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  Stephen R. Reily Beyond Royalty Revenue: Measuring ROI from licensing
by Stephen R. Reily
February 14, 2005

Measuring returns from marketing work is increasingly important, and will become even more important in the years ahead. At the same time, marketing professionals have identified the task of measuring ROI from marketing as one that they lack sufficient tools to accomplish.

In recent surveys senior marketing professionals say that accountability for marketing services is more important than ever, and that they expected it to become even more so in the years ahead. They also say they lack the tools to measure ROI from most of their work. One survey showed that 77 percent are dissatisfied with their ability to measure marketing accountability. Only 31 percent believe that ROI can be calculated for more than half of their marketing budgets, and 22 percent admit that they cannot calculate ROI for any of their marketing budget.

Justifying marketing budgets, and determining what they should be, has become an almost impossible task. To make matters even worse, benefits from the kind of marketing now considered increasingly valuable—like word of mouth—are practically impossible to calculate.

In the face of such trends, and such uncertainty, there is a stronger case than ever that licensing should be part of every brand's marketing plan.

Among marketing tools, licensing is the only one that does generate a measurable benefit. Licensing professionals should take full credit for this fact when marketing budgets are set, but they should also do more. The licensing industry needs to find the right ways to measure the other tangible and intangible benefits from its work. This article confirms the case for licensing as the most productive tool in the marketing communications toolbox and sets out a case for measuring those benefits in new, creative and quantifiable ways.


Marketing with a Direct Return: Royalty Revenue
Marketing is made up of a variety of practices: advertising and pr, of course, but also promotions (both trade and consumer), sponsorships, CRM and interactive programs, packaging, and more. Licensing is and should always be considered a useful tool in the marketing communications toolbox. Yet resistance to licensing (in some quarters) persists.

At times of budgetary constraints and restrictions on headcount, there should be broader support for the only form of marketing that helps fund others. Strategic licensing programs should always be profitable, and any marketing effort that can support a brand, pay for itself, and returns dollars for other efforts, should gain strong support. Licensing professionals cannot forget to make this case for their own work. They generate the only marketing return that contributes directly to net income.

Generating a benefit that accountants can measure sometimes comes with its own costs; one is the risk that those benefits will become taken for granted. Licensing colleagues tell me that they are always looking for new ways to present the direct benefits of royalty revenue in ways that their employers and clients can appreciate. Here is one way they sometimes use: reporting the amount of gross sales their employer would have had to generate to produce the same level of net income generated by licensing.

For example, let's consider a company with core sales of US$ 300 million and a net profit margin of 10 percent. If the same brand's licensing program generated net income of $ 3 million, it would have taken a $ 30 million increase in core sales for the brand itself to produce the same result. In this example, licensing should ask for the same credit (and perhaps the same budget) that a divisional leader would receive for generating a 10 percent increase in the company's gross sales, or for supporting a 10 percent division of the company itself. As more companies ask all employees to consider their impact on EBITDA and the bottom line, licensing professionals should ask for—and receive—credit for the positive impact they produce.

Marketing with an Indirect Return
Impressions: Marketing professionals are familiar with counting impressions as a way to value their marketing efforts, both in terms of what those efforts should cost and what benefits they can generate. Licensing professionals are themselves increasingly familiar with this tool, but the industry remains generally uncertain about how to calculate it appropriately.

We have all seen impression counts and reports that created only eye-rolling among their intended audience; over-inflated or imprecise numbers backfire by suggesting a real number that was not worth reporting, and the licensing industry needs to avoid. At the same time, calculating impressions from licensing at only the number of units sold—the rock-bottom number that can be verified because it forms the basis of a licensee's reporting—is insufficient to establish the benefits of licensing, for several reasons.

First, a licensed product, unlike the fleeting impression created by an advertisement, lasts, in the consumer's shopping cart, kitchen, on the family's dinner table, on the teenager's back, for weeks or months or years. Calculating impressions from licensing must take into account the ongoing, multiple impressions each licensed product generates.

Some calculate units sold, trade impressions, consumer impressions paid, and television and radio advertising at different rates each to let the client know what it would have cost to promote its brand as the licensing program has done.

But even this count is insufficient to calculate the benefits of many licensing program. Two examples:

  • The Olay brand has had a great success extending its cosmetic equities into vitamin supplements, and surely one of the great benefits of the program has been to refresh the brand with placement in new drugstore shelves; in another aspect of the consumer's day; and as a trusted, everyday presence supporting the consumer's good health. How to calculate not just the number but the quality of the impressions this program has created for the Olay brand?

