One important factor in deciding how to license is the degree to which brand managers expect to control, oversee and approve the brand's licensed products. If they expect a high level of control, then the brand should choose an equity-based approach. If they can accept less control, a merchandise-based approach is possible.
By definition, packaged goods professionals care a lot about the look of packaged goods, especially when they represent their own brands. To develop successful licensing programs those managers must either exercise great control over licensed products (and look for fewer products), or create appropriate guidelines and let go.
The licensing programs of Coca-Cola and M&M's are great examples of merchandise-based approaches. Coke offers licensees different "looks" to use each season, looks that relate only indirectly to its own products and advertising. Similarly, M&M's will allow its candy characters to appear in almost any position and attitude to fit the distribution or usage of a licensed product. Both brands have goals of making licensed products as ubiquitous as possible—of giving consumers endless new ways to build their brands into their lives—and they have succeeded.
Because most brand managers spend all day long controlling the physical appearance of their products and advertising them consistently, they often find it difficult to approve licensed products that part ways with the look of their core products. These brand managers will have an easier time with an equity-based approach. Two successful examples are Stanley Tools and Timex, which have both built portfolios of unique, equity-enhancing licensing products.
Type of Brand
Another important factor is the nature of the brand itself. An everyday brand can attempt a licensing program of either type. Two examples of different approaches, each with everyday brands, are Pillsbury (which follows a merchandise-based approach) to Procter & Gamble (developing unique products based on brands like Olay and Mr. Clean).
A premium brand, on the other hand—or a brand with a very strong personality—will do better to remain with an equity-based approach. Harley-Davidson is both, and the licensed products it approves are each unique; they follow the premium pricing and embody the strong personality of the brand itself. It would be difficult to do so with a merchandise-based approach.
Resources and Process
There are some practical factors at work as well. A merchandise-based approach is not possible unless a company is willing to support its licensing efforts with a big staff and budget (or give a commissioned agent free reign). An equity-based approach is better suited for companies (like most) that expect licensing to pay for itself, and for companies (like most) whose overstretched brand managers have barely enough time to do their own work, much less review endless rounds of licensed products for approval. Merchandise-based approaches require lots of people, resources and flexibility; they must be constantly refreshed. An equity-based approach can more easily succeed with fewer people, resources and creative options for licensees.
A brand's approach to licensing will not only determine the procedures it must follow; it can also determine the program's results. A merchandise-based approach results in many licensing products; an equity-based approach results in unique consumer products. A merchandise-based approach will generally mean more deals with lower average returns per deal; an equity-based approach will generally result in fewer deals and higher averages—each licensee will be expected to do more.
We believe that an equity-based approach generally offers consumer product brands a higher return-on-investment, from both a financial and branding perspective.
As for finances, a smaller number of bigger deals takes less time to manage than a lot of smaller deals, and therefore generates greater profits. The time required to manage license agreements is generally unrelated to their scale; at times it actually seems inversely related (the smaller the deal, the bigger the hassle). Those hassles represent costs, and in a larger portfolio of deals, there is simply a greater likelihood that one of them will require excess resources to manage. For most brands (for whom achieving success along Coke's lines is not possible), an equity-based approach usually offers a higher return-on-brand equity as well. Measured against the investment of time, money and brand equity invested in a licensing program, the greatest net benefits come from big successes with unique products. If the goal is moving the hearts of minds of consumers—as it should be—it will be more efficiently accomplished with fewer licensed products, each of which embodies the unique equities of the core brand.
Few consumer brands can accomplish successful merchandise-based licensing programs on a large scale; few brands are so huge, and few brand managers are tolerant of seeing their logo on so many products. Most who try will end up with an incomplete collection of licensing products that fail, as a whole, to advance their brand. They can succeed, however, with a more focused, strategic approach. Great consumer product brands with passionate brand managers and finite resources can build great equity with licensed products just like their core products—unique, compelling and highly profitable.