Merchandise and Brand Licensing

How teams, films and characters earn money from products they never make themselves, and the risks of stretching a brand too far.

When you buy a team jersey, a lunchbox with a cartoon character, or a toy from a hit film, part of what you pay goes to the owner of that name or character - even though they probably didn’t make the product. This arrangement is called licensing, and it turns popular brands and characters into a steady stream of income.

How licensing works

In a licensing deal, the licensor - the owner of a brand, logo or character - gives a licensee - usually a manufacturer or retailer - permission to use it on products. In return, the licensee pays a royalty, typically a percentage of the product’s sales, and sometimes a guaranteed minimum payment.

This is attractive to both sides. The licensor earns money without building factories, managing stock or taking on much risk. The licensee gets to sell a product that customers already want, because the brand does much of the marketing work.

Why fans pay a premium

A plain shirt and a team shirt may cost similar amounts to produce. The difference in price comes from what the logo means to the buyer: identity, loyalty and belonging. Economists would say the brand shifts the demand curve - people are willing to pay more for the same physical item because of what it represents.

This is also why merchandise sales often jump when a star joins a new team, or when a film is released. Demand follows popularity, and licensors try to time new products to match the moments fans care most.

Who earns from a jersey

Suppose an official cricket jersey sells for 2 thousand rupees. The store might keep about 800 rupees to cover rent, staff and profit. The manufacturer receives around 1 thousand 200 rupees, and from that it pays the team a royalty - say, about 10 percent of that wholesale price, or 120 rupees. The team earns 120 rupees from each jersey without making a single one; across hundreds of thousands of sales, that becomes a significant income.

Protecting the brand

Licensing brings risks for the licensor. If a licensee makes poor-quality products, it can damage the brand’s reputation. Too many licensed products can also cause brand dilution - when a name appears on so many items that it stops feeling special. Careful licensors approve designs and limit how their brands are used.

Counterfeit goods - fake products using a brand without permission - are another challenge. They can be cheap and widely available, especially around big events. Counterfeits take sales from licensed products, pay nothing to the brand owner, may be poorly made or unsafe, and are illegal to sell in most countries.

Beyond sport

Licensing is huge in entertainment. Popular film and cartoon characters appear on clothes, toys, books, food packaging and theme park rides. For some franchises, merchandise and licensing earn more over the years than the films themselves - one reason studios favour characters that can be turned into products.

Assuming a brand's owner makes its products

Most branded merchandise is made by other companies under licence. The team, studio or brand usually earns a royalty on sales rather than making and selling the product itself - which is why licensed goods can appear from many different manufacturers.

Key takeaways

Licensing lets brand owners earn royalties on products made by others.
Fans pay a premium because a logo carries identity and loyalty.
Brand dilution and poor-quality licensees can damage a brand's value.
Counterfeits take sales from licensed products and pay nothing to brand owners.