In-House vs Licensing: Strategic Choices and the Cost of Control
1. Introduction
The fragrance industry is one of the most iconic and competitive segments of the luxury and beauty market. It is characterized by a complex interplay of brand heritage, consumer perception, creative innovation, and distribution strategy. In recent decades, the market has evolved dramatically, with new consumer preferences, digital retailing, and increasing globalization reshaping how fragrance brands approach growth and profitability. Within this context, brand owners face critical strategic decisions when determining how to manage their fragrance business: whether to pursue an in-house model or a licensing model.
The in-house model refers to a business structure where the brand owner retains full control over the fragrance creation, production, marketing, and distribution. In contrast, the licensing model involves contracting an external partner to produce, distribute, and often market the fragrances, while the brand owner collects royalties in exchange for the use of the brand name. While the licensing approach offers immediate cash flow benefits and lower operational complexity, the in-house model provides greater control over product quality, brand experience, and revenue potential.
This essay explores the financial, operational, and strategic implications of both models within the fragrance industry. Using illustrative financial modeling, including EBIT and working capital trends across revenue scenarios, it highlights the trade-offs between control, risk, and capital requirements. Further, it demonstrates how the decision between in-house and licensing impacts not only the profitability of the fragrance business but also the broader brand equity and long-term positioning in the market.
Finally, the essay presents a compelling case for the role of Carrara Advisory, which offers expert guidance and operational execution for brands considering the in-house model. By acting as an external beauty department, Carrara Advisory allows brands to capture the strategic benefits of in-house management without the operational and capital burden of building a full internal team, effectively bridging the gap between control and efficiency.
2. The In-House Model
2.1 Definition and Operational Scope
The in-house model in the fragrance industry involves full ownership and management of all aspects of the fragrance business. This includes concept ideation, formula development, production, packaging, marketing, distribution, and sales. By maintaining direct control over the value chain, the brand owner can ensure consistency with the brand’s identity, align products with strategic positioning, and respond quickly to market trends or consumer feedback.
Operationally, the in-house model is intensive. It requires investment in production (often through contract manufacturers), supply chain management capabilities, and dedicated marketing and sales teams. The brand must also manage inventory, logistics, and regulatory compliance, all while maintaining brand standards across different markets. This complexity is often seen as a barrier to entry, particularly for smaller brands without deep operational expertise.
2.2 Financial Profile: EBIT and Working Capital
Financially, the in-house model is characterized by high upfront and ongoing investment in working capital, particularly inventory and accounts receivable. Using the illustrative model, working capital requirements scale dramatically with revenue, reflecting the need to fund production, distribution, and marketing.
However, the in-house model also offers the potential for higher EBIT and profit margins as revenue scales. In the provided financial scenario, EBIT margins start around 5% at lower revenue levels and gradually improve to approximately 12%, reflecting the scale effect on the operational cost for marketing and SG&A.
2.3 Strategic Advantages
The primary advantage of the in-house model lies in control. Control enables the brand owner to:
Maximize revenue potential: By capturing the full margin, rather than a royalty percentage, the brand can leverage growth opportunities more effectively.
Protect brand integrity: Maintaining direct oversight of creativity, production, distribution, and marketing ensures consistent alignment with brand values and identity.
Collect and analyze consumer data: Direct engagement with retailers and customers allows the brand to gather insights for product innovation and personalized marketing.
Exercise pricing power: With no intermediary controlling prices, the brand can implement strategic pricing policies, premium positioning, and promotions.
Leverage market presence for brand extensions: Higher revenue, full control and market visibility facilitate launching adjacent categories (e.g., skincare, cosmetics, home fragrances), strengthening the overall brand ecosystem.
2.4 Risks and Challenges
Despite its advantages, the in-house model carries notable risks:
Capital intensity: Significant funding is required for production, inventory, marketing, and operations.
Operational complexity: Managing multiple functions in-house demands expertise, infrastructure, and coordination.
Market exposure: The brand bears the full risk of market fluctuations, including sales volatility, supply chain disruptions, and regulatory changes.
In essence, the in-house model offers higher upside potential but requires careful strategic planning and resource allocation to succeed.
3. The Licensing Model
3.1 Definition and Operational Scope
In contrast, the licensing model delegates operational responsibilities to a partner, typically a manufacturer or distributor with established capabilities. The brand owner grants the licensee the right to produce and sell fragrances under the brand name, receiving royalties in return. Licensing can include specific agreements on product quality, marketing guidelines, and distribution channels, but operational control is limited.
3.2 Financial Profile: EBIT and Working Capital
The financial appeal of licensing lies in its low capital requirement. Working capital is minimal because the licensee typically handles production and inventory financing. In the model provided, working capital under licensing is roughly one-tenth of that required for in-house operations at comparable revenue levels.
