Product Licensing: Benefits, Process & Examples for eCommerce

eCommerce is a dynamic industry, where brands must build consumer trust and brand recognition to thrive in the competition. Product licence is becoming very popular and being recognised as a beneficial strategy to boost a product’s attractiveness and obtain a competitive edge in the market.

According to a survey, the international sales of licensed goods reached $340.8 billion in 2022, which proves the efficiency of the product licensing strategy.

Learn about product licensing, why a licensing agreement is important, and how to obtain product licences with favourable terms. You need to understand the advantages and disadvantages of product licensing to make the right decision for your firm.

Product License: Overview

A product license is a legal agreement whereby one party allows the other to manufacture and market its product, and use its intellectual property and brand name. The person who manufactures branded products is known as the licensee, while the person who owns the brand is known as the product licensor. A product license sets terms for royalties for the licensor. 

Process of Acquiring a Product Licence

The procedure to acquire a product licence is as follows:

1. Select Your Products Carefully – The products selected should be consistent with your brand personality and strength. They should have the potential to take up a major market share.
2. Assessment of the Provider – It is necessary to start communication and demonstrate an interest in the licensor and his product. Identifying the right partner is one of the most crucial activities. Ensure that the name and image fit your business and the organisational goals of the business. Analyse the prior project experiences and market records of the licensor.
3. Negotiation – It involves the determination of various terms and conditions that govern the product licensing agreement. Include detailed provisions for royalty payments, marketing policy, and any other practice that the partners will have to adhere to, like product specifications for maintaining quality, the geographical areas allowed, and the period of the agreement.

Strategies for Identifying Products for Licensing

The choice of the right product to be licensed is a crucial factor for success. The following approaches should be taken to look for potential collaborators for product licence.

• Market research: Analyse the current market situation to identify customers’ needs and the issues they tend to experience most often. With this knowledge, it becomes easy for one to narrow down the options for products. Locate merchandise that offers items with unique characteristics that may assist in meeting the needs of the customers.
• Interact with Licensing Consultants: These experts have many clients who are searching for licensing agreements for all kinds of products. This is particularly important because their knowledge can assist you in getting the opportunities relevant to your field faster than otherwise.
• Trade Shows and Conferences: These events will help you reach many potential licensors who bring unique and new products to the market.
• Make Use of Trade Directories: Check specialised trade directories that contain firms or products that are willing to enter into licence agreements. These resources provide quite a vast pool of information when it comes to looking for possible licensing partners.
• Stay Updated With Industry Publications: Analyse current issues, magazines, and journals. Look for articles on market types of potential licensing subjects that will fit your strategic business vision.

Process of Licensing Products to External Parties

Here is how to give product licence to external parties:

Develop a Licensing Plan:

The power and control of the licensor are relatively high in the case of an exclusive product license. It permits to manufacture and distribute the products within the specified region. A non-exclusive licence increases outreach since several licensees are allowed to utilise it. Here, the licensor has less control over marketing and production as compared to the licensee.

Factors to be included in the licensing plan are:

• The royalty structure: This defines how the licensor’s ongoing payment will be set. This should be integrated into the strategy. 
• Revenue Percentage: In the fee structure, a fixed percentage of the total income that the product generates is determined.
• Per-Unit Fee: An amount that the licensee agrees for each unit sold in the market through distribution channels.
• Combination: A mixed strategy of charging per unit of goods or services and a percentage of the revenue.

Marketing of the Product Licences:

Marketing tools are employed to promote the product, compare it with rivals, and stay in touch with the consumers. Good marketing practices attract companies (licensees) that are interested in expanding into new areas and providing new products and services.

What is Product Licensing and How it Works?

New product concepts can be brought to the market by product licensing. The licensor or the owner of the asset grants the licensee to produce as well as market and sell the product for a given period and within the specified regions.

The licensee uses the intellectual property and has to give a percentage of the earned profit to the licensor. With its resources and established distribution system, the licensee manufactures the product and either markets it directly to the general public or supplies it to other firms as stated under the license for the agreed amount of time.

Understanding the Concept of Licensing Agreements

A licensing agreement is an essential legal document that outlines the obligations and rights of both parties involved in the contract. It specifies the terms and conditions which allow the licensee to utilise the licensor’s intellectual property. It serves as a guide, ensuring that each party is aware of their obligations. 

Contents of a Standard Product Licensing Agreement

The following are some essential components frequently seen in a product licensing agreement:

• Product Definition: An accurate description of the licensed product, including any related patents or trademarks.
• Territory and Term: The time frame of the contract and the region in which the licensee is allowed to sell the licensed products.
• Money Matters: Royalties are used as the charge structure to cover the licensee’s usage of the intellectual property. It can either be decided at a fixed percentage of the total revenue generated or a fixed lump-sum amount for each product that is sold in the market. 
• Quality Control: Guidelines and practices for maintaining the product’s quality and brand image. 
• Distribution and Marketing Policies: Specifies the methods for marketing and selling the licensed product.
• Confidentiality Measures: Provisions protecting the licensee from uninvited disclosure of private information on the product and its development. 

Examples of Successful Licensed Products

What product licensing has done for LEGO Sets can only be termed as growth and success on a massive scale, as it partners with the ever-famous Hollywood franchise Harry Potter, dealing with building set designs. 

