updated - June 4, 2020 Thursday EDT
Franchising and licensing are two very different business models, but they can both have a similar positive effect on brand growth. When you are ready to expand your business into new geographical regions or product areas, I strongly recommend you take the time to learn about the key differences between franchising and licensing, as well as the advantages and disadvantages of each option for expanding your business into new markets. The following information will help you decide which business expansion plan is the right one for your brand.
What is franchising?
Franchising is a model in which a business sells contracts to entrepreneurs to allow them to duplicate a successful business model in another location. In the contract, you can specify exactly how you want the franchised business to be run. For example, you can define the products that the business will sell, or require franchise employees to undertake specific training, and even provide uniform clothing requirements.
McDonald's is one of the most famous franchise businesses in the world. Every McDonald's restaurant is owned by an individual franchisee, but all franchisees must conform to a standard agreement regarding the products they sell and the uniforms employees wear.
Franchising involves taking a successful business model that has already proven itself and teaching other people to duplicate it. This can be a very successful strategy for growing a business.
What is licensing?
Licensing means providing other companies with a license to use your brand identity and logo. I could point to many examples of licensing in retail. For example, Calvin Klein manufactures very few of the products branded with the company's logo. The other products, including clothing and perfume, are made by manufacturers who have purchased a license agreement to use the Calvin Klein brand.
Another famous example of a successful licensing model is provided by Disney. The Disney Consumer Products branch often licenses its movie characters, images and names to companies that want to create clothing, toys, home furnishings and even personal care products. In this way, Disney has managed to spread its brand images all over the world, promoting recognition among consumers globally.
Lastly, the Girl Scouts brand licenses its brand. The organization licenses its name to cookie bakers all over the United States. In addition, the Girl Scouts name and cookie types are even provided on license for companies to use in ice cream and cupcakes.
Advantages and disadvantages of franchising to grow your business
Franchising is often a good way to expand your business without having to invest in opening up a range of new locations yourself. Compared to licensing, franchising allows you to keep a high level of control over how your brand name is used. This method of growing your brand involves rolling out a proven business model, in which you can control how franchisees present your brand to the world.
Parry Sohi, co-founder Scholars Education Centres, offering Toronto tutoring, has attributed his success to the franchise model. "The concept of franchising has really helped us grow our brand across Ontario and we are now strategizing a growth pattern across Canada. Without franchising, the pace at which we could expand would not be possible. Bringing on franchise partners in locations including Mississauga, Milton, Markham, Barrie and locations across Canada that have an aligned vision to ours and are highly motivated to succeed, ensures that quality and service expectations of our customers are always exceeded."
To create a successful franchising model, you need to offer plenty of support to your franchisees. You will need to provide training programs for franchise owners, and possibly also for employees, to ensure they represent your brand in the way you want. It is very important for you to ensure that the level of service your franchisees provide matches your expectations. If a customer has an interaction with a franchised branch of your business, it is important for that person not to be disappointed by the service, as failing to meet expectations could damage your brand.
Advantages and disadvantages of licensing to grow your business
Licensing allows you to widely expand your business with very little initial investment. You can make money from products that bear your brand logo, without having to invest in manufacturing the goods yourself. The licensee takes on the financial and legal risks involved in manufacturing products for sale.
The main disadvantage of licensing is that your licensees may end up becoming competitors of your brand. For example, you could end up in a situation where you are competing with your licensees for the highest rank in search engine results pages.
Another risk of licensing is that licensees might lower the standards for which your brand is known, which could lead to a risk of reputation damage in the long run. Reputation is extremely important in today's age of digital marketing, where authority counts for everything.
Licensing vs. franchising: Which is right for you?
Deciding between licensing and franchising can be tough, but it is an important decision that you need to take your time over. Before you rush into either business model, I urge you to consider all the legal and financial consequences of licensing or franchising.
Many companies struggle to make the difficult decision between licensing and franchising. Before you decide between the two options, pay attention to the advice given here to work out whether franchising or licensing is right for you.
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