Many licensors, especially early in their licensing experience, face the challenge of having to choose product categories for licensing of their brands. Examples of bad category choices are, unfortunately, ubiquitous in the world of brand licensing. Typically, neglecting the analysis of brand's 'compatibility' with the product categories and the consumer perception of the licensed goods leads licensors numerous negative consequences for the brand. Those include:
- Brand saturation/overextension of the brand
- Market cannibalism of the brand’s products
- Reduction of the brand’s market share
- Restriction of licensing opportunities in the future
Bearing that in mind, how do brand owner make sure to avoid these mistakes in the first place?
Here are a few tips to jot down.
Determine what IP in the brand's portfolio is suitable for licensing
The first step in planning the licensing process is to define the status of the brand's intellectual properties by classifying them as core and non-core. While non-core properties are always available for extension into new product categories, it's best to start the licensing journey with extending into categories that are the closest to the brand’s entity.
In his article, Oliver Herzfeld, a brand licensing industry mastermind, has outlined checkpoints to help licensors validate their category choices. The approach covers the following questions:
- Do the selected categories build on the property equities for licensing?
- Will licensing into these categories expand the marketing opportunities of a property?
- Will it expand the property’s retail presence?
- Do the categories resonate with the current consumers of the property, and is it capable of attracting a new audience?
- Does the property deliver a unique selling proposition to the target audiences of the chosen categories?
The latter is the most important questions for licensors to answer at this stage. Ultimately, the idea of brand licensing is to integrate the brand equity into new products in a complementary way. The brand's equity and the product's quality should complement each other in a way that will attract the end consumers. Therefore, it's the brand owners' mission to study what this added value is for the consumers and how it can be designed in the licensed product line.
This leads us to the next step:
Understand the brand’s identity
Most noteworthy, brand owners need to know how exactly they want their customers to perceive the licensing production prior to launching a licensing program. They may decide to gather insights through surveying customers or holding internal discussions. In either case, it's handy to organize the ideas into a clear hierarchy of the brand's attributes and essential characteristics. This will help the management team to gain a better understanding of the brand's power and how it should address the audience with the licensed program.
Having successfully completed the mission above, brands start seeking for the perfect product categories that match their identities. Considering the variety of industries involved in licensing today, there isn't a 'one-size-fits-all' strategy for making the best choice. One of the most important commonsense principles, however, is to choose the product categories for which the key attributes of the brand will affect the buying decision of its consumers. Licensors should also evaluate the saturation and fragmentation levels of the respective markets to validate the brand's fit further.
The best strategy for brands new to licensing is to focus on a few properties at a time to test their fit to the selected categories. Preferably, these properties should be the ones with the most critical value propositions. On this stage, licensors should also calculate estimated licensing revenues and assess the possible impact of this agreement on the brand's core sales.
Choose a suitable licensee in the market of the selected product categories
In one of our previous articles, we have discussed how important of a subject choosing the right licensee is. Most of all, licensors should assess financial stability and manufacturing capabilities of the licensees in the chosen category market. While these are the primary reference points, it's nonetheless imperative to evaluate other factors. Namely, those are the licensee's reputation, satisfaction levels of their customers, and quality of their production.
Brand owners should keep in mind that collaboration with licensees is two-sided. It's important for the brand to secure rentability of a licensing agreement. Nevertheless, brand's licensing partner will also expect a potential lift in their revenues to justify the requested royalty rate.
In conclusion, licensor's best bet for making the right product category choice is to first examine the brand equity from the inside. They should determine the intellectual properties best suited to licensing and the unique values with which their brand can complement new product categories. In so doing, the brand's team can validate whether the licensing venture has profitable prospects. If these prospects are solid, the brand has high chances of landing a lasting licensing partnership. And if it isn't, it's wise to repeat the process from the very beginning and revise the product category choice.