Another excellent example – is Häagen-Dazs, one of the most famous ice cream brands which has effectively used product licensing. It has granted permission to businesses all around the world to use their delicious recipes.

Microsoft doesn’t have to make everyone buy another copy of Windows, they have licensed it. By doing so, they have managed to massively increase their customer base in the market. 

Tips for Successfully Negotiating a Product Licensing Deal

As soon as you identify a product that has the potential to be very profitable, you have to get in touch with the licensor or the owner of the item. To negotiate all the terms and conditions, the licensor is the appropriate person to contact. Check whether you as the licensee will be the only one to use the licensed product or the licensor intends to involve other companies for the product. It is necessary to be as concise and clear as possible when stating your objectives and requirements for the licence. Discuss the quality control procedures, royalty scheme, marketing strategies, and sales goals. It sets the stage for a good and healthy working relationship. 

Budgeting for Product Licensing Expenses

Licensing is a good opportunity for online sellers to expand their business and range of products. However, effective supervision of the process includes rigorous preparations in terms of budgets. The following lists the main costs to take into account when planning for a product licensing agreement: 

License Charges:

• Advance Fee: For the licensing rights, some licensors require an initial payment. This charge may vary depending on the product, the market potential, and the extent of the brand’s awareness to the consumers.
• Royalty Payments: This can be in relative percentage of the total sales from the licensee or a proportion of the sales revenue earned per product.
• Legal Fees: Determining the qualitative nature of a licensing agreement requires legal aid in writing and evaluating the contents of the agreement as well as negotiating the conditions. 
• Promotion & Marketing: If you need your product to be promoted in the targeted market, then you must work on your social media accounts to improve brand recognition. Allocate the amount to be spent to run the ad campaigns and interact with the audience.

Factors to Evaluate Before Licensing Your Product

Assess the economic feasibility of your product’s licensing strategy. Analyse consumer needs for pricing and quality as well as trends in the market to determine what level of demand exists for your product. This means identifying potential clients and evaluating market trends. Consider factors like quality, price, and unique features to determine whether your product can stand out in a competitive market. A successful partnership in product licensing requires a shared vision, objectives, and standards of excellence.

Reasons Inventors Choose to License Their Inventions

Product licensing provides an organised approach to bridging the gap between innovation and the market. Following are the reasons why innovators choose product licensing:

Licensing gives innovators access to a licensee’s pre-existing infrastructure for those who do not have the required funds or personnel to manufacture the product. This allows them to use the licensee’s resources, including manufacturing capability, operational activities, and marketing strategies while generating income passively. Through licensee, the innovator’s products reach a wide network of target audiences. They can save a significant amount of time and money by collaborating with a licensee.

Advantages and Disadvantages of Product Licensing

There are several pros and cons to product licensing and they are listed below.

Benefits to the Licensee:

• Getting the best product ideas and features and turning them into tangible assets for quick market entry with a potential high-demanding product.
• Does not require investment in research and development, saving time and money. Current resources can be optimally utilised to manufacture and sell the product. 

Benefits to the Licensor:

• Reduction of the significant investment required to establish factories for production, distribution outlets for sales, and advertising campaigns for promotion. 
• Can concentrate more on innovation and development of new product concepts while the licensee handles its operations.

Drawbacks Faced by the Licensee:

• Relying on the intellectual property of any licensor can pose problems in terms of market performance. Products could become less popular, or customers might look for different products.
• Royalties are expensive, and negotiating favourable terms for the price is challenging.

Drawbacks Faced by the Licensor:

• The licensee regulates the manufacturing standards of the licensed product, marketing strategies, and selling techniques. The lack of resources, production capacities, and knowledge can diminish the product’s success.
• While almost all licensing agreements prevent intellectual property theft, even the most robust legal clauses can be misused, if not safeguarded adequately.

Income from Licensing Your Product Idea

Licensing your product is one of the most scalable ways to make residual income. Royalties represent passive income that does not require much work. Typically, these are figures based on a percentage of the licensee’s sales. The income depends on a few factors, including the product’s unique characteristics and current market demand. 

Determining the Worthiness of Product Licensing

A critical review must be conducted before beginning the licensing process. While estimating the value of a product licence, assess the risks and rewards for both parties involved. Consider royalty scheme, brand alignment, potential market exposure, and production capacity among potential licensees.

You need to determine if licensing the products can help you in achieving your business goals. For assessing market opportunity, you should prepare a market research report to analyse the market size, sales data and revenue growth, key trends, and information on major players of the related industry. Also, check whether the suppliers have the required knowledge and efficient manufacturing capacity along with quality control systems for handling demand. To succeed in a licensing agreement, your product must offer distinctive features to help meet the end-users’ expectations. 

Conclusion

Businesses and inventors can take advantage of product licensing. Licensees can partner with a logistics solution provider like Shiprocket to reach a large customer base. They make it simple to operate your eCommerce business. You can access a variety of their built-in features that help you with inventory management. Take advantage of discounted shipping rates from courier partners to offer competitive delivery options to your customers. At Shiprocket, they act as an enabler by simplifying fulfillment and logistics so that product license owners can dedicate their time to scaling their eCommerce businesses successfully.