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A Cure for Licensing Dyslexia |
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Developing a Licensing ROI Model
Let’s consider three models that use different methodologies and require increasing levels of investment.
The first model considers royalty revenue and licensee marketing expenditures. This requires that licensees provide the licensor with advertising and promotional support expenditures as well as PR efforts and results (‘ad value equivalents’). This model takes a straight-forward, if not limited, approach to valuation. | Licensing ROI = | (Royalty Revenue + Marketing Expenditures) - Investment | | 
| | Investment |
The second model reflects the fact that licensed products can generate a wide range of consumer impressions or ‘brand contacts’. The challenge is to first identify and then quantify these brand contacts. The model uses a weighting system that considers media type, retailer, product image and relevance, product usage, and product lifecycle.
| Licensing ROI = | (Royalty Revenue + Brand Contacts Value) - Investment | |
| | Investment |
The third model involves pre and post measurement of a specific brand metric(s) to create a brand multiple (analogous to a P/E ratio). Brand loyalty is an ideal metric since it is the primary brand-building benefit created by licensed products. In addition, there are research techniques to measure brand loyalty indicators such as price premiums, switching costs, advocacy of the brand, etc.
| Licensing ROI = | Increase in Brand metric (post) | |
| | Brand metric (pre) |
Marketing Before Royalties
Licensed products can enhance the brand franchise by providing a wide range of sensory associations that enrich the brand and strengthen consumer relationships. These brand-building benefits include increased brand loyalty, which has a direct influence on profits.
Consumer research is required to develop an accurate licensing ROI model. Licensors should budget funds for this research if their objective is to determine the real value of the licensing program. Royalty revenue should be reinvested into research as well as other licensee support programs.
Licensors should beware of the licensing dyslexia syndrome and understand that the brand benefits from licensed products can far exceed royalty revenue. Fortunately, this malady can be cured by a marketing orientation and a commitment to consumer research.
Author Bio
Kirk Martensen is President of Goldmarks Company, a Chicago-based consultancy that specializes in brand extension licensing. Kirk can be contacted at (773) 529-7500 or kirkm@goldmarks.net
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