceed slowly and in measured stages when it comes to choosing the type and number of categories. Building a brand takes time. The same goes for extending and expanding it.
Think broadly and creatively about possible brand extensions and then put these ideas through a series of screens and filters based on business considerations (eg, strategic fit, core sales and channel implications, product liability issues and market size) and anticipated consumer benefit or risk. When you have an initial list, generally between 10 and 30, then screen again in two ways. First, test your ideas against consumers for positioning and brand permission: do consumers understand the brand’s connection to this product or service? Do they see the fit with your brand imagery and promise? How would they expect this offering to differ from competitive products? Are they interested in purchasing your brand over others? Why, and at what price? Are there any downsides, cautions or concerns? Next, with the test results in hand, ask the following:
- Is there a potential licensee partner out there that you could likely feel comfortable with?
- Is it likely that the brand promise which consumers expect can actually be delivered?
- Is it likely you can succeed and if so, is the anticipated financial payback large enough to be of interest?
- Finally, share your research and results with relevant retailers and e-tailers – these are the path to consumers, so it is crucial to determine whether they are interested in buying.
Deciding on how to implement the extensions you have chosen involves a host of considerations, including make or buy economics, potential distribution and sales organisation concerns, potential category liability and future acquisition plans. However, if licensing is the chosen implementation path, then the question of the number of licensees arises.
This can usually be broken down into two issues. One is control: you want consumers to view you and your brand as one company, one personality, one promise, one message; not 10, 20 or 900 different ones. The second is the cost and logistics of programme administration: what does it cost to manage and coordinate dozens or hundreds of licensees in potentially every corner of the world?
So how many licensees is the right number? As with so many things, it depends. The question we at LMCA always ask is: “How few can we have without missing the boat?”
Some licensors, especially those in apparel, may have dozens of licensees within a single product. In men’s underwear, for example, it is sometimes believed advantageous to have a different licensee for boxer shorts versus briefs versus bikini, for silk versus cotton, for different price points, for e-commerce versus mass merchants versus department stores and for different territories. In cases such as this, licensees are generally viewed as manufacturing partners which all come together under a single design, marketing and distribution machine which is directly managed by the licensor. This is sourcing without taking on responsibility for plant and equipment, material purchasing, working capital and inventory.
However, if licensing is about growth and diversification, about extending into new categories, channels or territories that are outside of your expertise, then the logic of licensee choice must be adjusted. Instead it becomes based on the licensee’s long-term ability to succeed for you in the market. Track record, motivation, resources, organisational stability and personal chemistry are key. The licensee must understand the licensor’s brand and interests, and be able to translate them into a viable long-term success which will satisfy their mutual interests. Licensees here – those charged with product design, manufacturing, marketing and distribution – tend to be resource-rich, established companies with distinct and well-defined personalities of their own. Herding companies like this can be a challenge and as a result it is important to carefully pre-screen candidates to ensure the right personal chemistry and shared vision between licensor and licensee – and between different licensees. Where possible, we at LMCA generally try for a single licensee for each major category – the main exception being for different geographic territories or category silos. In some situations it makes sense to use different licensees for consumer markets versus commercial, industrial and governmental markets.
You can monitor consumer complaints, product returns and service calls on specific products. The best licensors also conduct periodic tracking surveys to measure consumer attitudes and perceptions of their brand and the products being sold. They do the same for measuring retailer attitudes and perceptions. Monitoring social media can provide important insights.
In addition to all the normal quality control and termination rights for cause, it is possible to reverse course and terminate a licence early, without cause. Early termination buy-out provisions, while not common, are on the increase because experienced licensing managers want ways to cover themselves in the event of unexpected changes in corporate ownership, management or strategy.
As most of us know, situations and circumstances are sure to change. The Sharp example clearly speaks to that point – the possibility of an outright sale of the brand was not at the forefront of its thinking when it started licensing.
Buy-out and early termination provisions are typically negotiated on a deal-by-deal basis and frequently include the licensor’s ability to recall or purchase all unsold inventory at a favourable price, as well as a formula to compensate the licensee for its investment and for any lost profits. Regrettably, there was no early termination provision in the Sharp licences.
The risks of over-licensing are real, but they are also manageable. Strategic brand extension licensing has proven to be an incredibly successful tool which leading global companies are using to generate incremental revenue streams, increase brand awareness and access new customers and distribution channels, with little cost or risk. When carried out right, you can use licensing to reinforce your brand equity and position your brand for long-lasting success.