In less than a year, the Global Fund, which raises money to fight AIDS in Africa, has generated tens of millions of dollars and a fair amount of controversy through its association with the Product Red campaign. The campaign — in which several well-known companies have created one-of-a-kind products and are giving a portion of their sales price to the charity — has brought in $28-million.
While some marketing executives have criticized Product Red for promoting consumerism and benefiting corporations more than charity, other marketing experts applaud the endeavor, which has received widespread publicity and is spearheaded by the rock star Bono and other celebrities. They say that, by involving six big companies such as American Express, Gap, and Motorola rather than one or two manufacturers, and getting them to participate in the campaign for at least five years, Product Red is taking business-charity deals to a new level.
Well-Known Groups Fare Best
Other charities, lured by the possibility of earning millions of dollars for their organizations, are signing similar deals that grant companies the right to create specialty products bearing their name.
The World Wildlife Fund is working to create a line of licensed products that align with its environmental and social mission, and Habitat for Humanity is now exploring whether it too will offer a line of goods brandishing its name and logo.
Such deals — in which charities license the right to use their name to companies and receive royalties on product sales — are steadily becoming more lucrative for charities.
But while licensing can produce significant revenue, experts caution, it is not for every charity. Nonprofit organizations must have widespread name recognition or known expertise in a topic, such as child safety or disaster preparedness, to influence consumers to buy products bearing their names. And according to experts, successful licensing deals can take up to two years of time-consuming research, negotiations, and product development with companies before any products are created.
"It's not for short-term players," says David Hessekiel, president of the Nonprofit Licensing Forum, a Rye, N.Y., trade group for charities. "A lot of it is what Donald Trump might call 'the art of the deal.' You really need to be able to show the value of your brand and develop relationships with licensees who will invest in the product lines."
Another potential problem with licensing is what some experts have called "cause clutter," the growing number of marketing ventures between charities and businesses that include but are not limited to licensing.
A survey released this month by Cone, a Boston consulting firm that helps charities work with companies, found that only 14 percent of consumers said they would pay more for a product if it supports a social issue or the environment, down from nearly 30 percent who said so in 2004, the last time the survey was conducted.
"The space is terribly crowded right now," says Lori Redmer, vice president of leadership giving at Save the Children, which is now in the process of revising its licensing efforts because some of its product sales have sagged as consumer and business habits change.
"The competition has gotten a lot more intense," she says, because retail companies have consolidated, leaving fewer retail outlets available, and many nonprofit groups have started to offer their own products. "That's made the space very challenging."
Promoting Preservation
That competition is rising, in large part, because licensing deals have the potential to generate substantial money for charities.
The most successful efforts are those in which the products have a strong commercial appeal — and a close tie to a charity's mission, licensing experts say.
The National Trust for Historic Preservation over the past decade has lent its name to an array of mass-marketed products such as American Tradition house paint, high-end furniture, and intricately designed carpets, all of which bear the National Trust's name and complement the organization's mission to preserve historic buildings.
Royalty payments on licensed products earn the National Trust about $2.5-million annually, according to its most recent audited financial statement.
That is small compared with the $69-million the organization raised from private sources last year. Miriam C. Lenett, the charity's director of business development, says that, even so, "this has become a significant part of what we do."
Ms. Lenett says the organization's licensing deals carry several nonfinancial benefits, most notably promoting the National Trust's mission among consumers the charity would not otherwise reach. The licensing arrangement has also prompted Lowe's, which sells American Tradition paint at its home-improvement stores, to contribute $1-million annually to the National Trust.
Strict Criteria
Another national charity, the Sierra Club, expects to earn close to $1-million in royalty payments this year from its line of licensed products, which include environmentally friendly clothing, chocolates, puzzles, stuffed animals, and educational flashcards.
The organization has a committee of volunteers who conduct research on each company that might license its name, to make sure that it meets strict criteria. The Sierra Club's private-label wines, for example, must be produced by wineries that engage in organic-farming practices, meet requirements for fair treatment of their workers, and avoid planting on hillsides in ways that would create erosion, says Johanna O'Kelley, the Sierra Club's director of licensing.
"It's very tough for someone to pass all of the screens, plus make everything the way that we require," she says.
Such screening processes illustrate one of the differences between licensing and other marketing efforts that are simpler and of shorter duration.
Racking Up Royalties
In many marketing agreements, nonprofit groups earn money and exposure in deals where companies link the charity's name to an established product, such as Clorox bleach or Yoplait yogurt. In such cases, the charity sometimes receives a guarantee that it will receive no more than a certain sum — regardless of how many products are sold.
Licensing, however, allows nonprofit organizations to sell products under their own name and to receive royalties, a percentage of the price of each unit sold. The rest goes to the manufacturer, retailers, and others who help sell the product.
Ms. Lenett says the National Trust typically earns royalties of 1.5 percent to 10 percent on each product sold. The organization also negotiates a "minimum guarantee" that is paid to the trust, and it attempts to secure five-year licensing contracts with companies.
