Trademark licensing is the process through which a company grants permission to other businesses to use its intellectual property – whether it’s the brand name, software, or patent – in exchange for financial returns.
What is Trademark Licensing?
Trademark licensing is the process of granting permission to another company to use your business’s intellectual property (IP). Trademark owners can lease patents, software, or characters to other companies. Licensees can resell the intellectual property at a higher price or manufacture goods bearing the intellectual property. Regardless of the method, the licensor receives a percentage of the financial return as compensation for granting permission.
5 Types of Licensing Deals
1. Brand and Registered Trademark: Companies can own the rights to use a brand name or logo. Companies can grant licenses to other trademarks to use their trademarks.
2. Patents: Patents provide legal protection for new inventions. Patents can be awarded for new machines, designs, or plants.
3. Characters, Entertainment, and Art: Companies can grant licenses for using characters as trademarks. For example, Disney licenses its characters to other brands for use in clothing, home decor, and mugs.
4. Software: If you pay to use a specific software, you are purchasing a license for a single user or a team. You are not allowed to sell access to the software to anyone else – unless you have a multi-user license. This allows third-party companies to resell the software code to others.
5. Sports: The market for licensed sports goods is a big business. It reached a value of $31.3 billion in 2022 according to the Global Licensing Group – and is expected to grow at a compound annual growth rate of 3.5% until 2028. Teams from the National Basketball Association, National Football League, and European football leagues enter trademark licensing deals.
Benefits of Trademark Licensing
1. Brand Growth and Access to a Wider Audience: Trademark licensing simply means forming a partnership with another company. One of the most important benefits of these partnerships is the ability to reach a wider audience. Collaborating with another brand gives you immediate access to its customers and audience, and vice versa. Whether you are the licensor or licensee, both brands provide each other access to their audiences for growth and expansion into a new age group or geographic location – whatever the case may be. Market penetration is easier when working with licensors who are already present there.
2. Building Stronger Customer Relationships: As your brand grows, the desires and expectations of your customers grow with it. Regardless of your company’s size, it can be challenging to expand your product line in a way that meets those expectations. Trademark licensing is one way to bridge the gap between your manufacturing capabilities and product design. The ultimate result? Increased repeat sales and offering products that your customers are looking for.
3. Generating Supplemental Revenue and Diversifying Your Income: With a trademark licensing agreement, as the licensor, you typically receive royalties for each licensed product sold. While royalties may not typically grow your business from $1,000 to $1 million, they can be a good way to add supplemental value and diversify your brand’s revenue streams.
4. Protecting Your Brand from Counterfeit Products: If you go to a public market, you’re likely to see unauthorized and counterfeit products being sold illegally. Think of those $20 “Coach” handbags or $10 “Ray-Ban” sunglasses. When a brand becomes big enough, counterfeiters are not far behind. Trademark licensing can help stay ahead in this area. One of the initial stages of the trademark licensing process is protecting your intellectual property. It also protects your brand’s reputation by specifying clear terms regarding reductions and similar issues.
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Experimenting with new product categories: entering a new market carries risks. Of course, you can conduct product research, listen to customers, and observe what competitors are doing. But you won’t really know if an investment in a new product will be worthwhile until you do it. Brand licensing deals can make this less risky. On one hand, established companies have access to funding, expertise, and experience in an existing market. On the other hand, as a startup, you will need either to seek external funding or put your own money into product development. This can take a lot of time and money, and it can also be risky.
6. Relying on manufacturing or distribution resources: One of the toughest aspects of growing a business is manufacturing. You can attract customers to your store or e-commerce site, but once they get there, you need the manufacturing process to run smoothly. Otherwise, those potential customers will leave empty-handed. According to Jared Smith, Chief Marketing Officer at Joy Organics, brand licensing makes this easier. “Working with a licensor or licensee with experience in manufacturing and/or distribution can allow you to leverage those resources,” he says. “This can shorten the time it takes to reach market and save you money and time by eliminating the need to set up a production facility, for example. By sharing common costs like promotional and advertising efforts, both the licensor and licensee may be able to save money and achieve efficiency.”
How to License Your Brand
An effective brand licensing strategy ensures that your brand assets are secure and protected, and that any licenses you grant will ultimately benefit your brand. Here’s how to get started:
1. Protect Your Intellectual Property
Protecting your intellectual property is one of the most important factors behind licensing your brand. The last thing you want to do is give someone unrestricted and full access to your brand assets without getting anything in return. The best way to protect your brand is to work directly with a lawyer who specializes in intellectual property and start early. Make sure to register and protect your brand assets from the beginning. Then you can think about granting licenses for them later.
