Franchising is a marketing strategy to expand the business where the owner of the business i.e. franchisor provides the right to sell the product or service of the company like using it’s business model, SOP’s and intellectual property. Moreover the one to whom all these rights are sold is known as franchisee.
This strategy is used for rapid business expansion with attention to minimum financial risk. Additionally if you have a good business, good product, good quality with good service, you can easily expand their business through this model.
The franchisor of a company provides the right to use the proprietary tools, technology, software, trademark, signage’s, manuals and the business procedures to the legal affiliated dealer known as franchisee, seeing that franchisor get revenue, profit and a part of royalty from the franchisee. It becomes easy for the franchisee as he gets the ready made blueprint, business model as well as operating system to earn money.
What’s in it for me?
MODELS OF FRANCHISING
From Franchisor point of view there are three models:
COCO
Company owned company operated is a model where the business together with the branches both are owned by the company. In this model, both capital expenditure and operational expenditure is borne by the company itself. This model easily attracts franchisee because they don’t have to invest in any expenditure plus all the operational procedure works under company guidelines.
FOCO
Franchisee owned company operated is a model where capital expenditure is borne by the franchisee but the operational expenditure bears the franchisor. The franchisor believes that their business operations are perfect as a matter of fact it should not be replaced by any other operating process.
FOFO
Franchisee owned franchisee operated is a model where franchisee takes the responsibility of taking care of capital as well as the operational expenditure. It means both the investment as well as well the operating process is controlled by the franchisee, franchisor provides other rights to the franchisee such as proprietary rights, trademarks, patents, copyright, signage’s, manuals etc.
The major drawback is that the franchisor uses your brand name but operates according to his own procedures, company’s brand name comes at risk if the standards are not laid properly.
For more business related ideas read: 9 Easy Ideas for Marketing as well as Business
FEATURES OF FRANCHISING
Correspondingly, now talking about the features or characteristics of this model, below are some points on it’s features:
Expansion of business
Any company who needs to expand it’s business can adopt this model, provided that it should have a well established business with good product, good services and good quality.
Ease in Entering new market
Even though you are an amateur who is seeking opportunity in entering into any market, this model will give you a great exposure and knowledge about the industry.
Standard operating procedure
There should be an agreement between the two parties that the franchisee will adopt the business model of franchisor in like manner would not hamper the standards laid by the franchisor.
Right to use trademark and patent
Franchisor in return provides the right to use of trademark, copyrights, patents, intellectual properties together with technical know how of the business.
Little Investment
Anyone having good amount to invest can become franchisee, although the investment is limited in the initial in the form of fees, the franchisee has to pay ongoing royalty fees in specific time intervals. Royalty is some part of the sales given to the franchisor in order to use the patents.
Training
Since already mentioned that the franchisee must use the well established business model of the owner, he must know the whole process of operating it. So to make franchisee familiar, the business owner provides him training to maintain the basic standard operating procedures.
ADVANTAGES OF FRANCHISING
From Franchisor point of view:
Business Expansion
The foremost reason of adopting this model is to expand business, getting increased revenue, increased profit as well as attracting more potential customer for their brand.
Controlled Business Model
Because of implementing this model, franchisee is bounded to use the already established business model and standard operating processes. So that franchisor can always keep an eye on the standards been correctly followed by the franchisee.
No Burden of Capital Expenditure
Franchisor get free of burden of the capital expenses, since it is borne by the franchisee. In fact for every new outlet, he gets initial fees and royalty throughout the franchising period.
From Franchisee point of view:
Entry in the Market
It gets easier for an amateur to enter into any market since all the research homework is already done by the owner and had maintain a goodwill in the market. Hence he does not need to find the target audience, position the product make any marketing plan, these all strategy is already done by the company and has acquired well amount of customer in the market.
Ready made Business Model
Franchisee get full benefit of the well established business together with good brand name. By all means he gets the rights to use trademarks, patents, software’s, manuals and signage’s of the business.
Limited Investment
Franchisee needs to pay little amount to buy the franchising model in the initial as one time investment.
DISADVANTAGES OF FRANCHISING
From Franchisor point of view:
Risk in Maintaining Standards
While selling the franchising model, there’s always one doubt or risk in the minds of franchisor whether the franchisee will be capable enough to maintain the standards of the business, If not it may lead to customer churn and high reputation loss in the market. So franchisor needs to find somebody who is trustworthy and skillful enough to run the business properly and ethically.
Profit Sharing
Franchisor find this model as an expansion of their business but all the profit earned in the end is not theirs, only the partial amount of profit comes under his shares.
Sharing Confidential Information
In this case, selling franchising means selling the rights to use all confidential information of the company like patents, technical know how, software’s, and many related stuff.
To grow your franchisee business successfully watch: 6 Point Formula To Avoid Franchisee Failure
From Franchisee point of view:
Controlled Business
Franchisee find it fully controlled, he finds it difficult because there’s always somebody who is keeping an eye on his business everytime. Freedom is doing business is lost as well as his innovation is discouraged. On the whole, franchisee is not allowed to create his own ideas infact he can only do what is already mentioned in the SOPs and the business model.
Restriction on Expansion
Franchisee cannot expand business on his own, he has to take franchisor’s permission before selling franchising rights. Also the termination of the franchising is in the hands of franchisor, he can end the franchising license anytime.
Ongoing Royalty
Apart from the franchising fees, which is paid in the initial, franchisee has to pay an ongoing royalty over a specific time intervals which leaves franchisee straightaway with low amount of profits in the end.
Also Read: Top Business Ideas: How to Get Your Own in 6 Simple Steps
FRANCHISING V/S LICENSING
What is Licensing?
Licensing is a process of leasing brand name, patents, trademarks, designs, logo, as well as copyrights. In this model, the one who lends is licensor and likewise the one who borrows is licensee. Licensor gives permission to the licensee to manufacture products under the brand name of the owner.
How Licensing is different?
| Franchising | Licensing | |
| Right to use patents together with trademark | Yes | Yes |
| Maintaining Standard operating Procedures | Yes | No |
| Royalty Payments | Yes | Yes |
| Control over Franchisee/ Licensee | Yes | No |
| Training provided by Franchisor/ Licensor | Yes | No |
| Example | KFC, Domino’s, Buskin Robins, Subway, etc. | Microsoft, P&G, etc. |
For more information watch video by Sahil Khanna: Best Idea For Business Expansion
SOME FAMOUS EXAMPLES
Some of the well known examples are:
- McDonald’s- Food and Beverages QSR
- Kidzee- Children’s play school
- Javed Habib Hair and Beauty- Health and Beauty
- Khadim’s- Footwear Retail
- Cult.fit- Fitness Centers
- FirstCry.com- Baby and Kids Retail
- Chai Point- Tea Outlet
- Lenskart- Eyewear (Franchise in Offline Stores)
Also read: Basics to Backward Integration- Functioning of this Strategy
CONCLUSION
In this article, we covered all the basic topics, firstly explained the meaning of both franchisor and franchisee. Also included the features and lastly models of franchising. If you think still some points are missing and should be covered in this article, do let me know through a comment.
FAQs
The key policies are:
– Passing ownership to the franchisee
– Accepting and maintaining the established standards
– Time period is limited, although it can be renewed
– Marketing and advertising about the brand, to make customer aware about the availability of products in your area
– Royalty payments
As already explained, there are mainly three types- COCO, FOCO and FOFO.
