WHEN DECIDING WHETHER OR NOT TO LICENSE A NEW PRODUCT
Given the popularity of licensing, many businesses today must face the question of whether to manufacture a new product itself or license the product to another company. Major factors entering into this decision are the nature of the product and the relative strengths of the business and its potential license. Experts recommend that businesses examine their core competences when deciding whether to license a product. For example, an in-depth assessment of the company’s unique skills and abilities may indicate that it could make more money by licensing its manufacturing process than it could by manufacturing and marketing a finished product. Basically, if your company has the expertise and resources needed to make the product profitability in-house, then you should probably do so. If not, then it makes sense to find a licensing partner who can contribute the needed resources and expertise.
The following factors may indicate that a business would be best served by launching a new product in-house rather than licensing it to another manufacturer: 1) the new product is a fairly straight-forward extension of an existing product or brand; 2) the new product will be sold through the same channels of distribution used for existing products; 3) the new product shares similar production and sales cycles with the company’s core business; 4) making the new product will not require special technical or marketing skills that would require the business to seek expertise it does not already possess; and, 5) the business possesses sufficient resources and production capability to manage the larger operating base required to produce the new product. When these conditions are met, it is likely that the company would benefit from producing its own goods rather than licensing them to another company.
Becoming a Licensee
Some business owners worry that they will not be taken seriously when they attempt to enter licensing agreements for the first time. They assume that individuals and companies that own licensable properties prefer to work with larger, well-established licensees. But experts claim that, in most cases, unsuccessful businesses have good opportunities to obtain licensing rights. Manufacturers looking to become fist-time licensees can expect fair but intensive negotiations and ongoing participation by the licensor during the life of the product. In general, licensors like to see that potential licensees have a solid track record of making quality products, including some that are similar to the property being licensed. Businesses interested in obtaining a license must be willing to submit a financial scrutiny, provide references, describe their available sales force and retail accounts, and make sales projections.
Suggestions for businesses interested in becoming licensees must do the following: 1) Businesses should try to license properties that are similar to their existing products and services, or that add an extra dimension to their core business; 2) Business should make sure that the licensors has a good reputation and a history of supporting the property and protecting it through legal means; 3) Businesses should examine the provisions of the contract to ascertain its length, the renewal options available, and the amount of guarantees and loyalties expected.
Licensing Agreements
The arrangements between the licensor and the licensee are typically laid out in a legal document known as licensing agreement. This formal agreement is an important component in a successful business venture. While it is impossible to determine the future success of a product, much can be done in the earliest stages to ensure that a licensed product gets the best chance possible. One might even say that the entire future of a licensed product is laid out, at least in part, during the process of negotiating a license contract.
Licensing agreements usually include a number of provisions designed to protect the interests of both parties. Some of the most common elements of licensing agreements are outlined below:
Financial Provisions
Payments from the licensee to the licensor usually take the form of guaranteed minimum payments and royalties on sales. Royalties typically range from 6 to 10 percent, depending on the specific property involved and the licensee’s level of experience and sophistication. Not all licensors require guarantees, although some experts recommend that licensors get as much compensation upfront as possible. In some cases, licensors use guarantees as the basis for renewing a licensing agreement. If the licensee meets the minimum sales figures, the contract is renewed; otherwise, the licensor has the option of discontinuing the relationship.
Time Frame
Many licensors insist upon a strict market release date for products licensed to outside manufacturers. After all, it is not in the licensor’s best interest to grant a license to a company that never markets the product. The licensing agreement will also include provisions about the length of the contract, renewal options, and termination conditions.
Quality Control
In order to ensure quality, the licensor may insert conditions in the contract requiring the licensee to provide prototypes of the product, mockups of the packaging, and even occasional samples throughout the term of the contract. Another common quality-related provision in licensing agreements involves the method for disposal of unsold merchandise. If items remaining in inventory are sold as cheap knockoffs, it can hurt the reputation of the licensor in the marketplace.
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