There are many reasons why licensing has grown so impressively and quickly. The traditional reasons have not changed very much:
- Mature markets and increasing competition force companies to explore new growth avenues
- New competitors, high advertising costs and new media vehicles require companies to look for innovative ways to reach consumers
- The financial upside in licensing can be quite substantial
- Better and better companies are becoming licensees…further reducing the risk and boosting the attractiveness
Beyond the traditional reasons, there are strategic motivations brands consider when utilizing licensing as a strategic tool. Some of those strategic motivations are:
Reduce Barriers to Entry. When moving into a new business, barriers to entry can be very substantial and companies always evaluate their financial commitments, degree of risk, and potential return before they undertake any new project. Because new areas can be difficult and costly to get into, companies welcome strategic alliances that can help them reduce both cost and risk. Licensing is a perfect form of a strategic alliance: a group of licensees with significant resources work under the umbrella of a single brand. The licensor sets the brand’s direction and enforces the controls, including accepting appropriate categories, restricting territories, monitoring quality and timing.
Increase Barriers to Entry. Successful brand extension licensing increases the barriers to entry for one’s competitors.
|Test Relationships. Licensing is an easy way to test the affinity between partners before getting involved in a deeper relationship that could be difficult to terminate. Licensing relationships are relatively hands-off and unburdened by the issues of funding and management. Neither party tells the other how to run their business. Well-matched licensing partnerships tend to evolve into more comprehensive relationships.|
For some, licensing provides an “analytical window” to take a look at other businesses, with licensee and licensor sharing important information about each other’s business. For others, licensing paves the way for future alliances, opening up better sources of raw materials, sharing technologies, and other resources. Such License-to-Own (LTO) licensing deals are not as common in the U.S. or in Europe, but the LTO strategy provides strong incentives to Asian licensees to invest heavily upfront in the brand, and to treat the brand with the level of dedication and care as if it were their own.
Manage Resources and Stay Focused. Many top managers develop licensing relationships as a means to expand their overall resource base. Others are motivated to license because it allows them to “stick to their knitting,” to keep their attention focused on the core businesses that are in line with their corporate strategic directions and more profitable, particularly in tough economic and competitive times. Licensing helps trademark owners develop manufacturing, marketing, and financial knowledge in areas totally outside their own. Entry is more expedient, risk is reduced, and chances of success are improved.
|Expand into New Territories. Licensing can also be a means to expand the brand quickly into new markets and into markets in which there are legal barriers to foreign ownership Licensing has long been used by pharmaceutical and semiconductor companies who have products with worldwide appeal, but sales and distribution reach limited to particular geographic areas.|
Many companies use licensing agreements to expand their worldwide sales rapidly without the need to commit to growing internal organizations.
Technological leadership. Identifying and engaging licensees with leading technologies can perpetuate a brand’s reputation for leadership, further strengthening the brand, yet without increasing R & D spending.
|Legal. Extending a brand into new classifications of goods through licensing allows broader trademark registration of the brand and, therefore, stronger ownership of the brand. In situations where a brand is in danger of being declared generic, registration for other classifications of goods may help win that battle.|
As key retail and consumer trends shift the business landscape, and we look to the role licensing will play for brand licensing, one thing is clear— brand licensing will continue to be a strategic tool for brands to implement as part of their overall business strategy. Whether it’s a way to offload manufacturing expenses, test out new innovation opportunities or dive into untapped markets, licensing is a cost-effective method for brands to reduce costs, diversify revenue streams and keep ahead of the competition.
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