What Is Product Licensing? (Definition and Overview)

What is product licensing?

Product licensing could be the best-kept corporate secret. Countless brands benefit from this technique because it allows them to increase their product offerings while generating new revenue sources. 

Many of our friends, family, and even employees in different departments may be unable to define product licensing. Some of their favorite products are, without a doubt, licensed even if they aren’t aware of it.

There are two parties involved in product licensing: a licensor and a licensee. The licensor owns the rights to particular intellectual property (IP.) The licensee uses the licensee’s IP through a license agreement to make products. 

A product (or merchandise) license allows licensees to use well-known intellectual property to create branded products for a set time.

The licensee creates products utilizing the licensed IP and pays the licensor a royalty. In exchange for its use once they obtain the rights. This can be a one-time fee or a percentage of the sales of the IP-based items. 

You can employ this model for many products, including clothing and accessories, toys, home items, and more.

The licensor may or may not own the rights to their creation through a patent or other means, but the concept remains in their possession. 

They can allow a licensee to make and sell their innovation if they agree to pay the licensor royalty fees on sales. You typically calculate it as a percentage of gross wholesale sales.

Licensors forego all revenues on their product in exchange for the licensee company’s rapid manufacturing, distribution, marketing, and sales power. Moreover, they also precede their know-how in the product’s subsequent development. This is a fair deal when you consider the benefits.

What are the benefits of licensing a product?

It provides a source of passive income:

If you hold intellectual property, licensing is a way to generate a steady passive income stream. You additionally don’t have to do anything to generate those profits. 

Post developing the IP, sell licenses, and you’re good to go. As long as the licensees make money, you’ll make money as well. You won’t have to bother losing your ownership rights. 

These payments could continue with no interruption for several years.

It opens up new business possibilities:

This arrangement can favor a licensee since it requires less money from them to establish a business venture. 

They may buy a license rather than outright ownership and start making money right immediately. Paying for a license requires less cash upfront. When a licensee improves on a product, they might profit more from their business. 

Even if the desired thing is a trademark or brand name, the new company benefits from the information’s reputation and consumer awareness.

It lowers the stakes for both parties:

Licensing intends to lower the risks of doing business for all parties involved. There are fewer risks in product creation (using product management tools) market testing, production, and distribution for licensees. 

From the licensor’s standpoint, there are fewer risks in the marketing and service of what is delivered.

Neither side must invest their own money in these areas to profit. This leads to a win-win situation for all parties involved.

It provides prospects for self-employment:

Licensing allows people to start their businesses. They get to enjoy all of the perks of self-employment, such as the ability to establish their hours. At the same time, you profit from having someone involved in your intellectual property. 

From a licensee’s perspective, there is the potential to obtain a monopoly over a product or service in a given territory. That is, at a lower cost than going at it alone. Personal IP provides the same benefits to the licensor.

It enables you to create your marketing strategy:

A licensee is far more knowledgeable about their market than the usual licensor. This understanding enables intellectual property to get promoted more appealingly to the average consumer.

It’s a way to broaden the reach of a message, a product, or a concept without investing heavily in it. Even when certain aspects of the arrangement are pre-planned, the licensee is nevertheless allowed some autonomy and control over the running of their firm.

How does a company license its product?

Create a unique product:

Spend the effort to sketch your idea, build prototypes, and document it. You can also develop a way to improve an existing product using the right product roadmap tools.

Before you file for a patent or start looking for licensees, make sure there is a market for your creation. Make a business strategy to ensure you make the best decision possible.

Carry out a patent search:

Make sure your idea hasn’t already got patented by checking the USPTO’s online patent database.

Try applying for a provisional patent:

A provisional patent application could be a good compromise if you must protect your intellectual property but haven’t finished your product.

Filing a patent application:

To file a patent application online, use the USPTO’s EFS-Web service. Cooperate with the patent examiner until the patent gets granted.

You can find licensees using the following methods:

Look for potential licensees in your area and develop a pitch. Before you discover an interested licensee, you may need to network. Put a sponsored ad, or contact many licensees. 

If you plan to license more items in the future, take the time to create connections with possible licensees and learn about their processes.

Sign a licensing deal:

Sign a license agreement once you’ve discovered the proper business partner. If you want to make sure your rights get preserved, have your lawyer evaluate them and recommend changes.

The following items usually get included in licensing agreements:

• Subject Matter: This could be a patent, a trademark, copyright, a design, or a trade secret.
  
• Granting of Rights: This section explains what you’re giving the licensee.
  
• Licensor’s Obligation: The licensor’s obligation gets outlined below, including any support or training that the licensor will provide.
  
• The licensee’s obligations: Financial Requirements, Guarantees, and Confidentiality are detailed in the Licensee’s Obligation.
  
• The fee of Licensee: The licensee receives a sum of money when they sign the contract.
  
• Royalty: The percentage of wholesale sales the licensor will get is royalty. A minimum royalty gets included in many agreements. The majority of royalties get paid quarterly.
  
• Term: This specifies how long the arrangement will last.
  
• Specific area: The term “designated area” refers to the boundaries of the manufacturing and marketing areas.
  
• Closure: This refers to how either party can terminate the contract.
  
• Guarantee: Any guarantees or liabilities the licensee provides get included in this category.

Obtain royalties:  

Collect royalties when your product sells for the length of the contract.