Franchising/Licensing as a Business Model

As a Chinese Idiom goes “Learning is like sailing against a current; if you do not advance, you will retreat”. The same can be applied to today’s business world where competition is rife. As a business owner, we have to constantly endeavour to develop, to grow and to expand. 

You probably would have started your business from scratch several years ago, putting in sweat and tears to establish a profitable business and your own brand, and now finally enjoying the fruit of your labour, a comfortable life. Kudos! 

But, as a businessperson we need to always remember that comfort is a silent killer. So, what’s the next step for you? If retirement and cashing out from your business is not the answer for you right now, how do you seek to grow your business and your brand further? 

One of the most popular ways is growing your business through a third-party distribution system. 

The Third-party Distribution Systems

Three common strategies for collaborating with other parties to establish presence in a market are distributorship, licensing, and franchising. All three include contracts requiring a third party to represent your company or brand in a specific manner. Understanding each one’s unique traits will enable you to choose the most effective path to market. The advantage of these systems is your company does not need to open another location in the region personally, which lowers the administrative costs. Besides, third-party partners should be familiar with the local laws and customs in their foreign market, as well as the pricing strategy in their local market. 

However, in this article, we will only discuss franchising and licensing. 

  1. Franchising

First, let’s talk about franchising. A franchise is a business model that consists of three essential components: using the brand, using the business system, and paying a fee to use the two pieces jointly. It is the practice of granting permission for the use of your brand name and operational procedures in exchange for an initial and/or recurring fee.

  1. Licensing

On the other hand, licensing has a lot fewer restrictions and requirements attached to the procedure. Licensing is a business arrangement whereby one firm authorises another company to produce its goods using its brand name in exchange for a certain fee. Contrary to the control a franchisor has on franchisee, licensing does not provide the licensor as much power or influence over the licensee’s operations.

There are some brands that adapt both franchising and licensing models as a way to expand. A great example of this would be Starbucks. Starbucks has a franchise in almost every popular location. These might be retail establishments, libraries, or colleges and institutions. Other retail sites with substantial foot traffic or sales volumes will also be taken into consideration by the corporation as possible Starbucks programme locations, where they sell licensed Starbucks-packaged chilled coffees. 

There is no correct answer as to which business model is preferable; both licensing and franchising are effective expansion strategies to obtain the market share. In my opinion, businesses that care about the way their brand is portrayed in a specific market are the ones that should consider franchising. 

The majority, if not all, of the operational obligations and standards that Franchisees must adhere to are specified by the Franchisor in a franchise agreement. On the other side, licensing is a much looser arrangement and only covers one of the two—the brand or the business model.

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