Most Common Pitfalls Licensees Watch Out For Part 1 | Branding | Brand Licensing
Over the past fifteen years, I have seen many licensing deals go south because one of the parties fell into a pitfall that could have been avoided. I will share with you the most common pitfalls of brand licensing that I have come across.
Biting off more than you can chew
Licensors interested in licensing a category to a prospective licensee will ask the licensee for sales projections by region and by channel along with a sales plan.
- In trying to “win” the license, the prospective licensee will often provide the licensor with a “best case scenario” instead of a more realistic case.
- These initial projections will then be used by the licensor to develop minimum sales targets and royalties, which will become part of the contract agreement. Licensees can get into trouble when they agree to just about “any” terms in order to get the license.
- In this instance, the licensee often ends up accepting sales targets they may not be able to achieve, which ultimately will result in a breach of contract.
Getting in over your head
While negotiating their license, prospective licensees often try to secure multiple regions or channels as part of the deal. This may be because the licensee really believes it can take full advantage of all of the rights offered and sell its product into each of the channels or regions.
- In reality, the company often has only one opportunity to sell the branded merchandise to a specific retailer. If that one opportunity falls through, the licensee fails to meet its sales and royalty targets and may request royalty relief.
- This usually leads the licensor to ask the licensee to demonstrate how they are maximizing their rights.
- When the licensee is not prepared to do so, not only will they get not get the royalty relief they are asking for, they may be required to develop a comprehensive plan on how they intend to fully exploit their license.
- If the licensee is unwilling or unable to develop the plan or invest in the license, they may lose rights to certain channels or regions.
Creating unrealistic expectations
Licensees may not fully understand the true strength of the brand whose license they just acquired. The licensee may overestimate the power of the brand believing the brand alone on their product will result in acquiring new clients or larger programs with existing clients.
Even if the licensee has invested in product development and built the essence of the brand into their product, they may not win new business immediately. When new sales fail to happen, the licensee may feel like they got sold a bill of goods.
A license works best when a great product is combined with a great brand to solve an unmet consumer need. Even with the world’s greatest brands, there are no immediate guarantees. However, if the licensee and licensor continue to work together, they likely will achieve positive results over time.
Have you or someone you’ve known made any of these mistakes? If so, what was the situation and what was the outcome? Are there any other pitfalls you’ve experienced you care to share?
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