How To Use Product Licensing (With Advantages and Disadvantages)

Updated June 24, 2022

Product licensing is a common form of cooperation between two companies to obtain mutual benefits from selling a product. A company may use this to expand products it offers or the markets where it sells. Learning about licensing agreements can help you determine if a company may benefit from using one. In this article, we discuss what product licensing is, what an agreement typically includes, the advantages and disadvantages of licensing, how to find a product to license and how to license a product.

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What is product licensing?

Product licensing is a legal agreement between two organizations in which a product's copyright holder allows another company to sell the product in a designated region. The company selling the product may compensate the rights holder through a flat fee, a percentage of sales or both. A company licensing a product may do so exclusively, or as one of multiple companies licensing rights to the product in different regions.

Related: What Is Commercial Use? A Definitive Guide

What does a product licensing agreement typically include?

A product license contains several components which outline the terms of the agreement. Common components of a product licensing agreement include:

  • Subject matter: The product the rights holder licenses to the licensee

  • Obligations: Agreements made by the owner and the licensee detailing what they offer to the other party

  • Fees and royalties: The structure of compensation one party receives from the other, both as flat rate and percentage or volume-based payments

  • Region: The area in which the copyright holder grants the licensee the right to market and sell the product

  • Term: The start and end dates for the licensing agreement

  • Termination: Terms under which the parties may end the agreement early, and any associated obligations

Related: 10 International Market Entry Strategies (With Definitions)

How to find products to license

If you believe that a product licensing agreement may help raise profits, follow these steps:

1. Perform market research

Examine and analyze marketing and sales data to identify potential markets to engage. Market research may allow you to identify a demographic or region currently underserved by the products available to them. This can present an opportunity to introduce a new product profitably. Market research can be useful when assessing the potential value of a licensing opportunity and determining if it's worth pursuing.

2. Gather company information

When seeking a licensing agreement, the copyright holder may often request information about your company, such as financial records and your plans for the license. This is an important step for the license holder because it allows them to protect their brand and ensure that any partner they agree to terms with can provide them with sufficient value. Creating an appealing packet to share with license holders which outlines how your company can benefit them may improve your chances of reaching a licensing agreement.

3. Search for licenses

There are many ways you may choose to pursue licensing opportunities, including using products currently available for licensing and contacting copyright holders about products they may not currently license but on which they may reach a licensing agreement. Common methods of searching for a potential licensing opportunities include:

  • Contacting licensing consultants, who work with multiple clients, offering licensing arrangements on their clients' products

  • Posting an open call for licensors to pitch their products to your company for licensing

  • Using trade directories listing companies or products available for licensing agreements

  • Reading industry publications which may include advertisements for products available for licensing and discussion of products on which you may reach a licensing agreement

Related: Your 6-Step Guide To Becoming a Distributor

4. Assess your options

Consider the licensing opportunities available and choose the option that provides the most value. This may involve identifying a single target and pursuing a license exclusively for that product. It may also involve considering multiple licensing options to leverage the opportunities and receive the best deal possible on the product or products you choose to license.

5. Negotiate licensing

Have discussions with the rights holder for the product you hope to license. This allows you to reach an agreement which both companies feel benefits them. During the negotiations, you may discuss a range of terms, including where you license the right to sell the product, whether you're the exclusive licensee or they may seek additional licensing opportunities with competitors, fees and other expectations and requirements.

How to license products to others

Here's a list of steps you can follow to license your products:

1. Perform market research

You can begin your preparations for licensing your own product by performing market research. This provides you with a better understanding of the market where you sell your product, and potential markets you may pursue. For example, market research may allow you to identify a region where your product may be successful that you can meet through licensing with another company.

2. Develop your product

Work on your product to make it as appealing as possible. This may include internal testing, focus grouping and limited releases to test its performance with consumers. By refining your product and making it valuable to potential customers, you can also make it a more appealing licensing opportunity for a company seeking to make an arrangement.

