Brand licensing happens when a company grants permission for other businesses to commercially use their intellectual property—be that their brand name, software, or patent—in return for royalties.
If you’re unsure whether brand licensing is right for your business, this guide is for you. Explore the types of deals you can broker, the benefit of licensing your intellectual property, and examples of brands that have successfully licensed their products.
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What is brand licensing?
Brand licensing is the act of giving permission to another company to use your business’s intellectual property (IP).
Brand owners lease their patents, software, or characters to other companies. Licensees can re-sell the IP at a higher price or manufacture merchandise with the IP on it. Either way, the licensor gets a kickback—as a percentage commission or a one-time fee—as a thanks for granting permission.
One real-world example of a brand licensing deal is Barbie. The global brand is known all over the world and has licensing deals with all kinds of businesses, retailers included. One such retailer is Shopify merchant The Oodie, which sells limited edition Barbie products.
5 types of licensing deals
Brand and trademark
Businesses can own the rights to use a brand name or logo. These are called trademarks, and they exist to prevent other companies from using a company’s assets.
Companies can give licenses for other brands to use their trademarks. Take Coca-Cola, for example. Independent brands that manufacture the fizzy drink on behalf of Coca-Cola can do so because they have a trademark license. These partnerships drive upward of $1 billion in retail sales for the mega brand.
Patents
A patent is similar to a trademark in the fact that it’s intellectual property legally protected from unauthorized commercial use. The only difference is that patents are given to new inventions, not brand names or logos.
Patents can be awarded for new machinery, design (consumer product), or plant inventions. One example is Lollacup. Anyone who wants to use its weighted children’s sippy cup needs a patent license from the brand.
Character, entertainment, and art
Characters are another type of trademark that brands can license. The most obvious example? Disney. You’ll find Mickey Mouse, Marvel, and Star Wars characters on merchandise all over the world—not just official Disney merchandise. Third-party brands get a license to use Disney’s characters on their clothes, home décor, and mugs.
These trademarks pass over into entertainment. Disney also licenses its movies, TV shows, and music. Even footage of its theme parks can only be used by those with a brand license.
Software
If you’re paying to use a software, you’re buying a single-user or team license. You’re not allowed to sell access to the software to anyone else—unless you have a multi-user license. This allows third-party companies to re-sell a software company’s code to other people.
Sports
The licensed sports merchandise market is big business. It reached a value of $31.3 billion in 2022 according to the Global Licensing Group—a figure predicted to grow at a compounding annual growth rate of 3.5% through 2028.
Sports teams in the NBA, NFL, and European soccer leagues all broker brand licensing deals. Each agreement allows third-party companies to produce merchandise with the team’s logo or player name.
The benefits of licensing your brand
Grow your brand and reach a wider audience
Licensing your brand essentially means forging a partnership with another business. One of the main benefits of these partnerships is being able to reach a wider audience.
Working with another brand gives you instant access to its customers and audience, and vice versa. Whether you’re the licensor or the licensee, both brands lend each other their audiences to grow and expand into a new age demographic, geographic location—you name it. Market penetration is easier when you’re working with licensees who are already established there.
Build stronger relationships with customers
As your brand grows, your customers’ desires and expectations grow with it. No matter the size of your company, it can be hard to grow a product lineup in a meaningful way that keeps pace with those customer expectations.
Licensing your brand is one way to build bridges between your manufacturing and product design capabilities. The end result? Driving repeat sales and delivering the products your customers are looking for.
“The licensed product definitely spreads faster on social media,” says Brian Garofalow, Chief Marketing Officer at Igloo. “And when people buy it, they love sharing it. That’s a huge part about our businesses and our positioning: We’re fun. It makes a lot of sense when we do fun licenses, because it puts smiles on people’s faces, and they love showing off their coolers.”
