When on the search for an untapped market, gilded with the promise of increased profits and limitless consumer potential, licensing always seems to make its way into conversation. While it has mass-market appeal, a certain amount of status, and the capability to grow a business, it is not a simple venture to be taken lightly. Between research, administrative time and strict guidelines, licensing can become a business in itself.
The low-down on licenses
There are two main groups in licensed apparel: authorized manufacturers and licensees. The former does not hold the actual license but is granted the temporary right to reproduce a specific design.
Before any item can be put into production and sold, a mockup of the product and design must be sent to licensing for approval. (Image Courtesy Aztec Promotional Marketing)
For example, if a licensee can’t handle the capacity of an order or doesn’t offer a particular product, they can issue an authorized manufacturer’s agreement (AMA) to a third-party. This states that the licensee is giving permission to create licensed work for a single job, which cannot be reproduced or resold after the fact, explains Patti Winstanley, Aztec Promotional Marketing.
The other is a licensee, which gives a company the rightful use of a licensed design, commonly a team/school names and/or mascot.
The team and athletic markets are highly-competitive, and especially so in terms of entities producing licensed goods. So when does it make sense? Certain business models seek out licenses only after there is retail interest, says Boxercrafts’s Shannon VanWagoner, while others pursue a license that may make sense geographically or strategically. However it is decided, one thing is certain: a strong marketing plan is necessary in order to obtain a license. Schools, teams and other entities that grant such authority must be sold on that plan.
“You have to be able to tell them how you are going to market and sell their products,” Winstanley explains. “They can only give so many licenses so they’re going to give them to the people they feel have a plan.”
The first step toward creating a marketing plan should include what schools or organizations are worth pursuing and then narrowing down the desired products. Each product, whether apparel or hard goods, has a unique license. Even though sights may be set on T-shirts, there is no guarantee that that particular license will be granted. Sources report considerations here have to do with saturation of the market. At the end of the day, a school will choose a company that will help to propel and grow a brand in a unique way, says VanWagoner.
While each school is different, a typical application includes paperwork stating the marketing plan, samples of the intended licensed items with an example of finished work and a check for license fees and advanced royalties.
While advanced royalties is a fixed amount that guarantees a minimum earning throughout the year, license fees for the college market run from 8 to 12 percent, depending on the school, with the average at 10 percent. Each license held carries this fee, with a number of schools adding license fees to each item type (T-shirts, pants and caps) as opposed to category (apparel).
With increased prices on the back-end, pricing needs to be adjusted accordingly for profit. The main modes of accommodating for these added fees are to build the fees into overall pricing or to charge a premium for the licensed goods only.
Another consideration in pricing is whether or not the license has a minimum royalty per unit (MRU), which sets a minimum value for each individual product sold. This, VanWagoner explains, is a company’s way of ensuring that they are receiving money, even if the licensee is selling all goods at a fixed price or to a value retailer.
A major part of a license agreement is the actual art. A license gives a decorator or manufacturer the right to use a library of well-known mascots, characters and text associated with an organization or league. In order to keep in the good graces of the licensing company and out of legal trouble, licensees must follow strict guidelines on everything from image and word placement, to hangtags and colors. This includes both marketing and raw materials, according to Cara Cherry, Stahls’.
Once a design is created, it must be sent in for approval by the school for final say. “Sometimes licensing will come back to you and say the design needs to be changed. For example, if the mascot name is included, that has to be smaller than the school name,” VanWagoner reports.
In licensing, color matching is as important as the image itself. Each school has very specific Pantone colors that must be matched precisely to receive approval. Licenses also have varying degrees of artistic freedom. Depending on the school, a decorator may have a limited number of design and color choices or the ability to use an endless selection.
One unique aspect of graphic licensing in our market is in utilizing licensed transfers. In this category are licensed images, letters and numbers that are in compliance with an organization and resold for after-market placement.
An example of this model would include industry resources such as Stahls’, which holds a transfer license with the NHL and offers officially-licensed kits that contain hang tags, numbers and player labels. These kits are bundled together in an effort to ensure compliance.
This model has other restrictions as well. Cherry explains that the kits are, by contract, required to be placed solely on authentic Reebok jerseys. “It is up to the retailer/distributor to attach the proper identification to the kit,” clarifies Stahls’ Marketing Specialist Paul Sabatini. He notes that the leagues are known to survey the industry to ensure the licensed kits are being used in the proper manner.
Indeed, legal matters are a big part of licensing, with agents scouring the marketplace to keep an eye out for frauds and unlicensed goods. This only adds to the pressure on those that are following the rules. “The biggest challenge for those that are licensed and do what is right by only printing what is correct are the printers that will do whatever someone wants,” states Winstanley, which is an unfortunate reality.
While even a variation in color can result in legal ramifications, there are instances where companies that no longer holding licenses continue to produce goods with the copyrighted images, sometimes unbeknownst to the buyer or distributor. The easiest way to combat wrongfully-printed merchandise is to look for a hangtag stating a products authenticity. “Most are holograms so they can’t be copied and must be purchased directly from the licensing company,” VanWagoner adds.
“You don’t date licensing, you marry it,” muses VanWagoner. She stresses that, for all of its upsides, licensing is a commitment. “There are a lot of people that get into licensing and don’t make it through to their second year.” A major part of this commitment is in administrative time involved, says Winstanley. Depending on the terms of the licensing agreement, performance reviews are conducted either monthly or quarterly for the life of the license. This includes basic paperwork as well as sales records, says Cherry, but can go as far as audits.
Contracts can be set annually, which is most common, or for multi-year use. At the typically annual review, performance of the licensed items are taken into account. “You may not get what you had before or they may let you add more or different items,” Winstanley explains.
At the same time, Cherry reports, the licensing league or organization can choose to renew or put the license under review. In this case, they can choose to end the agreement due to poor sales or performance.
On the other hand, the licensee is free to end the agreement as well. According to VanWagoner, it’s not an uncommon occurrence to drop a license that a retailer once carried but is no longer offering. “It doesn’t do any good to hold onto a license that you’re not producing anything for.”
When all is said and done, there is much to be gained from selling licensed good, but it comes at a price. “Decide if it’s a market that you’re willing to put the time and effort into and the money developing it,” advises Winstanley. With the substantial amount of paperwork, time and monetary investments, the consideration to go forward with a license should be a careful one. VanWagoner adds, “It is uphill but the reward is great. When you can do it and really do it well, licensing can be a lot of fun.”