What is licensing in business?
Innovation, especially when it comes to the development of new products and services, is one of the most exciting activities in any organization and the one that usually gets the most attention. But as we saw, it bears some risks and the failure rate is astonishing by all counts.
There are, however, other alternatives for coming up with innovative products without the risks that
In particular, there are two that I feel deserve to be discussed in some detail because they can be extremely effective as an alternative to in-house efforts and could even be more profitable.
One of these alternatives is the “emulation” of other companies’ products and services, especially those created by the players leading the space.
A second alternative to in-house innovation is licensing technology and products from third parties. That means that, instead of making a product, you get a license (i.e. a permit) to make the product under a different name or to use somebody else’s product as part of yours.
This is more common than we might think. Renowned beauty company Estée Lauder licenses fragrances and cosmetics from other well-known names such as Tommy Hilfiger, Donna Karan, Michael Kors, DKNY and Tom Ford.
It is actually through licensing that most products created by individual inventors make it to market and the model is very popular in the toy industry. The inventor signs a licensing agreement granting manufacturing rights to a large company who will pay a royalty (a fee) for each unit sold.
A variation of a licensing agreement is private labeling, where a company has the maker of a product slap its own brand on the item. You may be surprised to know that Amazon.com owns more than 70 private label brands.
In fact, most products sold under store brands like Walmart’s Great Value and Target’s Simply Balanced are made under private (also called white) labeling agreements.
A licensing deal can of course work both ways, that is, you may use it to get access to another company’s innovation, or to give other companies access to yours. In either case both the licensor and the licensee benefit from the transaction.