Generate incremental revenue and diversify your revenue
With a brand licensing agreement, and as the licensor, you’ll typically receive royalties for every licensed product sold. Royalties aren’t typically going to take your business from $1,000 in revenue to $1 million, but they can be a good way to add incremental value and diversify the ways your brand can make money.
Depending on the licensed merchandise, that incremental revenue can even help to smooth out seasonal swings in your retail store.
Protect your brand against counterfeit products
If you’ve ever been to a public market, you’ve probably seen unlicensed and counterfeit products being sold illegally. Think of those $20 “Coach” handbags or $10 “Ray-Ban” sunglasses.
When a brand gets big enough, counterfeiters are never far behind. Licensing your brand can help you stay ahead of this curve. One of the first stages of the brand licensing process is to protect your intellectual property. It also protects your brand’s prestige with explicit terms around discounting and similar issues.
This proactiveness means your brand has a leg to stand on when battling counterfeit products.
Experiment with new product categories
Breaking into a new market is risky. Sure, you can do product research, listen to customers, and keep an eye on what competitors are doing. But you never truly know whether investing in a new product will pay off until you do it.
Brand licensing deals can make this less risky. On the one hand, well-established businesses have access to finance, expertise, and experience in an already established market. On the other hand, as a startup company, you’ll need to either seek outside funding or put your own money into product development. This can take a lot of time and money, and it can also be dangerous.
An established, more profitable corporation will be able to manufacture in larger quantities and advertise your product to a much larger audience—something smaller, independent businesses can’t do so easily.
Lean on manufacturing or distribution resources
One of the hardest things about growing a retail business is manufacturing. You can drive customers to your store or ecommerce website, but as soon as they get there, you need the manufacturing process to run smoothly. Otherwise, those potential customers leave empty handed.
According to Gerrid Smith, chief marketing officer at Joy Organics, brand licensing makes this easier. “Working with a licensor or licensee who has established manufacturing and/or distribution facilities and experience may allow you to take advantage of these resources,” he says.
“This could shorten your time to 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 the licensee may be able to save money and gain efficiencies.”
How to license your brand
An effective brand licensing strategy ensures that your brand’s assets are safe and protected, and that any licenses you hand out will ultimately benefit your brand. Here’s how to get started.
1. Protect your intellectual property
Protecting your intellectual property (IP) is one of the most important factors behind licensing your brand. The last thing you want is to accidentally give someone full, unfettered 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 to get started early. Ensure your brand’s assets are trademarked and protected from the very outset. Then you can think about licensing them down the line.
2. Do your research
Licensing your brand isn’t a one-and-done process. If you’re looking to aggressively pursue brand licensing as a growth engine for your retail business, it’s best to create an overarching strategy that outlines what you’re looking for in a potential licensee. That way, you can make a quick decision about which companies to approach and approve.
It all starts with extensive research. Like any partnership, you’ll evaluate potential licensees to ensure they’re a good fit for licensing your brand. There are a ton of factors that go into brand fit, but let’s boil it down to a few questions you should consider:
- Are your customers interested in this product? If customers frequently ask if you offer a product (and you don’t), that’s a good opportunity to offer someone else a license to produce that product under your brand name.
- Does your brand’s equity translate to this product? Sports teams license their logos and names to apparel companies because fans snap up Red Sox hats like there’s no tomorrow. That fits. It wouldn’t make quite as much sense for Tampax to license their brand to a company that makes breakfast cereal.
- Does the licensee have the operational capacity to add value? You gain the most from brand licensing agreements when the licensed products sell (a lot.) For any potential licensee, ask yourself: Can they produce enough of the licensed product to make the agreement lucrative?
3. Set terms and restrictions
Once you’ve found a potential licensee who’s a good fit for your brand and customers, it’s time to draft the licensing contract. As we just touched upon, you should work with a licensing agent or attorney to help ensure your contract includes all the necessary terms and that the agreement is legally binding.
As your agent draws up the license, there are several terms and restrictions you’ll decide on. These lay out the specifics of the partnership and set expectations for both you and the licensee.
