What’s The Difference Between Franchising And Licensing?
For those considering investing in or owning a franchise, there is often much uncertainty. In fact, the pros and cons involved, as well as the differences and commonalities between franchising and licensing, can be very confusing. In the post below, you will find a definition of each as well as their associated benefits and difficulties. Read on to find out more.
Licensing is when a business leasing protected intellectual property (IP) to a third party. They can then sell products that the license covers. A great example of this would be purchasing a Nike jacket with your favorite team’s logo on it. Just because your team is using the Nike logo, does not mean that they are franchising Nike.
Similarly, a local business owner who owns a Subway is not per say “licensing” the Subway, rather they are franchising it. A franchise owner is only licensing the trademark of the parent brand and is running a franchise business operation. A franchise is different in that it means a business has permission to run as a part of a larger organization. This business gets to follow the model and be supported by the larger brand with established marketing and business systems.
Every franchise holds a license in terms of branding/trademark, but not every license is a franchise; the business models are also fairly different as will be explained below.
Pros Of Franchising
First of all, let’s take a look at the world of franchising and what pluses and negatives of choosing this business option are.
Big Brands Provide Lower Risk
One of the biggest pros of choosing a franchise business is that there is significantly less risk when compared to starting a business that is not a franchise. This is because you will already have an established customer base and a turnkey operation. There will be a whole demographic of people that already know who you are and what you do. Therefore as a franchisee, all you need to do is to tap into that raw potential. This also means you don’t have to waste time reinventing the wheel, and the van hits the ground running and is ready to make profits.
You Are Not Alone
Another one of the most convincing benefits of choosing a franchise business is that you won’t be going it alone. In fact, franchisors can provide support in many ways, including training, systems, marketing, and even financially (in the form of loans, loan referrals to banks, etc.).
Then there is the fact that choosing a franchise business can help you secure a much more profitable location that you would be able to source on your own. Think retail centers, large entertainment venues, airports, rather than tucked away in the corner of town. This will obviously be excellent for your footfall and so your sales. Now it is not impossible for a traditional business to secure these premium locations, however, it is much more difficult.
Cons of franchising
Money And Fees
The most profitable franchises tend to charge the most to sign up. Which means you will need a good chunk of money to get things off of the ground.
Additionally, even when you have things up and running, you need to remember that the franchisor will still require royalty payments. Not to mention the money in exchange for the branded supplies you will need to successfully run your business.
It’s Not An Easy Ride
Another con to consider when it comes to franchising is that despite working with a big name brand, you are not guaranteed success nor an easy route to the top. In fact, you will still need to put in just as much work as any other business, albeit that the infrastructure required to run successfully is provided for you.
For free-thinking entrepreneurs, running a franchise may not be the best option. The reason for this is that they can be very prescriptive and restive, not allowing you to change or innovate where you see fit.
Now we know about the good and bad of franchising; let’s take a quick peek at the benefits and disadvantages of licensing.
Entry Into A New Market
The main benefit of choosing a licensing business model is that it will provide your business a way to crack a market you are currently not in, or to establish oneself in a market where they are fighting for market share. For example when Lego and Star Wars teamed up, allowing the former to use the latter’s IP to huge financial success.
Lower Risk Than Starting Up An Independent Business
Additionally, the level of risk involved in licensing is lower because you have a product that is ready to hit the market, with a brand people trust. This means you have to waste neither time, money or product development and testing.
Many businesses find that licensing isn’t all it’s cracked up to be. Especially when they are seriously restricted in terms of where they can sell the products they license and the stiff competition of competing firms using the same logo or brand.
Additionally, keeping up with product trends, and staying ahead of the curve can be hard. The reason being is that you never know when another better product will come out and blow the one you pay a lot of money for out of the water.
In conclusion, there are pros and cons to choosing both licensing or franchising as a way to start up or grow your business. However, franchising provides the most substantial advantages due to overall stability and support from the parent company. Overall, there are numerous advantages to both business models, however, they cater to different types of businesses.
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