Licensing is lucrative because it generates money in three ways. First, you can license your IP to multiple licensees simultaneously. Second, it generates recurring revenue from these licensees, which is also known as auto pilot revenue. And third, you can let licensees re-license your IP and pay you twice. These are the three big reasons why licensing is so lucrative.
A good example is a kids movie. It’s licensed to many companies at the same time, creating hundreds of products such as T-shirts, hats, shorts, toys and other product categories. It’s also licensed internationally, creating more recurring revenue opportunities around the world.
The second lucrative side of licensing is recurring revenue known as royalties. Recurring revenue is one of the highest profit margin forms of revenue, continuously regenerating year after year. It’s very similar to real estate, such as a commercial office, that’s built once, and continues to collect rents for years to come. In the case of your IP, you develop it once, and through licensing, you generate recurring royalties from all the licensed products or services.
Collegiate sports licensing generates millions of dollars in recurring royalty revenues. Consumers love buying everything from T-shirts and sweatshirts to cell phone cases to home decor with their favorite college team’s brand. Each year, fans and alumni buy products featuring the team logos created decades ago that still deliver tens of millions of dollars in new product sales.
By thinking about different ways to use your IP, you can create more recurring revenue from new licensees. One example is applying your consumer software to the business market, or applying a medical technology to the food industry. One of the nice things about intellectual property is it can change and evolve. And that’s one of the secrets to the money-making side of licensing.
A third way to create lucrative licensing revenue is through sub-licensing. Basically you let one or more of your licensing partners re-license your IP to other companies and you get paid by both the licensee and sub-licensee. One of my clients used this strategy to successfully launch their product in Europe. We licensed a large distribution company and gave them sub-licensing rights to some countries in Western and Central Europe. In this case, the master licensee paid royalties from their direct product sales as well as royalties from other companies in different countries.
These are some of the lucrative ways that licensing generates income from IP. And it’s why you must understand the difference between money and legal side of licensing. While legal is a part of the process, the core of licensing is taking specific steps and actions to create money-making licensing deals with your IP.
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Remember, licensing is a money-making process. Through licensing, you create a bigger “revenue pie” for your IP, which makes it more profitable for you and your licensing partners.