Licensing – which is often referred to as trademark licensing – is the practice of contracting with another party to obtain and use rights, intellectual property rights in our case, in exchange for an agreed payment (a fee or royalty). A licensing relationship typically involves an agreement between a trademark owner (the “licensor”) and another party (the “licensee”) in which the licensor permits the licensee to use its trademark in commerce. Simply put, a license grants the licensee rights in property without transferring ownership of the property.

Take, for instance, Luxottica, the eyewear company that acquired the rights to manufacture and distribute Prada, Burberry, Tom Ford and Chanel sunglasses. Prada, Burberry, Tom Ford and Chanel still own their names and have the right to use their names (aka their trademarks) in the sunglasses/eyewear category; they have just chosen to authorize Luxottica to do it for them. Without such authorization, Luxottica would not be able to manufacture eyewear using the name “Chanel”, for example, without being on the receiving end of a trademark infringement lawsuit from Chanel. This is one benefit of a licensing agreement. It allows both parties to benefit without anyone’s intellectual property being violated — assuming all goes well.

Growth via Licensing

Licensing is also a powerful way for a brand to grow by tapping into new geographic markets and new market categories they simply are not equipped to cater to. Licensing can help a company to commercialize its intellectual property or expand its current operations into new markets more effectively and with greater ease than on its own. By granting the licensee the right to market and distribute the product, the licensor can penetrate markets it could not otherwise hope to serve. The licensee may agree to make all the adaptations required for entering a foreign market, such as translation of labels and instructions; modification of goods so as to conform to local laws and regulations; and adjustments in marketing. Normally, the licensee will be fully responsible for local manufacture, localization, logistics and distribution.

Moreover, licensed products, such as eyewear and fragrances, which are sold at much lower price points than a designer dress, for instance, serve as a way to both profit and court potential new customers. As of last year, about 90 percent of the $160 million a year in sales at Calvin Klein Inc. comes from licensing the designer’s name to makers of underwear, jeans and perfume. It is an especially effective tool for high fashion houses due to their high price points. The average person cannot afford a $4,000+ Chanel dress but can more easily afford a Chanel fragrance. By reaching these consumers, Chanel aims to create a sense of brand loyalty and as a result, may be able to sell these same individuals bags and even dresses in time.

The Rise of Licensing

While licensing is a common industry tool, it has not always been this way. In fact, it largely commenced in the late 1940’s, when Christian Dior began marketing Dior stockings in the United States, creating a system to license hosiery. The following year the Paris-based design house began to license its neckties. According to a statement from Dior, “all accessories followed, and within three years, this system was copied by all the couture houses.”

Case in Point: Tom Ford

Tom Ford is an interesting case. In April 2005, on the heels of his departure from Gucci, he (with the help former CEO of the Gucci Group, Domenico de Sole) launched Ford’s eponymous label based solely on two licensing deals: one with Estée Lauder for perfume and cosmetics, another with Marcolin Group for eyewear. These licensing partners have allowed Ford to build a bigger business, more quickly, with a smaller investment than if he tried to do everything on his own. Whereas most luxury fashion businesses start off with very expensive in-house ready-to-wear collections, which require significant upfront investment, the Tom Ford brand would launch with products at more accessible price points, run by trusted partners and requiring little to no cash investment from Ford himself.

Deals like these come with multi-million dollar budgetary commitments by the licensee to advertise the product lines. These global campaigns, which Ford directed and oversaw himself, would give further visibility to the Tom Ford brand and help to reach a vast consumer base from day one. “I realized that [the licensing deals] would keep my name very public, [so] that if I chose to go back into fashion it would even make my name bigger,” Ford has said of the move.