How Does Licensing Products Work?
In the world of manufacturing and sourcing products, a very common channel to enable an opportunity for all types of businesses is the practice of licensing. If your business or idea needs to be fast-tracked or cost-effective licensing may be the option for you instead of creating a brand new product from scratch.
A license (American English) or licence (British English) is an official permission or permit to do, use, or own something (as well as the document of that permission or permit).
A license can be granted by a party to another party as an element of an agreement between those parties. A shorthand definition of a license is “an authorization to use licensed material”.
In particular, a license may be issued by authorities, to allow an activity that would otherwise be forbidden. It may require paying a fee or proving a capability. The requirement may also serve to keep the authorities informed on a type of activity and to give them the opportunity to set conditions and limitations.
A licensor may grant a license under intellectual property laws to authorize a use (such as copying software or using a (patented) invention) to a licensee, sparing the licensee from a claim of infringement brought by the licensor.[ A license under intellectual property commonly has several components beyond the grant itself, including a term, territory, renewal provisions, and other limitations deemed vital to the licensor.
Term: many licenses are valid for a particular length of time. This protects the licensor should the value of the license increase, or market conditions change. It also preserves enforceability by ensuring that no license extends beyond the term of the agreement.
Territory: a license may stipulate what territory the rights pertain to. For example, a license with a territory limited to “North America” (Mexico/United States/Canada) would not permit a licensee any protection from actions for use in Japan.
Intellectual property licensing plays a major role in business, academia, and broadcasting. Business practices such as franchising, technology transfer, publication, and character merchandising entirely depend on the licensing of intellectual property. Land licensing (proprietary licensing) and IP licensing form sub-branches of law born out of the interplay of general laws of contract and specific principles and statutory laws relating to these respective assets.
There are three core areas of licensing. They are:
Licensing Out – This is when you are the party providing a license.
Licensing In – This is when you are the party who is acquiring a license.
Cross License – Provide a license to a party while they give you one of theirs.
There are few faster or more profitable ways to grow your business than by licensing patents, trademarks, copyrights, designs, and other intellectual property to others. Licensing lets you instantly tap the existing production, distribution, and marketing systems that other companies may have spent decades building. In return, you get a percentage of the revenue from products or services sold under your license. Licensing fees typically amount to a small percentage of the sales price but can add up quickly.
Who can obtain a licensing agreement? The list runs the gamut from a multinational conglomerate to a one-person operation. But in general, a licensor looks for the strongest company in terms of finances, manufacturing, and marketing. The good news for small businesses is that strength is not necessarily measured in dollars or longevity.
So by now, you are asking, what are the core benefits of licensing-in or licensing-out? They are as follows:
- Alternative to selling
- Cheaper than making it yourself
- Opens a unique source of funding/revenue
- Allows simplified expansion into new markets
- Cheaper than developing yourself
- Allows for the creation of collaborations and partnerships
- Minimize timeline associated with new product development
- Reduce risks that are associated with building new ideas/products
What is most exciting today in our modern world is that the fact that there is a very large amount of products, businesses, ideas, solutions, and people of influence being presented to us every single day. All of which have unique areas that can be licensed to a number of interested parties for mutual benefit.
The world is in need of unique channels to allow us to capture our ideas and turn them into reality with as little risk and cost associated, and licensing is one of these powerful channels.