  • Similarly, we developed a licensed TABASCO-brand slot machine that has been a success with unit sales that have not exceeded four digits. Should the benefits for the TABASCO brand be limited to the several-thousand products sold to casinos? Or should we find a way to calculate the millions of consumers who have seen and interacted with it in a place that the brand itself cannot even pay to advertise?
There is no perfect tool for measuring the benefits of programs like these, but we can do better. Licensing professionals should encourage an independent consultant or research university to develop a simple tool for calculating impressions for licensing.

New Sales: Licensing also brings about new sales for the brand's core business; it should claim and receive credit for those sales, which take two forms:

  • Ancillary Sales: Sales to the licensee

  • Licensee as Customer: Licensees often make the licensor's product part of their own; this means Teflon included in blue jeans or Jack Daniel's whiskey mixed with branded chocolate.

  • Licensee as Reseller: Licensees often purchase and resell the licensor's product: a classic example would be an OREO gift set that includes OREO cookies in a branded ceramic cookie jar.

  • Incremental Sales: This means sales of the brand's core product to consumers in transactions that would not have taken place without the licensed product in place—not just the incremental sales licensing inspires.

  • Coupled Sales: For example, when licensed products include coupons for the licensor's own product (like a visit to a Weight Watchers clinic, a subscription to Playboy, or a bottle of rum to go with a drink mix) that are simultaneously purchased by the consumer.

  • Expanded Footprint in Key Retail Accounts: A great recent example of this is the licensing of confectionary brands into health-and-beauty-aid categories like lip gloss. The expanded presence of a candy brand throughout the drugstore has given the brand's own salesforce a basis to expand its facings and distribution with drugstore accounts.

  • Increased Profitability by Account: Several major licensors are using the success of their licensing programs to "bulk up" the case they make to their own accounts. For example, a chain store's watch buyer might think Timex is a brand limited to his section until he is informed that the brand is generating sales and profits for his colleagues throughout the store, including apparel and health monitoring products. With that information the buyer should see the brand in a more favorable light, recognizing the impression and profits it generates with consumers throughout the store.

Supporting Brand Value: A new accounting rule (in the US) called FASB 142 allows brands to maintain their balance sheet value if the brand's owner can show that it has not been impaired. While too specialized a point to discuss in detail here, this rule creates the potential that licensing will offer brands new ways to show that their long-term value has not been impaired, even in years when their own sales or profit margins may be flat or declining. Some experts believe that a similar rule in Europe has encouraged a more sophisticated view of licensing and its role in supporting a brand's overall value. Although in the US it applies only to brands that are acquired, we should expect to see developments along these lines in the US before long.

Marketing with an Intangible Return
The most exciting work in branding right now is in marketing that offers consumers new ways to let a brand into their lives. It falls under a variety of names: experiential, buzz, viral, guerilla, word-of mouth, and permission marketing are some of them. What these forms of marketing have in common is an assumption (paying people to receive your message is not the best way to market a brand) and a problem (measuring ROI, except in very broad strokes, is nearly impossible).

In many ways, licensing fits snugly in this realm of non-traditional marketing. It offers consumers a new way to experience a brand. It gives consumers a way to spread a brand's message themselves. It offers up a brand at times and in places where consumers are able and willing to let it into their lives. Yet no one has yet come up with a way to isolate and measure the impact of these steps in consumers' lives.

Because of its tangible benefits, licensing does not require these other benefits to justify its place in a brand's marketing plan. But when these intangible benefits become measurable, licensing should earn even more support because of the impact it has in bringing brands into consumers' lives.

As a relatively new form of marketing, licensing is too often an afterthought, or something brand managers have sought ways to avoid. If licensing professionals do their job right it should not be, for they can make the case that licensing generates the most measurable benefits of any marketing tool. The licensing industry needs to do more to communicate and establish uniform metrics for measuring the benefits of licensing. With those metrics in place, licensing will satisfy a very high standard of accountability among marketing tools—and could elevate the capacity for measurement among marketing tools in general.

   Stephen R. Reilly is CEO and co-founder of IMC Licensing, a full-service licensing agency specializing in consumer product brands, including Tabasco and Jack Daniel's.

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