2. Conduct Your Research
Licensing your brand is not a one-time process. If you are looking at brand licensing as a growth driver for your business, it’s best to create a comprehensive strategy that outlines what you are looking for in a potential licensee. This way, you can make quick decisions about which companies to approach and approve. It all starts with thorough research. Like any partnership, you will evaluate potential licensees to ensure they are a good fit for licensing your brand. There are multiple factors that affect brand compatibility, but let’s summarize them into a few questions you should consider:
– Do your customers care about this product? If customers frequently ask for a particular product (and you do not offer it), it’s a good opportunity to license another company to produce that product under your brand name.
– Does your brand’s value translate to this product? Sports brands license their logos and team names to clothing companies because fans buy Red Sox caps as if there’s no tomorrow. That makes sense. It wouldn’t make sense to license a brand like Tampax to a cereal company.
– Does the licensee have the operational capacity to add value? You get the most out of brand licensing agreements when licensed products are sold (in volume). For any potential licensee, ask yourself: can they produce enough of the licensed product to make the deal profitable?
3.
Defining Terms and Restrictions
Once a potential licensee that fits your brand and customers is found, it’s time to draft the licensing agreement. As mentioned, it’s important to work with a licensing agent or attorney to ensure that the contract includes all necessary terms and that the agreement is legal. When preparing the license, there are many terms and restrictions that you will decide upon. These terms outline the details of the partnership and set expectations for both you and the licensor.
How to Create a Trademark Licensing Agreement
A trademark licensing agreement contains all the details about how two companies will work together. For example, licensees (the company purchasing the rights to license the trademark) often pay a portion of each sale of the licensed product to the licensor (the licensed trademark). Here are nine things to consider in a licensing agreement:
1. Work with an Attorney
No one knows the details of a binding agreement like a trademark licensing attorney. Do a Google search to find attorneys experienced in your specific type of intellectual property – such as patent law or software – as well as in your industry. Ask for reviews from previous clients. Read case studies of deals they have brokered. Ensure you are clear about the fees they will take from the deal before signing the contract.
2. Define the Licensed Intellectual Property
In addition to outlining the specific roles of both the licensor and licensee, your trademark licensing agreement should clearly define what is included (and what is not) as part of the agreement. Sanrio is a retail company that manufactures luxury products for video game and anime fans. According to Sarah Viter, the operations manager who brokers Sanrio’s licensing deals, “[You need to define] what needs to be provided by the licensee; such as ‘we agree to promote the item you created for us within X timeframe’. Having all that predefined is a great thing. And then, having a complete set of all the assets I wish for, whether that’s a copy of the game or character backgrounds if they haven’t been released yet; any of the artwork or personal items. Basically, anything we need to know [should be] there on the day we sign the license.”
3. Consider Exclusivity
The majority of trademark licensing agreements are non-exclusive. This means you can grant your trademark license to as many competing apparel companies as you choose. While non-exclusivity is the norm in trademark licensing, it should still be specified in the contract. In some cases, you may choose to offer a small number of exclusive licenses. Having fewer licensees using your intellectual property provides a competitive edge – and in this case, you can often demand a higher financial return.
4. Define Royalties
One of the biggest benefits of trademark licensing is the additional income it builds. Licensees profit from your intellectual property. So, in your trademark licensing agreement, specify the details of your financial compensation for licensing your business’s intellectual property. Some common payment structures in trademark licensing deals include:
– Upfront flat fee: Licensees pay a flat fee upfront for licensing your intellectual property. This is typically an annual fee.
– Ongoing royalties: Licensees pay a specified percentage of the unit price or a set dollar amount for each licensed product sold. If you demand 10% of the licensed products and the licensee sells $500,000, your check would be $50,000.
– Some brands may also choose to include sales monitoring as part of their agreement. In this case, the licensor may request sales data from the licensee to verify whether the partnership makes commercial sense to continue.
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There may also be discussions about reducing licensed products during this process, especially using a revenue-sharing payment structure. Clearly specify in your licensing agreement the maximum discount that licensees can offer to their customers. After all, a 10% discount on a licensed product at full price may be completely different from a $20 discount on a $50 reduced product.
5. Consider Quality Assurance
When you grant another company permission to use your name, logo, or image on their products, you are taking a calculated risk. Your brand is automatically linked to the quality and content of those products to some extent, and you are somehow held accountable for them. That’s why it’s essential to include quality assurance terms in your trademark licensing agreement. Your reputation and identity as a brand are at stake.
