Product licensing has become a popular business opportunity over the last few years. But what is product licensing, and how exactly does it work?
Product licensing is used successfully in a number of industries. Next time you take a can of beer from the fridge take a closer look at the label – and see product licensing in action. Because, for example, many well known brands of beer are brewed in this country under licence from the brand owners abroad.
It’s also found quite extensively in the business opportunities world. It’s possible to buy the rights to market and sell several business opportunity manuals and courses from their publishers under licence.
How does product licensing work?
Let’s start with a few fundamentals. With a traditional business model you invent, create or manufacture a product. Then you sell that product to your customers.
But product licensing is quite a different business model. You don’t have your own product. Instead, you buy the right to sell someone else’s successful product with their permission, under licence.
A company who grants a licensee to sell their products to another is known as the licensor. Someone who buys the rights to sell someone else’s products is known as a licensee.
Now let us look at a few of the pros and cons:
The pros of product licensing
- Fast start up. No need to spend time creating/inventing/designing your own product.
- Cheaper start up. The product owner has already met all the research and development costs.
- No previous knowledge of the product/industry needed.
- You get to hitch a ride on what is hopefully a proven brand.
- You can copy ready made/proven marketing and operating methods.
The cons of product licensing
- You won’t have total control of your business. The product licensor will be able to dictate how and where you can sell the product, and also the price.
- You might not have product exclusivity. The licensor may be able to appoint other licensees who can sell the same product in the same area in direct competition with you.
- The licence may only last for a specified period, e.g. five or ten years. What happens to your business after that time?
- If the licensor’s business fails for some reason, or if the product fails to sell, your business could fail – through no fault of your own.
Some checks to make before moving into product licensing
- What costs are involved? Do you have to pay an upfront licence fee or a fee per product sold, or both?
- What kind of back up and support does the licensor provide, especially in service and marketing?
- How long does the licence last and is it renewable?
- How many other people are/will be licensed to sell the same product in the same area/country (or territory as it’s known)?
Important. Be especially cautious if the licensor is able to grant an unlimited number of licences to sell the product in the same country. As time passes you could find that more and more sellers will be licensed to sell to an ever-decreasing pool of customers.
Product licensing is a perfectly bona fide business opportunity and it is used successfully by businesses large and small around the world. However, make sure you check exactly what you are committing yourself to before signing up.