Licensing is defined as the process of renting a copyrighted or trademarked entity for use with a product or service. It might be any assets from the signature of someone famous to a picture, graphic or logo. A business contract is drawn up between the owner of the trademark or copyrighted material and the individual who wishes to rent it. These people are identified as the licensor and licensee respectively.
Why would anybody want to license an entity? Simple answer is to get more sales. A few brands attract such high customer loyalty that you can sell almost anything once you have that image or logo or signature on your product.
The licensor is normally encouraged by the cash they could earn but this is not always the sole reason. Entering into the market could be a bigger issue. For example, if a new movie is being produced, the producers realize that having stacks of toys or goods related to the movie in shops will aid increase the hype around launch date thus leading to a raise in box office takings.
Licensing also gives the licensor an opportunity to move into related product areas without having to incur the rate of product design or development. They might be looking to break into new markets for illustration a US product launching in China but because of limited knowledge of the new market they will want to try out first via a relatively low risk cheap way such as licensing. If the new market loves the product, they know they have only hired the brand for a short length of time and are collecting a percentage of sales. Once the time frame is up they can enter the market on their own. If the new market isn't successful, they have still got revenue from hiring the brand but they haven't wasted any money testing an unresponsive marketplace.
Obviously the licensor needs to guard their brand first and foremost so there will be very strict quality controls put in place to cover this issue. An Additional common elements to a license will be a specific geographic place i.e. you cannot just trade wherever you wish. The deal will also stipulate the time the license has been permitted, the conditions for renewal, the agreed contract rate and terms of payment - this is usually a percentage of sales subject to a minimum value i.e. you complete paying a specified minimum amount even if you don't sell anything. But if your product sales take off, you will pay some percentage back to the licensor. There will also usually be an agreement over how many licenses will be issued for that specific territory i.e. you could have a sole license or be allowed to license more people.
People who want to take up a licensing contract do so since they believe that they have found a perfect market for that product but do not have the capacity to financial support the operation themselves. Or they may have developed a new product that will do much better having been associated with that brand name for even a short period of time. Building status in the business is important, almost as vital as being 100% sure you understand the licensing process and know accurately what you are getting into before you sign that contract.
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