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Posted on 4 May 2011 by Ceris Burns

Licensing & Contract Manufacturing

Have you ever considered licensing or contract manufacturing as routes to enter overseas markets?  Both can be relatively low cost and low risk ways of increasing your international presence and sales. Ceris Burns, international marketing specialist for the cleaning industry discusses the pros and cons of licensing and contract manufacturing.

On my travels recently I have been asked by several European cleaning products manufacturers if I could seek licensing and contract manufacturing opportunities for them. As the cleaning industry has expressed a clear interest in these routes to market I thought it worthwhile sharing my thoughts on both options and to provide a few tips on how to avoid any possible pitfalls.

What is Licensing?
Licensing is a contract in which a licenser gives a licensee the right to use: Product or process know-how, patent rights, trademark rights or copyrights.  In some cases several of these might be included and the licenser may also sell components/services to the licensee as part of the deal.

When is Licensing a good choice?
Licensing can be a good choice for markets where it is difficult to deal direct or where the market size is too small to justify a higher level of involvement.  Demands on costs and management are fairly low as there is no need to set up manufacturing or a sales office.

How does it work?
The licensee pays a percentage of the sales achieved which means that as sales increase so does revenue for the licenser.  The licensee benefits as he can tap into know-how while avoiding the high costs associated with researching, developing and launching new products.

What can go wrong?
Things can go wrong because market needs change.  The market might demand something new that the licenser isn’t necessarily prepared to develop or the licensee learns so much about the product and market that he thinks he doesn’t need the licenser any longer.

What is contract manufacturing?
Contract manufacturing involves a firm agreeing for a local company to manufacture its product under contract.

When is contract manufacturing a good choice?
When current manufacturing or transport and duty costs would price the product out of the market, the manufacturer is looking for a means of reducing manufacturing costs to target a number of countries or government insists on local manufacture and there is no other way into the country.

What are the pros and cons?
Lower management and finance demands enable the company to focus on sales and business development.  Should the product not do as well as expected it is also less problematic to pull out of the market due to lower investment.  Contract manufacturing also lends companies more flexibility in supplying specific products to suit the needs of different markets and to compete at local prices when manufacturing is in countries with lower labour costs. Disadvantages include minimal control over the manufacturer’s activity, so for example quality may be below standard or working conditions not in line with the company’s corporate policy. The local company may also not possess the necessary knowledge to compete in the marketplace.

Tips to avoid problems
In both cases there is no substitute for thorough planning.  If looking for a local manufacturer, ideally you should settle on a company that has some synergy with your own management approach and beliefs.  You will need to visit their manufacturing plant several times and obtain references if possible from other companies for whom they manufacture. With respect to licensing, build some of the following into your agreement in order to prevent potential conflict:  Ensure your agreement includes factors such as duration, quality control, royalties and performance measurement, set restrictions on territory, request equity in the licensee and ensure you retain copyright, patents and trademarks.

If you are looking for a licensing or contract manufacturing partner contact Ceris at ceris@cbimarketing.com


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