Licensors often start their vetting process with a license application to learn about a prospective licensee’s proposed licensed product, the sales potential for the licensed product, and the underlying financial health of the licensee. This may be sufficient if the primary goal for a licensor is revenue generation; however, if the licensing strategy goes beyond royalty generation, a licensor will need to consider other factors to help ensure all parties have more significant opportunity for success in the licensing relationship.
A licensor who seeks to increase awareness of its brand, expand into new categories or markets, or develop new products to help serve its business goals, for example, may not consider short-term royalty potential as the primary factor in evaluating new licensees.
Depending on a licensor’s strategy, it might also incorporate factors into its review and vetting process to gain a broader view of a prospective licensee, its alignment with a licensor’s mission and vision, and potential for long-term growth. In such situations, a licensor’s vetting process might include the following:
- Organizational Fit. A prospective licensee and the new licensed products it proposes must be a good fit with a licensor’s mission and vision. The proposed products, the manufacturing and sourcing procedures, and the marketing and merchandising strategies, must all be in alignment with a licensor’s brand, image, and organizational direction. The prospective licensor’s business practices, executive leadership, management, and customer service staff will likely have an impact on a licensor’s brand, and these factors should be considered in the evaluation of alignment with the licensor’s organization.
- Operational Stability. Stability is essential, and some licensors assess stability by the number of years a prospective licensee has been in operation or the appearance of financial solvency; however, a more in-depth dive is always required. For example, a licensor will likely want to pull Dun & Bradstreet reports, ask for financial statements from non-public companies, check several references (other licensors, vendors, and manufacturers), and evaluate the leadership biographies for relevant experience. A licensor might also want to consider a prospective licensee’s operational structure and supply chain, paying particular attention to the ability to fulfill its marketing, sales, product delivery obligations in determining a potential licensee’s stability. In some cases, a licensor might also want to conduct a site visit to confirm its findings before issuing a license.
- Expertise. Experience with the proposed licensed product and the specific market for that product is best, although not always essential. If a prospective licensee has strength in a product category or market, a licensor will likely benefit from that expertise. However, there are times when a prospective licensee has knowledge with similar products in the market and is looking to expansion opportunities. In these situations, a licensor will need to consider if the expertise in existing markets or with similar product-lines will translate well into the proposed expansion plans with the licensor’s brand.
- True Opportunity. Opportunity for expansion into new categories and markets always should be considered, although carefully weighed against the risk to the brand. Prospective licensees rarely hit a home run with their first proposal to a licensor because they do not have a thorough understanding of the brand or a licensor’s strategy. It is up to a licensor to look for the “true” opportunity within the proposal, rather than just what is written specifically in the proposal. A licensee may not have sufficient knowledge of what is possible when proposing a licensed product. However, if a prospective licensee is open to exploring how to create a better fit with a licensor’s needs, values, and expectations, a licensing partnership might evolve to maximize the opportunity for both parties.
- Innovation and Creativity. Innovation and creativity may be the most critical factor when considering a prospective licensee’s proposal. Most licensors need progressive licensees—those who desire to go beyond placing a logo on an existing product in potential license’s current line. While there is a need in some categories for a product with a “logo slap,” a prospective licensee who demonstrates a commitment to developing new products or merchandising approaches that align with a licensor’s strategy, mission, or vision reflects a level of innovation and creativity that can create a valuable licensing partnership.
- Commitment to Brand. Commitment to a licensor’s brand should be demonstrated through a prospective licensee’s product development plan, marketing plan, and merchandising approach. A financial commitment should be readily evident, but a licensor should also look for messaging alignment, documented product growth strategies, and of course, a passion for the brand.
One way for a licensor to build value is to use this approach to systematically identify and develop new opportunities beyond the obvious. In fact, a key strategy for growth brands should be to raise brand visibility in unexpected places.
In fact, many excellent opportunities will come from distribution through unexpected places and proposals for such distribution warrant a much closer look. This is particularly true when a brand is first launching a licensing program or when a licensor desires to connect with its core audience in a different market.
For example, in the case of one organization rebuilding its licensing program, a prospective licensee’s commitment to the brand and their creativity and innovation in design resulted in several solid concepts, which later became successful licensed products in consumer markets where the licensor’s presence was very unexpected. The success of these licensed products proved the value of the licensor’s brand in the consumer marketplace and was instrumental in helping the licensor re-launch its licensing program.
Stable, innovative, and committed licensees who have a passion for a licensor’s brand are likely to be better partners and generate substantial revenue over time.
Some licensors may choose to focus primarily on new licensees who might generate higher royalty revenue for a short period, while others prefer the steady, long-term growth in royalty revenue. For the latter, a vetting process designed to create stronger alignment with a licensor’s mission, vision, and long-term goals, ultimately provide greater success for the program and result in stronger, more prosperous licensing partnerships.