How to create a brand licensing agreement
A brand licensing agreement accounts for every detail involved in how two companies will work together. For example, the licensee (the company buying rights to license a brand) often pays a portion of each sale of the licensed product back to the licensor (the brand being licensed). Here are nine things to consider in your agreement.
Work with a lawyer
Nobody knows the nuts of bolts of a watertight agreement like a brand licensing lawyer.
Do a Google search to find lawyers experienced with your type of intellectual property—such as patent or software law—as well as your industry. Ask previous clients for reviews. Read case studies of deals they’ve brokered. Make sure you’re clear on what fee they’ll take from the deal before signing on the dotted line.
It’ll take some time to find a lawyer who will make your brand licensing deal fair for everyone involved, but it’s the most important part.
Define the intellectual property being licensed
Alongside clearly defined roles for both the licensee and licensor, your brand licensing agreement should clearly define what is (and isn’t) included as part of the agreement.
Sanshee is a retail business that manufactures premium merchandise for video game and anime fans. According to Sarah Fetter, the operating manager who brokers Sanshee’s licensing deals, “[You need to specify] licenser deliverables; things like, ‘We agree to promote the item you’ve created for us within X amount of time.’ All of that spelled out in advance is such an amazing thing to have.
“And then, having a full suite of just all of the assets that I could ever hope for, whether it’s a copy of the game or backgrounds on the characters if it’s not out already; any of the artistic stuff or character items. Basically, any of that stuff we need to know [should be] there on the day we sign the license.”
Consider exclusivity
The majority of brand licensing agreements are non-exclusive. That means you can license your brand to as many competing apparel manufacturers as you choose. Even though non-exclusivity is the norm in brand licensing, it still needs to be outlined in the contract.
In some cases, you may choose to offer a small number of exclusive licenses. Fewer licensees exclusively using your intellectual property gives them a competitive advantage—in which case, you can typically command higher royalties.
Identify royalties
One of the biggest benefits of licensing your brand is the extra stream of revenue you build. Licensees make money off the back of your intellectual property. So, in your brand licensing agreement, go into extensive detail on the structure of your financial compensation for licensing your business’s IP.
Some common payment structures for brand licensing deals are:
- Initial flat fee. Licensees pay an upfront, flat fee to license your IP. This is typically on a yearly basis.
- Ongoing royalties. Licensees will pay a set percentage of unit price or specific dollar amount for each licensed product sold. If you’re claiming a 10% royalty on licensed products and your licensee sells $500,000 worth, your cheque would be $50,000.
Some brands also choose to include sales monitoring as part of their agreement. In this case, the licensor can request sales data from the licensee to check whether the partnership makes commercial sense to continue.
Conversations around discounting licensed products may also arise throughout this process, especially using the royalty payment structure. In your licensing agreement, clearly state the maximum discount your licensees can offer to their customers. After all, a 10% royalty from a $50 full-price licensed product is dramatically different from a $20 discounted one.
Think about quality insurance
When you give another company permission to use your name, logo, or likeness on their products, you’re taking a calculated risk.
Your brand is automatically associated with—and to some extent, held accountable for—the quality and content of those products. That’s why it’s vital to include quality assurance terms in your licensing agreement. Your brand identity and reputation are at stake.
Quality assurances might include restrictions for the licensee around:
- Distort images (like your brand logo)
- Changing your brand fonts or colors
- Adding new code to the licensed software
To protect your brand image, in your agreement, clearly define what’s being licensed (i.e., a video game character) and any restrictions on how a licensee can use it. For example: “Licensee cannot use our IP to manufacture or sell alcohol-related products.”
Timeframes
How long are you granting the license for another business to use your intellectual property? Sanshee’s Sarah Fetter likes to go for a year or two. It gives her time to assess the popularity of a licensed product before investing in a longer-term deal.
