Licensing builds a bigger money pie by tapping into partners with the production, distribution and marketing resources in place. They are established in the market and can add your intellectual property to their revenue pie.
Through the licensing partnerships with licensees, a bigger pie is created and it’s very profitable for everybody across-the-board. Many clothing brands, such as Hilfiger, IZOD, Calvin Klein and others have grown into brands generating hundreds of millions of dollars in licensed product sales. Other consumer categories that have created large markets through licensing include professional sports franchises, food brands, photography and entertainment.
Some intellectual properties are pure licensing models, such as dead celebrities, computer chips, software and more, that created hundred million dollar markets solely from licensing partnerships. Their business strategy focuses on licensing to established companies, and not spending their money on manufacturing, distribution and sales. They license to these companies who in turn integrate the IP into their products and pay a licensing fee for every product sold.
Brands use licensing to build bigger pies (both revenue and brand recognition) for their core products and services. Some brands use licensing to develop as many consumer products as possible; others use it to develop the most unique consumer products possible. One strategy focuses on a many different licensed products (merchandise), the other focuses on building brand equity. Coca-Cola and M&M’s are two examples of companies that use the merchandise based approach to licensing. Premium or specialty brands such as Stanley Tools and Timex focus on fewer licensees to build brand equity.
Licensing other companies to “build” upon your IP, expands your revenue pie into a variety of new product categories to build a bigger market for your products or services. This is an example of a smart business strategy. Especially if your technology applies to very large markets (such as smart phones and wearable devices) dominated by very big players. Rather than trying to compete against these big players, which is competitively risky and expensive, licensing lets you partner with these big companies. You tap into a bigger pie and get paid by all the competitors in these markets while focusing your resources on improving and developing your IP.