Last updated on October 31st, 2023 at 05:41 pm
The realm of business has always been about innovation and finding the best strategies to rise above the competition. As businesses continue to evolve, a particular model that has gained significant traction is the licensing business model. It provides a unique approach to collaboration, allowing businesses to enhance their offerings without reinventing the wheel. This model has proven to be particularly beneficial for B2B companies for several reasons.
1. Fostering Innovation and Diversification:
One of the primary advantages of a licensing business model in a B2B context is the fostering of innovation. When a company licenses another’s technology or product, it frees up resources that would have otherwise been dedicated to developing the same technology in-house. This approach not only reduces development time but also allows the company to focus on its core competencies, enhancing the product or service further.
Moreover, licensing can allow B2B companies to diversify their offerings more quickly and efficiently. By licensing products or technologies from other businesses, they can expand their portfolio without the high costs and risks associated with creating new products from scratch.
2. Cost and Resource Efficiency:
Implementing a licensing business model can lead to significant cost savings. Rather than investing a considerable amount of money, time, and other resources in developing a product or service, companies can instead license them from others who have already borne the development costs. This efficiency becomes particularly beneficial in a B2B context, where products or services often require significant research and development.
3. Access to Established Technologies and Brands:
Licensing offers businesses the chance to leverage already established technologies and brand names. For example, a company can license well-known software rather than develop its own, which can increase its credibility in the market. This association with recognized brands can help B2B companies attract more customers and create stronger business relationships.
4. Revenue Generation:
Licensing can also be an effective revenue generator. B2B companies can license their proprietary technologies or services to other businesses, charging either a fixed fee or a percentage of the revenue generated from the licensed product. This model can open up an additional stream of income for the company while also increasing its market presence.
5. Strategic Partnerships and Market Expansion:
Lastly, the licensing model can lead to strategic partnerships. These partnerships can be mutually beneficial, with each party bringing something unique to the table. Furthermore, licensing can aid in market expansion, as companies can access new markets through their licensees without the need for extensive market research or the high costs of market entry.
Where Licensing Works
Licensing is not for everyone and could backfire if not deployed strategically. A general rule of thumb is to not license your product if the licensor is in the same line of business as you. There are of course exceptions to this. But generally speaking, doing so would let a lesser rival offer a product that is as good as yours. The ideal use case for a licensing model is where your product forms a small, but vital component of a business with an entirely different business model. Uber’s licensing of Google Maps is a classic example. Other common examples include the licensing of music for use in events or movies, and the agreement to use patented innovations in the manufacture of electronic devices. For instance, Samsung and Google have cross-licensing agreements to make use of each others’ patents.
Economics of Licensing
The objective of licensing a product and not building it yourself from scratch is to cut down costs. Given this, there are two circumstances where licensing makes sound financial sense. The first is content aggregation. Take businesses like Getty Images or Spotify – these businesses aggregate content from professional creators (in these cases, photographers and music creators). For example, Getty Images offers around 20% royalty to photographers who want to sell their photos online through the site. The reason licensing for aggregation makes economic sense is because the content creation process is decentralized. It may be nigh impossible for companies like Getty Images or Spotify to build their own database of content without assistance from other creators.
The other instance where this makes economic sense is where there is a low cost for the return value. The reason Uber licenses Map content from Google is that it costs them less to get this information from Google instead of doing it themselves. But licensing Maps from Google costs money and the absolute costs increase with higher usage. In other words, there comes a point when it makes more sense for a company like Uber to build its own mapping software instead of licensing it from a third party. Given Uber’s acquisitions of mapping tech companies in the recent past, it is likely that the company will move away from Google in the near future.
Licensing Revenue Model
Licensing your content or product can be a great revenue generator for your business. This may be done either by charging the licensor for usage or for revenue generated. Charging for usage is the right approach if the licensor is in a line of business that is different from yours. Here, your licensor is essentially a consumer of your product and you may charge them either a fixed usage fee or one based on consumption. If your licensor is in the same line of business as you (Getty Images, for example), then charging them a percentage of the revenue is ideal. This way, the licensee makes money each time their content is sold by a third-party licensor.
Licensing is a lucrative business opportunity in a number of business segments – including software development and content creation. Identifying the right revenue model and picking the right target licensor will go a long way in establishing a successful business.
