The Golden BrandAs a lawyer, it is generally not my job to come up with a price to be paid for a license to use a client’s trademark. Sure, I might be given some ballpark figures by the client and set out to negotiate based on these figures, but I don’t come up with these ballpark figures. I could if it was asked of me, but it is usually left to the client to figure out what it thinks its brand is worth for the given situation.

I highlight “for the given situation” because, after doing a few of these deals lately and reflecting on the different prices paid by different companies to use the same marks, I have realized that there may be a fundamental flaw in the valuation of a trademark license.  It has become evident to me that three of the major factors in setting such a trademark license price are (1) reputation of the licensor brand, (2) price willing to be paid by the licensee  in a cost vs. sales-increase analysis, and (3) the risk to the licensor in diluting its brand’s reputation.  It is in the third factor that I have identified a problem that may incorrectly scew the agreed price one way or another.  Because I must neglect to use real companies’ names and prices paid, I will use hypothetical companies and prices to explain the issue.

Company A has a well respected domestic brand.  Company A has placed a minimum value on a license to use this brand mark at $100,000.  This is factor (1), above, and a starting place for negotiations.

Company B is a lesser known local brand in a similar - but not identical - market to Company A, and would like to sell a new line of its products in expanded areas - this product is not currently sold by Company A.  Company B estimates that it will sell 2 million units of this product if it can use Company A’s brand mark to market the product.  After production costs and other expenses, profits to Company B would be $500,000. 

Company C is a well respected international brand in a completely different market than Company A.  Company C would like to enter a new market with completely new products.  Company A does not sell products in this market, but consumers in this market would be more familiar with Company A’s brand than it would be with Company C’s.  Company C estimates it would sell 10 million units of the new product using Company A’s brand name, and after costs and other expenses, profits would be $4 Million.

Based on the above factor (2), it would make economic* sense for Company B to license Company A’s brand mark for anything under $500,000, and for Company C to license Company A’s brand mark for anything under $4 million.  (*Note - I am boiling this discussion down to economics and price setting, with all other factors equal.  Obviously, other factors influence the decision to license or not to license.)  Therefore, based on factors (1) and (2), a price between $100,000 and $500,000, or $100,000 and $4 Million, should be negotiated for Company’s B and C respectively. 

The third factor is generally the weight ont he scale.  The problem I come up with, however, is how to measure the weight.  Both of these scenarios don’t involve serious risks of market share dilution, as both Company B and C are offering new products in different markets than Company A.  Therefore, the main risk of dilution to be considered is that of goodwill - the risk of either company producing a “lemon” that could potentially decrease the goodwill in Company A’s brand reputation.  Do you measure this risk in the number of products that will be produced and on the market, thereby increasing the chance a lemon is produced or that quality standards will be diminshed by mass production?  On the other hand, do you measure this risk simply by the track record and reputation of the licensee for quality standards, thereby decreasing this risk if the company is well reputed in its own right?  Of course, there are provisions to be included in every trademark license agreement to account for controlling or checking quality standards to make sure they are being met, which somewhat mitigates this risk.  However, I believe that this factor does, and should, influence the settled price to be paid for the license.

Take Company C.  Company A could reasonably increase its price to Company C at a larger percentage increase than to Company B simply because Company C will be producing 1.5 million more products associated with Company A’s mark - increasing the opportunity for goodwill dilution.  The increase, of course, would be the estimated market value for this risk.  Company A could also increase its price to Company B at a larger percentage increase than to Company C simply because Company B is only locally known, and does not have Company C’s international track record to alleviate Company A’s fears that it always meets quality standards. 

This is an important measurement because this risk is one of the largest determents of trademark licensing, and should influence the agreed upon price of a brand license.  Furthermore, because this risk increases or decreases with each different licensee, there cannot be one set price for any brand mark license.

I would love comments.  Please note that this discussion is purely about setting a trademark license price, and not about the reasons for or against licensing.  That is a whole other conversation - and a later post.

This entry was posted on Thursday, January 21st, 2010 at 9:51 pm.
Categories: Trademark Trends ~ by Ian McClure.

One Comment, Comment or Ping

  1. MZ

    Dear Ian,

    IMHO the risk of failure of the (licensed) new product(s) and the resulting “damage to goodwill” cannot be calculated.

    About 90% of all new product launches fail. Failure is the norm, not the exception. Even big companies with the best reputation and all the market power fail. Do you remember Burn, an energy drink The Coca Cola Company introduced? It was backed with all of the might of the global market leader in carbonated drinks. And it tanked.

    In general, licensed product launches are more successful.

    And consumers allow brands to make mistakes. The Harley Davidson perfume or their cake decorations were bad ideas. They failed miserably. Did it hurt Harley Davidson? Yes, at B2B level it did. Did it damage the goodwill with consumers? No, consumers are forgiving, if you do not repeat your mistakes over and over again.

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