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Top 7 risks of brand licensing and how to mitigate them

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September 7, 2022 | 9 min read

By Michael Stone, chairman and co-founder of Beanstalk and author of, 'The Power of Licensing: Harnessing Brand Equity'

By Michael Stone, chairman and co-founder of Beanstalk and author of, 'The Power of Licensing: Harnessing Brand Equity'

While there are many marketing benefits to brand licensing, there are also risks - particularly if the licensing is not executed properly.

Generally, the benefits far outweigh the risks, and although the risks cannot be completely eliminated, they can be mitigated. Virtually all the risks have to do with a loss of control, which is an unavoidable feature of licensing. Brand owners are allowing a third party to utilize their most valuable asset - their intellectual property. In the journey from product development to consumer, many stops exist where there is risk.

Here are seven risks, followed by some things that you can do to mitigate them.

1) Licensed product failure

Cosmopolitan yogurts, Life Savers soda, Coors Rocky Mountain sparkling water, Colgate kitchen entrees, Frito-Lay lemonade, Bic disposable underwear, Ben-Gay aspirin, and, of course, Trump steaks. All failures.

A licensed product might fail for many reasons, and some of them are beyond the brand owner’s control. No one can force consumers to buy a product. Maybe the price/value relationship was wrong, the channel wrong, perhaps retailers don’t need a new product in the category, the competition is stiffer than anticipated, consumers don’t view the product as aligned with the brand, or the product misses the demographic target. Or maybe the idea was just a bad one.

Mitigation: When things go wrong, brand owners need to understand what went wrong and how it might inform future decisions. But we don’t want things to go wrong in the first place, which means brand owners must exercise forethought. Don’t just react to opportunities, be proactive. Do the research, the market evaluation, the strategy work, listen to what potential licensees say about the category.

2) Cannibalizing sales of the core product

When a consumer purchases Panera Bread soups at the grocery store, are they less likely to visit a Panera Bread restaurant for a bowl of soup, or are they two entirely different eating experiences? Does Crest Scope licensed disposable, pocket breath freshening spray cannibalize sales of P&G’s core Crest Scope mouthwash or do they have different use occasions - one is to carry and for convenience, the other kept mostly for use at home.

Mitigation: Brand owners must be sure that they are not making decisions that will damage the equities of their brands or consumers’ perceptions of the brand. Don’t make decisions that will disappoint consumers or affect their purchasing behavior in a negative way rather than the intended positive effect. This is entirely in the hands of the brand owner when evaluating licensing and product categories. While brands shouldn’t let fear misguide them, you do need to be careful about creating competition with your core offering or other brands in the portfolio.

3) Consumer complaints

A brand licensed its famous name for snow blowers. They didn’t work and broke down easily, and a consumer complaint made it all the way to the CEO. In another example, a licensee received a warning from the US Consumer Product Safety Commission about a product defect, didn’t fix the problem and was threatened with a recall. The brand owner wasn’t notified by the licensee until late in the process.

You can be fairly confident that if a consumer has a complaint about a licensed product or, even worse, is harmed by a licensed product, the consumer will be in touch with the brand owner, or worse, sue the brand owner. After all, the driver of the purchase was the brand name, the brand promise of trust and quality. The product looks like it came from the brand owner. Despite a brand’s best efforts, sometimes a clunker gets through the process.

Mitigation: Brand licensors must be prepared for consumer complaints, just as they are with respect to their own products. And licensees must be contractually responsible. Establish processes for handling consumer complaints in the license agreement, including indemnification and insurance provisions.

4) Contractual risks

I recall an incident when a licensee deviated from the style guide provided by the brand owner, didn’t submit the product for the required approval, and went to market with the unapproved product featuring the wrong design. It turned out to be a design that unintentionally insulted a group of consumers.

Although many contractual breaches can be resolved between the parties and don’t affect consumers (such as the failure to make timely payments), some breaches can cause mishaps in the marketplace. Licensees might sell unapproved products, or products outside of the contract grant, in countries that are not part of their contract, in unapproved channels of distribution (such as off-price retailers), or they may use social media without seeking approval (and that happens fast in real time). And much of this is further complicated by e-commerce.

Mitigation: Be sure to have strong contractual provisions that protect the brand and that can lead to breach, establish clearly understood contractual processes, and make sure that the people implementing the contract at the licensee understand those processes. Communicate, both formally and informally, with the licensee on a frequent basis. Be clear about expectations.

5) Non-performance

A famous brand in the do-it-yourself (DIY) category was licensed in the tape category (e.g., packing tape, duct tape, painting tape). The products were great quality, packaged beautifully and aligned with the brand’s equities and objectives. The licensee was passionate about the brand. Too bad Duck and Gorilla brand tapes filled the shelves. The licensee couldn’t get any retail traction and failed to perform. The competition was too tough.

Non-performance can result from many reasons - financial obstacles, challenging competition, the wrong distribution strategy, retailer limitations - often despite a good product idea, good design and the right price.

Mitigation: Gather information before making a decision. Don’t be arrogant about the fame of your brand and don’t let potential licensees be blinded by the fame of the brand. Ask for a business plan from the potential licensee. Again, do your research.

6) Retailers have the power

In 2000, the marykateandashley fashion apparel and accessories program exploded on the floor of Walmart stores across the country and continued its success for another eight years. The brand owner provided Walmart with beautiful camera-ready artwork for the signage to be used on store racks. Yet, often either no signage or the signage of other Walmart brands were featured on those racks. There was nothing that the brand owner could do.

Once licensed product is in a retailer’s hands, even with strong brand support, there is not much that a brand owner can do about what is done with the product, how it is displayed in brick-and-mortar or online, and how it is marketed by the retailer both offline and online. Ditto how the product is priced or discounted. The retailer is the gatekeeper and holds most of the cards.

Mitigation: Understand what is going on at retail in the category and understand the competition. Always know to which retailers the licensee intends to sell and at what price point before signing a license agreement. This should be covered in the licensee’s business plan.

7) Making promises that you can’t keep

When brand owners are “selling” their brand to prospective licensees they often speak enthusiastically of all the benefits flowing from a relationship with the brand. These may sound like promises but are really only possibilities. Perhaps the brand owner talks about marketing or co-promotions or its great relationship with retailers or its design department, social media campaigns or help with product development. Later on, when the brand owner is not able to deliver on these “promises,” the relationship can sour.

Mitigation: This is an easy one. Don’t make promises that you can’t keep or that you wouldn’t be able to formalize in a contract.

A licensing program characterized by the brand owner’s research, strategic thinking and insight, constant and continuous management of its licensees and frequent and regular communication and performance evaluation can’t guarantee success. However, it will greatly mitigate the risks of licensing, be likely to improve the licensee’s performance, and allow the brand owner to reap the many marketing, communication and financial benefits of licensing.

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