Burning the candle at both ends: how to balance potential profitability and brand protection when licensing brands

Abstract

Purpose: Drawing on transaction cost economics, the authors conceptualise brand licensing as a form of alliance. Its performance may be affected by a licensee’s potential opportunism resulting from an imbalance of specific investments in brand-building prior to signing the licensing agreement. From the licensor’s perspective, brand licensing represents a trade-off between brand protection and additional revenues. This study aims to examine how this trade-off shapes licensors’ evaluations of the attractiveness of brand licensing opportunities.

Design/methodology/approach: In a vignette study, 121 brand licensing professionals evaluated the attractiveness of up to eight hypothetical brand licensing opportunities with different levels of risk and profitability.

Findings From a licensor’s perspective, high brand quality and distribution risks decrease the attractiveness of a licensing opportunity, although the latter risks are more pronounced. High potential profitability has a positive and significant effect on attractiveness.

Research limitations/implications: The risks outlined in this study refer to licensee behaviour. The licensor may also behave opportunistically. The authors encourage research designs that enable a dyadic evaluation of licensing opportunities because a comparison of a licensor’s and a licensee’s assessments of the same scenario would be illuminating.

Practical implications: The findings enable the development of an evaluation template that directs brand owners’ attention to the risks and gains of brand licensing opportunities. It supports licensors in choosing the “best” opportunity.

Originality/value: This study identifies risks emanating from a licensee’s potential opportunism from a licensor’s perspective. It juxtaposes these risks with the potential profitability of brand licensing opportunities. It is thus one of the first studies to address a licensor’s decision-making trade-offs in a large-scale empirical setting.