While absolute EBIT grows with revenue, the growth rate is slower than in-house. The brand owner captures a steady stream of royalties without significant capital commitment or operational responsibility.
3.3 Strategic Advantages
The licensing model offers several advantages:
Low risk and capital-light: Minimal financial exposure makes licensing attractive for new entrants or brands with limited resources.
Operational simplicity: The licensee manages production, logistics, and distribution, freeing the brand owner to focus on brand positioning.
Faster market entry: Leveraging an experienced licensee can accelerate geographic expansion and category presence.
3.4 Limitations
Licensing, however, comes with constraints:
Limited revenue upside: Royalties typically represent a fraction of total sales, capping the financial benefit.
Reduced control: The brand has limited influence over product development, new categories entry, marketing strategy, and customer experience.
Slower brand equity growth: Reliance on a licensee can constrain strategic investments in market presence and innovation, potentially affecting long-term positioning.
4. Comparative Analysis: In-House vs Licensing
4.1 Financial Performance
The most immediate difference between the in-house and licensing models lies in financial performance, particularly in EBIT and working capital requirements. Using illustrative modeling across a range of revenue scenarios, several trends emerge:
EBIT Trends
In-house: EBIT grows rapidly with revenue, demonstrating economies of scale. Absolute EBIT increases significantly as sales expand, reflecting the brand owner’s ability to capture the full margin on every unit sold.
Licensing: EBIT grows more slowly. Royalties provide a steady income stream, but the licensee captures the operational profit. Even as revenue increases, the brand owner’s EBIT is limited by the royalty percentage.
Working Capital Trends
In-house: Substantial working capital is required, scaling proportionally with revenue. The brand must finance production, distribution, inventory, and marketing campaigns, which increases operational risk and exposure to cash flow pressures.
Licensing: Working capital requirements are minimal. Since the licensee finances production and inventory, the brand owner’s cash commitment is low, creating a low-risk, capital-light revenue stream.
These trends illustrate the cost of control. The in-house model demands financial and operational resources but allows the brand to capture higher absolute profit and scale effectively. Licensing reduces risk and capital intensity but constrains upside.
4.2 Strategic Trade-Offs
Beyond financial metrics, the two models involve different strategic trade-offs:
Control vs. Operational Simplicity
In-house: The brand owner maintains control over product development, pricing, marketing, and distribution. This enables consistent brand positioning and responsiveness to market shifts.
Licensing: The brand relinquishes operational control, limiting its ability to shape customer experience or enforce strict brand standards.
Revenue Potential vs. Capital Efficiency
In-house: Higher revenue potential translates not only into EBIT but also into greater market influence, higher brand visibility, and stronger negotiation power in distribution channels.
Licensing: While capital-light, revenue is capped by the royalty structure. The brand benefits from sales growth but does not fully capture the financial upside of category expansion.
Brand Equity Development
In-house: Direct customer engagement allows for collection of consumer data, enabling innovation and marketing strategies that enhance long-term brand equity.
Licensing: Limited contact with customers constrains the brand’s ability to build proprietary insights and brand loyalty.
4.3 Illustrative Scenario
To exemplify the two different strategies, we modeled the full Profit and Loss and Balance Sheet of a fragrance brand. In this model, we made assumptions regarding the evolution of SGA, marketing investment, DOS/DOI/DOP with scale, and other business dimensions. In our specific scenario, when the brand projects EUR 50M in annual sales the results are as follows:
At lower revenue levels, licensing yields higher EBIT in absolute terms. However, as revenue grows, the in-house model quickly overtakes, delivering higher margins and significantly greater value capture.
Working capital requirements for the in-house model are roughly 12 times higher, reflecting the financial commitment required to maintain control over operations and inventory.
Under these assumptions, EUR 50 million represents a crossover point, the moment where the two models generate comparable EBIT. Below this threshold, licensing outperforms; above it, the in-house model delivers stronger EBIT.
In conclusion, the in-house model is a long-term strategic investment: higher capital intensity but greater profitability and brand equity over time. Conversely, licensing is a lower-risk, short-term option with reduced control and limited upside.
5. Implications for Brand Strategy
The choice between in-house and licensing carries profound implications for brand strategy:
5.1 Market Positioning
In-house: Brands retain full flexibility to set pricing, manage promotions, and strategically position themselves. This is particularly important in luxury and prestige segments, where pricing and presentation are core to perceived value.
Licensing: Pricing and positioning are partially dictated by the licensee’s operational priorities, potentially misaligning with the brand’s strategic vision.
5.2 Brand Equity and Customer Relationships
Direct control over the customer journey allows in-house brands to:
Collect rich data on preferences and behavior.
