In a recession, marketers and institutions with strong brands may be tempted to license their names and trademarks. But while licensing can generate easy revenues, those royalties come with a potential risk to the brand. Consider Harvard University's recent ten year licensing arrangement with Wearwolf Group Ltd. of New York to develop and sell a line of preppy apparel bearing the "Harvard Yard" brand and crimson trim.
The University, presumably mindful of possible negative reputation effects, carefully avoided licensing the Harvard University logo or name. However, no matter how carefully written the agreement, the licensee will likely be straining to exploit the Harvard association. That, after all, is what they have paid for and it's the only obvious basis on which they will be able to charge a price premium for the brand. (Bloomberg reports that trousers will start at $195.)
The benefit to the university - in terms of either revenue or reputation -- is less clear. Royalties are unlikely to be more than 8 percent of wholesale sales; assuming a 50 percent retail margin, the Harvard Yard line would need to generate $200 million in retail sales, a very tall order, to produce $8 million in free cash flow for the University. Is this sufficient cash to offset the potential risk to the brand? Meanwhile, Harvard hardly needs to stretch its brand into other categories to boost its reputation. If anything, the proposed style of the apparel could tarnish the university brand by emphasizing a preppy stereotype that Harvard - seeking more diversity in its student body - may not want reinforced.
There are five principal questions that any licensor needs to answer before committing to a brand licensing agreement:
1. Why am I licensing my brand? Is it to enhance brand-name awareness, stimulate interest in a mature brand, penetrate new geographies more quickly with a recently launched brand, maximize the profitability of an existing brand, or some combination of the above?
2. What is my licensing strategy? Licensing a valued brand asset shouldn't be done opportunistically in response to random approaches from the marketplace. You should have a rigorous set of screening criteria to determine which product categories make sense to license, in what sequence, and to what sort of partners.
3. Will licensing enhance or dilute my brand equity? Licensing works best when consumers of the core product see the licensed product as a natural extension of the brand franchise, and consider it at least equivalent in quality in its category to the quality of the core product. Think Porsche sunglasses.
4. How will quality control be maintained? If sales do not match the licensee's expectations at agreed-upon quality levels, the licensee may be tempted to cut corners on quality and reduce prices. That raises the reputation risk to the licensed brand, and increases the likelihood of costly disputes.
5. How important is brand licensing to my strategic or financial success? For professional sports teams, sales of licensed merchandise carrying the club name are as important to them as to the licensees. When strategic importance is asymmetric, any deal is more likely to end up disappointing both parties.
Harvard already licenses a full array of college-related merchandise, from sweatshirts to coffee mugs, bearing its name and logo. Is the Harvard Yard deal with Wearwolf a smart new licensing strategy? Or might the downside reputation risk outweigh the royalty upside? Answers to the five questions above might prove illuminating.