Quality assurances may include restrictions on the licensee regarding:
– Distortion of images (like your brand logo)
– Altering brand fonts or colors
– Adding new symbols to the licensed software
To protect your brand image, in your licensing agreement, specify what is being licensed (for example, a video game character) and any restrictions on how the licensee may use it. For example: “The licensee may not use our intellectual property to manufacture or sell products related to alcohol.”
6. Time Frame
What’s the duration of granting the license to another company to use your intellectual property? Sarah Vetter from Sanchi prefers a duration of one to two years. This gives her time to assess the popularity of the licensed product before investing in a long-term deal.
However, there is no ideal length for a licensing agreement. A year is a good starting point, but some brands prefer long-term partnerships to have more time to sell the licensed inventory. Some who are dipping their toes into licensing may choose short-term deals to see if the business model works for them.
The duration is not overly critical. What matters is to include the agreed-upon timeframe in your trademark licensing contract.
7. Geographic Areas
If you work with multiple licensing partners, specify the areas where they are allowed to use your intellectual property. This will prevent them from competing against each other and causing disputes. If you are outside the United States, you are typically not allowed to sell items in countries where you hold intellectual property rights. So, if someone in England is producing a game and you sign a contract with them, you likely won’t be able to sell it in that country since they have a local person already doing that.
Postal regulations in some countries also play a role in agreeing on geographic areas. Sometimes, customers will ask you not to sell products in certain countries due to the extensive time spent trying to ensure they receive their items.
8. Shipping Responsibilities
Consider shipping responsibilities in your trademark licensing agreement. Who will be responsible for selecting, packing, and shipping the item to the customer? Where will the inventory be stored: in your warehouse, with the licensee, or at a third-party logistics company’s distribution center?
The ideal terms look like this: “We will send you X number of items to ship to Y location.” That’s it. When dealing with import regulations and specifications, it gets really complicated, especially when trying to fulfill orders. Include a termination clause.
9. Include a Termination Clause
Every contract should have a termination clause that explains:
– When the licensing agreement ends
– How either party can terminate the contract before its expiration
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The required notice to do this
You should also explain whether a trademark licensing deal automatically renews after the time expires, and if so, at what price. For example, if you are entering into a two-year contract with a licensee, you might have a clause stating that if the deal automatically renews, your royalty fees will increase from 10% to 12% of all sales of licensed products.
Examples of Licensing Agreements
1. The Walt Disney Company
Disney does not make every T-shirt or coffee mug with its characters. Since signing its first licensing agreement in 1933, thousands of other companies have had deals with Disney to get the rights to use its characters, brand names, music, and other trademarks. These companies handle the details such as producing and manufacturing those products.
These deals are why Disney seems to be everywhere. It is the top licensor in the world, with licensed companies and the company’s DTC sales reaching $61.7 billion in 2022.
A Birthday Place, which uses Shopify, has capitalized on licensing opportunities by offering a range of Frozen-related products on its website. Similarly, Sun-Staches, which also wholesales to retail stores, sells its own licensed product from Frozen.
2. Netflix
Netflix is the largest streaming platform in the world. Over 77 million customers pay for access to its on-demand content library. With its original series and films, Netflix has gained dedicated fanbases around many “sub-brands” or shows.
For instance, Fugitive Toys, which uses Shopify, sells numerous licensed products on its website and in its California stores. Among them are Stranger Things figurines.
But Fugitive Toys is not only licensing the brand with Netflix—they also license from Disney, Pokémon, and others.
3. Sweets & Geeks
Sweets & Geeks is a retail company that sells candy, clothing, toys, and quirky items inspired by pop culture. Therefore, it leverages multiple brand licenses to tap into current trends and generate interest in its products. It sells these licensed products through its website, retail stores, and personal events.
Its brand licenses include a variety of brands such as AirHeads, NFL teams, The Beatles, Settlers of Catan, and more. This allows Sweets & Geeks to create a collection of trendy products that resonate with shoppers’ interests.
Leveraging Trademark Licensing for Your Store
You do not need a famous character like Mickey Mouse to engage in trademark licensing. Sharing intellectual property for commercial use is a possibility for any brand—whether a licensor or licensee.
Use these tips to ensure your trademark licensing agreement is solid. Define financial compensation, quality assurance processes, and restrictions on how the licensee uses your intellectual property—especially considering that your brand identity will blend with theirs.
It may seem complicated, but a trademark licensing attorney will ensure your agreement is airtight. Start using Shopify POS
Shopify provides you with all the tools you need to manage your business, market to customers, and sell everywhere in one place. Combine in-store and online sales today.
Source: https://www.shopify.com/retail/licensing-101-brand-licensing-and-what-every-retailer-should-know
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