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How Licensing Works
Licensing is defined as the process of hiring a copyrighted or trademarked entity for use with a product or service. The property could be anything from the signature of someone famous to a picture, graphic or logo. A business contract is drawn up between the owner of the trademark or copyrighted material and the individual who wishes to rent it. These individual are termed as the licensor and licensee respectively.

Why would anyone want to license an entity? Simple answer is to increase their sales. Some brands attract such high customer loyalty that you can sell nearly anything once you have that image or logo or signature on your product.

The licensor is generally motivated by the cash they could earn but this is not always the only reason. Market penetration could be a bigger issue. For example, if a new movie is being produced, the producers understand that having plenty of toys or items which have picture of that movie on it in shops will help increase the hype around launch date thus resulting into an increase in box office takings.

Licensing also gives the licensor an opportunity to move into related product parts without having to incur the price of product design or development. They may be looking to break into new markets for instance a US product launching in China but due to limited knowledge of the new market they will want to try out first through a comparatively minimum risk inexpensive route such as licensing. If the new market loves the product, they know they have just leased the brand for a short length of time and are collecting a percentage of sales. Once the time frame is up they can enter the market on their own. If the new market isn't flourishing, they have still got profits from leasing the brand but they haven't wasted any money testing an unresponsive marketplace.

Obviously the licensor have to protect their brand first and foremost so there will be very strict quality controls put in place to cover this issue. An Additional ordinary elements to a license will be a particular geographic location i.e. you cannot just trade wherever you desire. The contract will also stipulate the time the license has been permitted, the stipulations for renewal, the decided contract price and terms of payment - this is usually a percentage of sales subject to a lowest value i.e. you end up paying a specified minimum amount even if you don't sell anything. But if your product sales take off, you will pay some percentage back to the licensor. There will also generally be a contract over how many licenses will be issued for that particular territory i.e. you could have a sole license or be permitted to license additional people.

People who want to take up a licensing contract do so as they think that they have found a right market for that product but couldn't finance the operation themselves. Or they may have developed a new product that will do much better having been associated with that brand name for even a short period of time. Making reputation in the business is important, almost as crucial as being 100% sure you comprehend the licensing procedure and know exactly what you are getting into before you sign that contract.

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