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How Licensing Facilitates
Licensing is defined as the process of leasing 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 signed between the owner of the trademark or copyrighted material and the individual who wishes to rent it. These people are called the licensor and licensee respectively.
Why would anyone want to license an entity? Simple answer is to get more sales. Several brands attract such high client loyalty that you can sell almost anything once you have that image or logo or signature on your product.
The licensor is usually motivated by the cash they could earn but this is not always the sole reason. Entering into the market could be a bigger issue. For instance, if a new movie is being produced, the producers understand that having stacks of toys or goods related to the movie in shops will help increase the hype around launch date thus leading to a rise in box office takings.
Licensing also provides the licensor an opportunity to move into related product areas without having to incur the cost of product design or development. They may be looking to break into new markets for example a US product launching in China but owing to limited knowledge of the new market they will wish to try out first via a relatively low risk inexpensive route such as licensing. If the new market loves the product, they know they have only rented the brand for a short length of time and are collecting a percentage of sales. Once the time limit is over they can enter the market on their own. If the new market isn't successful, they have still got revenue from leasing the brand but they haven't wasted any money testing an unresponsive marketplace.
Obviously the licensor needs to guard their brand first and foremost thus there will be extremely strict quality controls put in place to cover this issue. An Additional common elements to a license will be a specific geographic location i.e. you cannot just trade wherever you want. The deal will also stipulate the timeframe the license has been permitted, the conditions for renewal, the agreed contract price 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 though 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 particular territory i.e. you could have a sole license or be allowed to license more people.
People who wish to take up a licensing contract do so as they believe that they have found an ideal market for that product but couldn't finance 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 vital, nearly as crucial as being 100% sure you understand the licensing process and know exactly what you are getting into before you sign that contract.
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