3. Consider independent sales

Determine whether you intend to sell your product yourself in addition to licensing, or focus exclusively on licensing agreements. Selling your product independently can provide an effective proof-of-concept when seeking licensing agreements. By establishing your ability to sell a product within a market, you can demonstrate appeal to a potential licensee seeking to take over sales within the current region, or begin selling your product in a new region.

4. Search for licensees

Although a potential licensee may contact you directly, it can be beneficial to take an active role in seeking partners. Options for finding them include:

  • Placing advertisements in trade or business publications to alert potential partners to your availability for licensing

  • Searching for open pitching opportunities to discuss the potential for licensing your product with a possible licensee

  • Attending conventions such as industry meetings or product fairs to demonstrate your product to potential licensing partners

5. Prepare a package and presentation

Create documents or a presentation you can provide to a potential licensee to show the value that an agreement can provide them. This may include elements such as key pieces of market research, sales performance data or customer reviews on the products and services. A package allows you to show the benefits your product can provide to appeal to the potential licensee and provide leverage during negotiations if the licensee is interested in your product.

6. Negotiate licensing

Discuss your goals and demands for a licensing agreement with the potential licensee. Negotiation allows you and the other party to discuss common ground and find compromises on areas where your goals differ from theirs. It also helps you to reach an agreement which benefits both parties.

Related: 12 Important Negotiation Skills: Definition and Examples

Advantages of licensing

Some of the positive benefits you may consider when deciding to pursue a licensing agreement include:

Sharing knowledge

Forming a licensing arrangement with another company can form a partnership that provides mutual benefit through knowledge sharing. You can communicate with individuals working at the other company to discuss market research and performance data about the product. This allows you to identify more valuable information which you can use when making decisions on how to market and sell the product.

Entering a new market

A licensing agreement may allow the companies involved to access new markets. For the licensor, providing a license to an outside company to sell the product in a new region or to a new demographic may allow the company to expand its reach. For the licensee, gaining a new product may allow the company to sell to potential customers they may not have otherwise had products to serve.

Lowering acquisition costs

Entering an agreement in which you license the product from another company may be a more affordable option for accessing the product compared to purchasing equity from the copyright holder. By agreeing to a licensing deal, you provide your company with the ability to sell those products you find most beneficial while minimizing costs. This may be a preferable option if you believe the product represents an outsized portion of the other company's value, if you lack the capital to make a purchase or if the other company isn't interested in selling.

Maintaining ownership

For a company offering a product for licensing, a deal may encourage cooperation with a larger company while maintaining self ownership and control. If a company sees value in one or more of your products, but your company does not wish to sell controlling shares, a licensing agreement may be the best option. Your company may benefit from the income provided by the licensing agreement, while the licensee gains access to the desired products and your employer retains its equity.

Minimizing financial risk

By entering into a licensing agreement with another company, you can reduce the financial risks of bringing a product to market. A partner can share the responsibility for financial cost on the product. This minimizes the potential net loss in the event of a product not meeting sales expectations.

Reduced research and development expenses

Licensing a product manufactured by another company can help you save on research and development. By obtaining a license for a product that's ready for sale, you avoid designing and refining it. This can make licensing a cost-effective option for a company with a smaller research and development budget.

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Disadvantages of licensing

It's beneficial to consider reasons you may choose not to license a product. These reasons may include:

Lack of ownership

When reaching a licensing agreement on a product you're interested in, you don't gain full ownership of that product. You may choose to pursue different options, such as purchasing the parent company or the rights to the product. This can help when you're not sure if a product merits a complete purchase, with the license allowing you to enjoy some benefits without a full investment.

Licensing restrictions

When agreeing to a licensing arrangement, it's common for one or both parties to face restrictions in the agreement. When assessing the value of an agreement, it's important to consider these restrictions. In an appealing agreement, the restrictions don't overrule the value provided by the licensing.

Marketing limitations

Another area where licensing use for a product may produce reduced control is in marketing. The rights holder may restrict your options to fit their branding. Consider your marketing opportunities when deciding if the licensing agreement works for you and your employer.

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