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Why do luxury brands license their names and logos to manufacturers

DUBAI, UNITED ARAB EMIRATES - SEPTEMBER 29: Rihanna gestures on stage during her Fenty Beauty talk in collaboration with Sephora, for the launch of her new Stunna Lip paint "Uninvited" on September 29, 2018 in Dubai, United Arab Emirates. (Photo by Mark Ganzon/Getty Images for Fenty Beauty)

Licensing is a popular method used by brands to expand an existing business. Licensing is a legal arrangement whereby a firm gives permission to produce and market merchandise in the name of the licensor for a specific period of time. The licensor is then paid a percentage of sales (usually at the wholesale price) called a royalty fee. A royalty fee is usually somewhere in between 2-15%.

The first designer to license his name to a manufacturer was Christian Dior, in the 1950’s. Many other fashion labels including Ralph Lauren and Betsey Johnson extended their own fashion lines into home decor with the use of licensing agreements. Rihanna’s Fenty brand has launched brand extensions in Fenty Beauty and Fenty Skin.

Manufacturers of athletic shoes also have extended their business with licensing agreements to use their logos and names to produce active sportswear including Nike, Reebok and Adidas who have all used this method. Comic characters and TV characters are often licensed as well, including Spider Man and Hello Kitty.

The advantages of licensing include that the manufacturer gets to create merchandise with a highly recognized name. A manufacturer often produces licensed goods for serval designers or brands.

The advantages of the designer include the royalties they receive on the sale of each product (5-15%), as well as greater exposure of their brand, and little investment in the product development and manufacturing of new or existing products.

The disadvantages in licensing are very few. They may lose some quality control, but this is unlikely, as a licensing agreement stipulates a degree of quality control must be maintained, and manufacturers will not want to ruin their relationships with the licensor.

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