The six factors above will not ensure the long-term success of a licensee nor necessarily create a better licensing partner. However, considering those factors will help a licensor identify prospective licensees who are a better fit with the overall licensing strategy.
A version of this post was originally published in the Licensing Industry Merchandiser’s Association (LIMA) Bottom Line newsletter.
One of the most significant challenges for licensors is to keep the opportunity pipeline full. Regardless of the size of the licensing program, finding and qualifying prospective licensees can be a challenge. Some licensors need more opportunities to explore, while other licensors have the opportunities but do not have a defined qualification process. Unfortunately, some licensors have both challenges. To overcome those challenges a licensor might consider the following sales and business development techniques.
Let’s start with three fundamental assumptions:
- You have a strategy for each of your licensed properties;
- You’ve identified the product categories that align with your core brand message and best support your licensing growth goals; and
- You have a realistic understanding of the value of your brand and licensed properties.
While having a defined strategy for each licensed property and knowing the categories which each property fits best is a great starting point, you also need to have a realistic expectation of your licensed property’s value to a prospective licensee. For example, you may have a top brand in one category, but your brand might not bring significant or even incremental value to the market leader in another category that you’re targeting; therefore, your brand probably has less value for that category leader than it would for the number two or number three player. This will be a crucial factor in targeting and qualifying licensing prospects.
With these assumptions in mind, you can begin developing or refining the process to grow your licensing program.
Finding prospective licensees
Prospective licensees fall into two camps: Those who know and see value in your brand, and those who do not. The former is likely to be already knocking at the door to pitch new ideas, but the latter creates the biggest challenge for most licensors.
The best way to identify possible new opportunities is through Environmental Scanning—careful monitoring of the marketplace—for new licensing deals in your target product categories. You can also identify potential opportunities by noting specific changes at companies within those target categories, which might include:
- Changes in licensing, marketing, or other senior leaders;
- A shift in organizational strategy, new product line development or line extensions; or
- Expanding markets—either demographic or geographic.
Excellent sources of such information for Environmental Scanning purposes include LIMA, licensing trade publications and other marketing and business publications. It is important to note that Environmental Scanning typically provides advance indicators of possible opportunities, not those opportunities already clearly defined. You will have to invest time to determine if an opportunity does indeed exist, and how you might leverage your licensed properties into the mix.
When a prospect is identified, it is important to create an ongoing marketing and sales program to keep connected. Like any type of marketing program, a prospective licensee needs regular communication to keep your brand top-of-mind for the time when the opportunity does present itself, and the licensor’s sales and business development team steps forward to qualify and close the opportunity.
Qualifying new opportunities
Regardless of the source, once you have identified what you believe to be an excellent prospective licensee, it is important to have objective criteria in place to help you evaluate fit with your brand. The majority of prospective licensees will look good on the surface and will be reputable, but a deeper dive will give you a clearer picture of how well the company, its products, and its business practices align with the values and expectations of your business.
The first step in collecting the information you need to qualify further a prospective licensee is via a licensing application. The qualification process should include a review of objective matters such as:
- The applicant’s financial solvency, possible legal issues (including product recalls, infringements, social- and/or labor-related matters);
- Experience in developing and launching similar products in the marketplace;
- Experience working with other licensors, and;
- Reputation in their distribution channels for meeting demand.
A licensor may need advice from finance or legal experts for some areas of review.
Key Point – Ask: Does the market need this product?
The market need or opportunity for the proposed licensed products is critical in the licensor’s decision process. A licensor should also evaluate the prospective licensee’s understanding of the marketplace, the market needs for the product, the strength of the product development and launch plan, and the company’s commitment to market the licensed product. Then consider whether the licensor’s brand truly brings value to the product in the marketplace. If all align, it might be a good opportunity to further consider.
These review steps are somewhat subjective, yet an experienced licensor will quickly spot those proposals that are likely to fall short of expected performance if a deal is completed.
A prospective licensee who scores well in all of these review categories is clearly a catch. Those who do not may still be a good match for a licensor; it depends on the tolerance level for imperfect feedback in one or more of the review categories.
Some licensors develop a rubric or scorecard for evaluating prospective licensees and their tolerance for variances in the review categories is built into the scoring process. This approach also helps to make the review process a little more objective. The most significant challenge in finding and qualifying new licensing opportunities has more to do with the lack of structured, formalized systems for achieving these goals.
Keep in mind the best opportunities for a licensor are not those that are readily apparent. Licensors will have more significant success in growing licensing opportunities by looking not at “what is,” but at “what can be.” A defined process for identifying and qualifying opportunities will help you find and leverage “what can be” much more quickly.
A version of this post was originally published in the Licensing Industry Merchandiser’s Association (LIMA) Bottom Line newsletter.