Product licensing may be the best kept secret in business.  The practice allows innumerable brands to expand their product offering while providing additional revenue streams.   And while many of our friends, family, and even coworkers in other departments might not be able to give a definition of product licensing, there’s no doubt that some of their favorite products are licensed – and they probably don’t even know it.

Product licensing involves two parties: a licensor and a licensee.  The licensor owns the rights to certain intellectual property (IP) while the licensee manufactures products using the IP granted by the licensor via a license agreement.   A product (or merchandise) license allows licensees to leverage popular IP to create branded products, usually for a specific period of time. 

Once the rights have been secured, the licensee manufactures product using the licensed IP, and in return pays the licensor a royalty for its use. This can be a flat fee or a percentage of the sales of the products that incorporated the IP. This model can be applied to nearly any product, from apparel and accessories to toys, home goods, and more.

Merchandise licensing has benefits for both the licensor and the licensee. The licensor is able to offer new products that fall outside its core competencies.  It also provides critical revenue streams to entertainment producers and brands looking to grow.  Meanwhile, the licensee gains a competitive edge in the marketplace by differentiating their products through memorable IP or associations with quality brand names. Both businesses can see their respective brands gain increased relevancy, recall, and revenue, which helps explain why some of the biggest firms make use of the product licensing business model.

Many Disney products are made by third party manufacturers through the use of product or merchandise licenses.

Entertainment properties have long been a large part of the licensing industry. In 2018 The Walt Disney Company was the largest licensor by sales volume.   While the average consumer might assume that Disney produces all the products offered for sale under the Disney brand at retailers around the world, a great number of those products are produced by licensees. And this makes sense – Disney is great at making movies, and there’s no need for them to become experts in making every product offered under their name. So while Disney is busy animating the next blockbuster, they can leverage the expertise of other companies to make the apparel, bedding, and toys that will launch with the movie. Because everyone involved is using the same IP (characters from the movie, for example), and all are held to the highest standards, consumers never know that anyone but Disney created their beloved t-shirt, duvet cover, or doll.

The fashion industry also has an extensive history of product and merchandise licensing. Today’s well-known designer brands, such as Ralph Lauren, Michael Kors, and Vera Wang rely on licensees to build out their product assortments and present their customers with a full lifestyle offering. While Mr. Kors or Ms. Wang might create their eponymous apparel collections themselves, they often outsource the production of other product categories in a contemporary lifestyle brand’s portfolio.  Accessories such as hats, ties, and the like are regularly made by licensees, as are home products, footwear, fragrance, eyewear, and many others.

Other major players in the product licensing world are media and gaming properties, professional and collegiate sports teams, and food and beverage companies. Product licensing is likely responsible for your favorite sports jersey, your child’s cherished toy line, and the characters in your favorite video game. Each have their own reasons for using the product licensing business model, but all reach new customers and increase their product offering beyond their in-house capabilities by doing so.

When done correctly, consumers may never know that some of their favorite products were produced by a third party, and not the brand whose name is on the label. And that is the foundation for any successful product licensing program. When done correctly, licensors reach new customers and diversify their revenue streams, while consumers have more opportunities to engage with their favorite brands.

Ryan Kernan is Senior Director, Merchandise Licensing at Greenlight.