Brand licensing stems from a simple concept: The owner of the brand provides selected brand-exploitation rights to a third party in exchange for compensation, typically a percentage of the gross or net sales generated through the use of the brand by the licensee. With the right brand definition and investment, brand licensing can generate significant additional returns on the initial investment.
Successful licensors have been able to achieve high licensee revenue, driven by the number and size of licensing relationships and high licensing or "royalty" rates. I've seen a global entertainment company, a cosmetics manufacturer and a film studio generate more than 20% of total revenue from brand licensing alone -- powerful examples of how valued brands can help companies grow.
Other companies also have begun to appreciate the power of their own brands and have started to take advantage of them. Westin Hotels and Resorts' "Heavenly Bed" is designed to create a delightful, restful and differentiated customer experience by addressing travelers' need to get a good night's sleep in a comfortable bed. Guests who desire the Westin Heavenly Bed experience at home can actually purchase it through in-room catalogs, online and at Nordstrom, thanks to a licensing agreement with the mattress manufacturer. The Nordstrom site features a variety of Heavenly Bed merchandise, including candles, sheets and potpourri.
Godiva is another great example. It licenses desserts, ice creams and liqueur that add a stream of new revenue. Similarly, popular sports leagues such as the NFL, MLB and the NBA use licensed merchandise such as video games, apparel, toys and trading cards to strengthen and activate their brands while generating billions of dollars in incremental revenue each year. Chicago's two well-known baseball franchises, the Cubs and White Sox, each generate more than $200 million annually on merchandise revenue.
Brand licensing comes at a price, however. Companies need to be disciplined in developing and executing their brand-licensing strategies to secure the highest returns while preserving their brand equity. So how do they get started on the right track? Here are four things CMOs and their teams should consider:
1. Carefully evaluate which brands can be licensed. Brand-extension objectives should be clearly defined and fit within the company's strategic objectives for the brand. Brands that maintain strong and effective marketing and advertising programs, consumer promotions and meaningful innovation will command higher royalty rates. At the same time, brand extensions should clearly increase the value of the brand.
2. Create a robust licensing function with strong analytical and negotiation skills. Many licensors negotiate rates without a clear understanding of their brands' value. They accept the position of a price taker in negotiations against skilled licensees, influenced by the premise of additional revenue. Strong and experienced licensing teams with an understanding of their brands' market value, robust support systems and a high degree of preparation will help achieve high licensing rates. In addition, a strong team will conduct deep and comprehensive due diligence on potential licensees and develop contracts guaranteeing licensee performance and limiting the risks of brand erosion.
3. Identify licensees with a close strategic fit. Licensors get the highest rates from licensees that both fit and complement their brands -- companies with the same values, high-quality products and customer focus that also provide access to new competencies, customers and/or channels. The selection of the right licensee is therefore essential in driving licensing revenue. A strategic approach is required to achieve high returns, whereas an ad hoc, "trading" attitude will limit them. Look for a small number of large and attractive licensing opportunities, with licensees that are willing to maintain equivalent or higher standards for product and service quality.
4. Select profitable licensees. Our analysis showed that royalty rates are highly dependent on the profitability of the licensee's business. The same brand gets higher royalty rates from its most profitable licensees. Consequently, a well-informed selection and prioritization of licensing targets, based on expected profitability, will drive higher rates.
In difficult economic times, marketing executives may be tempted to overestimate the potential and underestimate the risks associated with brand licensing. Licensors need to manage risks such as brand dilution (from poor quality control), brand confusion (from mismatched products) and other brand-erosion risks resulting from unchecked licensee relationships. The lure of "easy money" can lead marketing executives to make undisciplined choices over time. But by treating brand licensing as a strategic decision, CMOs can position themselves to achieve high returns for their most important assets.
|ABOUT THE AUTHORS|
Jonathan Copulsky is a principal in Deloitte Consulting's Chicago office, where he leads the customer and market strategy service line. He has been involved with sales, service and marketing management, helping organizations to effectively initiate, manage, sustain and grow their relationships with customers. Mr. Copulsky speaks and writes frequently on issues related to sales and marketing management.
Philippe Lebard is a director with Deloitte Consulting, based in New York. He has extensive experience as a consultant, senior advisor and executive helping organizations develop innovative marketing and brand strategies. Most recently, he has worked with several leading firms to identify opportunities to leverage their brands through licensing and expansion into new markets and customer segments.