Most trademark licensing relationships are defined and evaluated based upon the terms in a license agreement contract. In the case of a brand extension license, there can be a lot at stake, including the health and vitality of the licensor’s brand. Surprisingly, many license agreements do not include specific terms or requirements that reflect key marketing objectives. This lack of ‘license alignment’ can be a serious deficiency in the license agreement that impairs the licensor - licensee relationship and limits the licensed business.

While careful planning can go a long way in creating successful new licensed businesses, this article focuses on problem situations with existing brand license relationships and agreements.

Seeking Alignment 

Trademark licensing arrangements attempt to leverage the positive associations and relationships that are related to specific intellectual property (e.g. artwork, brands, characters). In the case of a consumer product or service, the ‘brand’ is licensed and extended into a new or related category to generate incremental sales and profits for the licensee, while generating royalty revenue and marketing benefits for the licensor.

The license agreement attempts to define a complex relationship between licensor and licensee that impacts multiple stakeholder groups such as suppliers, employees, resellers, and consumers.

Problems can occur when license agreements fail to reflect key marketing objectives of the parties.

It is critical that the brand license agreement reflects marketing objectives of both licensor and licensee. Licensee performance should be evaluated based upon key performance indicators and metrics that are part of the license agreement. Of course, this is not often a simple task. Divergent business objectives make it difficult to create fair, balanced agreements. In addition, negotiating leverage and prowess are not always equal between the parties.

Alignment of the licensor’s marketing objectives with the licensee’s business objectives is essential to optimizing the licensing benefits for both parties. The end-goal is to develop terms that reflect these objectives and integrate related metrics into the license. Regular performance reviews and adjustments to license terms should also be considered as part of the license alignment process.

License Alignment Process

Key Alignment Factors

Brand licensing and brand extension is a long-term proposition. It is not unusual for these product lines to include multiple SKUs and continue for five to ten years, or longer. Indeed, it is the exception when one of these long-term relationships remains unchanged over time.

The reason why is relatively simple: business conditions change, and success in most businesses requires that companies adjust their products and services to reflect changing market conditions and customer needs. Successful license relationships are no different, and they too may require adjustments to the license agreement to reflect changes in the market place.

Whether you are planning a new license or evaluating an existing license, there are four critical elements of the marketing mix that should be defined, measured and adjusted within the license agreement to reflect the key marketing objectives of the parties: brand positioning, consumer/end-user, distribution, and advertising and promotion. The following guidelines relate to products. 

 

1.   Brand Positioning

Brand positioning provides the crucial construct of a brand licensing program and products. Each licensed product should have specific attributes that are consistent with and reinforce the licensed brand image. Importantly, the consumer or end-user of the licensed product perceive the ‘brand equity’ attributes of the product to be consistent with the licensed brand.

2.   Consumer/End-user

The target primary consumer/end-user is another critical consideration in the planning and evaluation of licensed products. Not only should the licensed product appeal to the end-user, the end-user should also appeal to the licensor. That is, there should be compelling benefits and value for both parties in reaching a certain end-user group. Of course, there should also be a process in place to analyze data on the consumer/end-user group.

 

3.   Distribution

Distribution is a key element of the marketing plan that the licensor and licensee should carefully address. The licensor must be aware of the effects of selling licensed products through new retailers and distributors or ‘resellers’. The critical consideration is whether the use of a reseller is enhancing or diminishing licensor or licensee relationships with other stakeholders (i.e. suppliers, employees, resellers, and consumers or end-users).

 

4.   Advertising and Promotion

The owners of most strong brands have spent relatively significant sums of money on advertising and promotion over the years. In fact, ‘brand awareness’ is a pre-requisite for developing a successful licensing program and a primary reason why most companies are interested in becoming a licensee. Unfortunately, high brand awareness can cause licensees to short-change advertising and promotion support for the licensed products, and lack of licensee support will severely limit the potential of the licensed business.

Aligning the License Agreement

As discussed, many license agreements do not reflect key marketing objectives and/or include terms that properly leverage the brand. Typically, the focus of these agreements is on financial terms such as royalty rates and minimum royalty guarantees, and as a result, the licensee’s performance is based on metrics that do not emphasize or measure the marketing benefits that are desired by both parties. Although sales and royalties are important, there are certain key performance indicators or metrics that can be incorporated into the license agreement that better reflect the interests of licensor and licensee.

The following examples illustrate the type of metrics that can be used in the license agreement to create alignment and measure performance. These metrics can become requirements that are incorporated directly into the license agreement (versus targets in a ‘marketing plan’). Whatever metrics are used, the licensor and licensee need to gain agreement on these requirements to ensure that they are appropriately reflect their objectives and maximize the business potential.