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Many firms are using licensing as a tool for market entry, and for good reason.
Take an example of database management software, which may be produced by a firm in the
By licensing their technology to a local player, and having the local player take care of local market needs, the
In many cases, the licensee will take care of integration of the foreign technology within their organization. And if there are marketing opportunities beyond the original licensee (a best-case scenario), then the licensee will add staffing, marketing to local clients, sales support and service to their duties.
Foreign producers need to know it's common that the licensee (in this case, the Japanese firm) earns more revenue in
Licensing isn't free, however. Aside from the costs in finding the right licensee(s), licensers need to add the costs of teaching, supporting and monitoring to keep the relationship prosperous. The licenser may have to help stimulate local demand for their product. And there are often other costs.
In examining licensing deals, the first thing to decide is whether it's indeed better to license or trade (sell) the product. There are pros and cons of each. Trading gets the seller a single client, and thus the vendor has to keep getting new clients, which is expensive. However, trading can give the vendor more control. The vendor isn't necessarily turning over the entire market to the local client.
Licensing offers lower entry and sustenance costs. And if you manage the licensee correctly, you'll have a local partner who will assist in all the areas mentioned above. However, mismanagement of that relationship can kill a market for a foreign vendor. If the licensee doesn't perform, the vendor may never gain market share in the desired country.
In our Japanese example,
But what if the Japanese perform up to the contract?
Revoking a license can be difficult in
Another negotiator's point in licensing is the type of license. Are you offering exclusivity in the market (meaning no one else can have a license)? Is the license time-sensitive, perhaps valid for one or two years? Is this a license to sell your product, a license to manufacture your product or both?
Are there additional conditions to be placed on the license? For example, who will trademark and (if necessary) patent the product or process you're selling? Will there be any conditions on the type of promotion used? Promotion can include distribution channels, type of media used, pricing and service/guarantee offerings.
How many licenses will be offered in each country/region/market/industry? Does a license for
The locals in their market will want to know what type of investment the suppliers are making. Will they commit funds, technical resources, press visibility, personnel, localization of product (if necessary), localization of marketing materials (if necessary), legal resources in their home market, approval and regulatory fees? Will certain manufacturing standards (such as ISO 9000, Six Sigma) be adhered to? Will the supplier accompany the licensee on sales and service calls, and for what time period?
How is revenue divided? Who holds the pen? Who gets paid first and when are the accounts paid fully? Is the licenser willing to plow back any funds into the local market?
Perhaps the biggest stumbling block is expectations management. Did the
I'm always amazed that most licensing negotiations center on protection issues, such as PI, patents, trademarks and repatriation of funds when almost all of those issues are unenforceable.
A thorough discussion (which may take several weeks) of the expectations serves two purposes: It allows the parties to get to know each other better, and it forestalls the cries of "foul" or "nonperformance" because both parties truly understand what type of deal is being created.
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