Friday, April 30, 2010

Sources of growth - Part 2

In Part 1 of this series on sources of growth, I mentioned that if licensing business is not managed well, the stream of income could fall through such factors as natural attrition, royalty erosion, underreporting of royalties.

The corollary is also true. That is, if licensing is well managed, income from existing customers can be maintained and even grown.

It is generally accepted that existing customers are an easier source of growth than new customers. This should not be surprising. If they have already decided to do business with you and have had a positive experience then they should have little resistance to doing more business with you.

To maintain and grow existing licensees, they need tender loving care. Natural attrition can be reduced through understanding the customer’s business and making suggestions to help them boost their activities. This can reduce risks of the licensee falling away due to business failure or just lack of interest in the IP.

Closer communication is also a way to control royalty erosion. When a licensee takes the IP for granted, the royalty starts to be viewed as a tax. It is a matter of continuous education to underpin the perceived value of the IP to the licensee’s business.

Having an effective system of licensee audits supported with penalties for discrepancies identified will be a disincentive to underreport. Understanding the market and communicating with other licensees also helps to identify potential sources of royalty “leakage”.

So what does it mean?

In Part 1 it was stated that neglected licensees could contribute to a drop of 25% in license income over 5 years. If you stay in close contact with the licensees and regularly introduce new IP to them, it is similarly possible that you can maintain and grow them by 25% over those 5 years. Such a scenario is represented below graphically:

Part 3 will explore a further source of growth.

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