Other charities such as the American Society for the Prevention of Cruelty to Animals and the American Red Cross report royalties of between 2 percent and 12 percent, depending on the product.
While many charities use a simple formula for setting up royalty agreements with companies, Product Red has a more complicated structure: Whenever a product is sold, a portion of the sales price goes to the Global Fund. The companies selling the products also pay a one-time administrative fee to Product Red, a newly created company that runs the campaign.
That structure means that Product Red does not have to report the same information a charity would provide to government organizations and the public, and that has fueled some controversy.
Ben Davis, a San Francisco marketing executive, has started a Web site and publicity campaign called Buy (Less) in an attempt to persuade Product Red's organizers, as well as other charitable marketing ventures, to reveal more about their finances.
"I see a lot of danger," says Mr. Davis. "This is a new frontier. A Wild West attitude. A lawlessness. We need to provide some genuine structure."
"Right now," he says, "it's hard to know where the Gap ends and Red begins."
Watchdog groups such as the Better Business Bureau say they expect charities and companies to disclose on a product how much of the money goes to the charity. But many of the products associated with the Product Red campaign do not meet that benchmark, since they do not clearly state the amount of money from the sale of each product that is given to the Global Fund.
Four states — Alabama, Maine, Massachusetts, and New Hampshire — have laws that require companies and charities entering into licensing agreements to register, says Gregory Lam, a Kansas City, Mo., lawyer who specializes in commercial agreements for charities. Those states, however, require companies to disclose the royalty per unit only if they have been able to determine that amount in their contracts. In some cases, the calculation is not available.
"In some cases, it is a practical impossibility," says Mr. Lam, who helped the Gap work out its deal with Product Red.
Kathy Van Buskirk, a Red spokeswoman, says the campaign is trying to be "as clear as possible" about how much money from each product goes to the Global Fund, but that is often difficult.
"It depends on the products," she says. "Apple has been very concrete with the Red iPod. It says clearly that $10 from every sale goes to the Global Fund. But for Converse, they have a variety of tennis shoes and models so it's more difficult."
Reshaping the Market
Even with the criticism, Product Red continues to raise money and is reshaping the market for other nonprofit groups, which have to work increasingly hard to win shoppers' attention with licensed products.
"There is so much out there now," says Phoebe Campbell, founder of Campbell Associates, a Tarrytown, N.Y., licensing agent for charities. "Everybody and their brother has a cause. It's gotten to the point that if you're just banking on the feel good, sales have started to decline."
Save the Children, which works to alleviate child poverty, has been overhauling its licensing arrangement because of what Ms. Redmer, the chief fund raiser, describes as a big shift in the retail market.
In the 1990s, Save the Children says, it earned millions of dollars by selling colorful neckties and bedding that featured designs by children. Since then, however, demand for its ties has dwindled because more employers have adopted business-casual dress codes.
That change, plus the consolidation of retail stores, explains why Save the Children will soon go public with new products.
"It's a vastly different retail concept than it used to be," says Ms. Redmer, who would not disclose how much money the charity has earned in its licensing deals. "The product has to stand alone on its own merits. It's not enough to be aligned with a nonprofit and be cute."
Other nonprofit groups with licensing deals will probably have to make changes, especially as competition continues to grow, Ms. Campbell says.
"You don't just want to slap a logo on something," she says. "You have to be sophisticated, and you have to approach it with the same mind-set that consumer companies and brands do."
The American Society for the Prevention of Cruelty to Animals hopes to capitalize on that approach when it unveils its new products in August. The charity, which would not provide an estimate of how much it expects to earn, plans to license pet products through two companies, Pet King and Team Products.
The organization has long allowed companies to pay a fee in exchange for an ASPCA "seal of approval" on their pet-care products, which had to meet the charity's safety standards.
Elysia Howard, the charity's vice president of marketing, says that the seal of approval, while lucrative, is being phased out because officials believe the ASPCA can raise more money and awareness with its own products.
"Our name has recognized value," Ms. Howard says. "We thought we could leverage that through wholly branded products." Licensing is, she adds, "a great way to generate new sources of revenue with limited expense."
Safety Products
Another big charity getting into licensing is the American Red Cross, which last year began offering products related to disaster preparedness, health, and safety.
The organization now has licensing agreements with 10 companies. Customers can buy Red Cross disaster radios, hand sanitizer, disposable gloves, humidifiers, and nursing shoes.
The Red Cross would not disclose how much the products have raised for the charity. But Jennifer Niyangoda, the Red Cross's manager of cause marketing, says, "It's definitely become a good, unrestricted revenue stream for us."
The Red Cross, Ms. Niyangoda says, has been careful in choosing companies that have strong product-safety records and the ability to get the charity's products onto the shelves of major retailers such as Bed, Bath & Beyond, Linens 'N Things, and Target. It has also worked to make sure that the products lend themselves to carrying the Red Cross logo.
"As long as we stay focused on the product categories that stay true to our mission, it will strengthen our place in the marketplace," Ms. Niyangoda says. "We're reminding people what the Red Cross mission and message is."