However, there’s no ideal duration for a licensing agreement. A year is a good starting point, but certain brands like long-term partnerships so they have more time to sell their licensed inventory. Others dipping their toe into the licensing waters might opt for short-term deals to see whether it’s a business model that works for them.
The length doesn’t matter so much. What does matter is including your agreed timeframe in your brand licensing contract.
Geographic regions
If you’re working with several licensing partners, clearly define the regions they’re allowed to use your IP in. It’ll prevent them from competing with one another and causing arguments.
If you’re outside of the US, you generally can’t sell items in the countries where the IP is held. So, if a person in England is making a game and you sign a contract with them, you likely aren’t going to be able to sell in that country, because they already have somebody who’s doing it locally.
Certain countries’ mail systems also play a role in agreeing on geographic regions. Sometimes clients will ask you not to sell in certain countries because you spend so much time trying to make sure you get their items.
Shipping responsibilities
Consider shipping responsibilities in your brand licensing agreement. Who will be responsible for picking, packing, and shipping an item to a customer? Where will the inventory be held: at your warehouse, the licensee’s, or a third-party logistics (3PL) partner’s distribution center?
Ideal terms look like this: “We are going to send you X amount of items to send to Y location.” And that’s it. When you get into importing and specifications and requirements it becomes really complicated, especially when you’re trying to do fulfillment.
Include a termination clause
Every contract must have a termination clause that explains:
- When the licensing agreement ends
- How either party can end the contract prematurely
- The notice required to do so
You should also explain whether the brand licensing deal auto-renews after time is up—and if so, at what price. If you’re entering into a two-year contract with a licensee, for example, you may have a clause stating that if the deal is automatically renewed, your royalty fee increases from 10% to 12% of all licensed product sales.
Examples of licensing agreements
The Walt Disney Company
Disney doesn’t manufacture every t-shirt or coffee mug with its characters on it. Since the empire signed its first licensing agreement back in 1933, thousands of other businesses have had deals with Disney for the right to use its characters, series names, music, and other trademarks. Those businesses handle details like producing and manufacturing those products.
These licensing deals are why Disney seems to be everywhere. It’s the top licensor in the world, with licensees and DTC sales netting the company $61.7 billion in 2022.
Shopify merchant A Birthday Place tapped into this brand licensing opportunity, offering a line of Frozen-branded party goods on its website. Similarly, Sun-Staches, which also sells wholesale to retail stores, has its own Frozen-licensed product.
Netflix
Netflix is the biggest streaming platform in the world. More than 77 million customers pay for access to its on-demand library of content. And with its own series and movies, Netflix has amassed dedicated fan bases around several of its “sub brands” or programs.
Shopify merchant Fugitive Toys, for example, has several licensed products for sales on its website and in its California stores. Among them are Stranger Things figurines.
But Fugitive Toys doesn’t just do brand licensing with Netflix—it also, like A Birthday Place and SunStaches, licenses from Disney, Pokémon, and others.
Sweets & Geeks
Sweets & Geeks is a Shopify merchant that sells pop culture-inspired candy, apparel, games, and novelties. As such, it leverages several brand licenses to be able to tap into current trends and spark interest in its products. The merchant sells these licensed goods through its website, retail stores, and in-person events.
The brand licenses are diverse, including AirHeads, NFL teams, the Beatles, Settlers of Catan, and more. This allows Sweets & Geeks to create a range of timely, trending products for shoppers.
Leverage brand licensing for your store
You don’t have to have a character as famous as Mickey Mouse to get involved with brand licensing. Sharing intellectual property for commercial use is a possibility for any brand—either as the licensee or the licensor.
Use these tips to make sure your licensing agreement is watertight. Define the financial kickbacks and quality assurance processes, and have restrictions on how a licensee can use your IP—especially considering your brand identity will be merged with theirs.
It might sound like a lot to work through, but a brand licensing attorney will make sure your agreement is watertight.
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