Develop targeted marketing campaigns and loyalty programs.
Maintain product quality and consistency, crucial for luxury brands.
Licensing limits these opportunities, as the licensee acts as the primary touchpoint with consumers.
5.3 Category Expansion and Ecosystem Building
In-house operations provide flexibility for cross-category expansion, leveraging brand equity in fragrances to launch skincare, cosmetics, or home products. Higher revenues from direct sales increase the brand’s credibility and influence, creating synergies across the portfolio.
Licensing may constrain expansion, as new categories often require new licensing agreements or partners, delaying execution and diluting strategic coherence.
5.4 Strategic Decision Framework
When evaluating which model to pursue, brand owners should consider:
Capital availability: Can the brand fund operational growth?
Operational expertise: Does the brand possess, or have access to, the skills required to manage production, distribution, and marketing?
Growth objectives: Is the brand seeking rapid revenue scale and long-term equity growth, or short-term cash flow with minimal risk?
Market dynamics: How competitive is the category, and how important is operational control for brand positioning?
5.5 Model Evolution: From Licensing to In-House and Vice Versa
In reality, the choice between in-house and licensing is not always permanent nor binary. Strategic sequencing can create advantages in different contexts:
Starting In-House: Some brands choose to launch a new category in-house to maintain full creative control, protect brand equity especially when setting up a new product category, or because demand from potential licensees is still limited. Once the category is established and consumer traction is proven, licensing may become a viable option for scale and international expansion.
Starting with Licensing: Conversely, brands with limited capital or uncertain market potential may initially adopt a short-term licensing agreement to minimize financial exposure and test demand. Once the category proves successful, the brand can internalize operations to capture higher margins, gain control over customer data, and drive long-term brand equity.
The optimal path is highly situational and depends on timing, resources, and strategic priorities. Carrara Advisory supports brands in defining not only the right model, but also the right sequence and timing for transitioning between models.
6. Carrara Advisory’s Value Proposition
Carrara Advisory specializes in guiding fragrance brands through this strategic decision, offering a unique combination of advisory and operational execution. Our approach ensures brands capture the benefits of an in-house model without the inherent complexity and capital requirement.
We begin with a detailed evaluation of each brand’s strategic goals, market positioning, and operational capabilities. By modeling EBIT, working capital, and revenue potential under both in-house and licensing scenarios, we identify the optimal path for growth.
For brands seeking an in-house approach but lacking the infrastructure, Carrara Advisory provides full-service operational support, including:
Strategy and Concept Development: Crafting product and brand strategies aligned with market trends.
Product Ideation and Design: Developing fragrances, packaging, and brand narratives.
Execution: Managing manufacturing, supply chain, and quality control.
Marketing and Distribution: Implementing go-to-market strategies across channels, ensuring brand integrity.
This “turnkey” model allows brands to leverage in-house advantages without building a dedicated team, significantly reducing operational and financial risk while accelerating time-to-market.
We also support brands in planning and executing model transitions, whether moving from licensing to in-house to capture higher margins and control, or starting in-house and later licensing to accelerate scale, ensuring each evolution aligns with brand equity and financial goals.
By combining strategic guidance with operational execution, Carrara Advisory enables brands to:
Maximize EBIT potential.
Retain control over brand identity and consumer experience.
Scale efficiently without significant upfront capital.
Build long-term brand equity and market influence.
7. Conclusion
The choice between in-house management and licensing in the fragrance industry embodies the classic trade-off between control and convenience, risk and reward.
In-house: Offers higher revenue potential, stronger margins, and full control over brand strategy, customer experience, and market expansion. The cost of control is high, both in terms of capital and operational complexity, but the long-term strategic benefits are substantial.
Licensing: Provides a capital-light, low-risk route to revenue, with operational simplicity and predictable cash flow. However, it limits influence over the brand, constrains revenue upside, and slows brand equity growth.
For fragrance brands seeking to explore in-house operations without the burden of building internal teams and mastering the full value chain, Carrara Advisory provides a unique solution. Acting as an external beauty department, we guide brands from strategy to execution, covering product development, manufacturing, marketing, and distribution. This allows brand owners to capture the benefits of control and revenue potential while mitigating risk and operational complexity.
In many cases, the best strategy is not a permanent choice of one model over the other, but rather a phased approach. A brand may begin in-house to ensure creative control during the launch of a new category or alternatively start with a licensing model to reduce financial risk and then take operations in-house once demand and profitability are proven.
Ultimately, the decision between in-house and licensing is highly context-specific. By assessing the brand’s goals, market positioning, and resources, Carrara Advisory ensures that each brand chooses the model that maximizes both financial performance and long-term strategic value.
