In the world of business, there are two common ways to expand a company’s operations without having to build from scratch. These are franchising and licensing. Some companies offer both. As a result, it may seem baffling and extremely similar, but they are distinctly different in terms of their level of involvement.
Franchising vs Licensing
The main difference between Franchising and Licensing is that the Franchises with better prospects for success may require initial start-up capital with a lower initial price, whereas, Licensing can be profitable during their first year without having to spend any money with a higher initial price.
Franchises are businesses that use established or successful formulas to ensure profitability or rapid growth. Moreover, when a person incorporates a franchise, they are given their own independent and unique piece of the business. For instance, there are many well-known fast food franchises all over the world.
Licensing is a form of permission that gives the owner or an individual who has been permitted to use intellectual property rights in a certain way. Moreover, With Licensing, the entrepreneur is just one of many who are given the right to use a particular product or service.
Comparison Table Between Franchising and Licensing
| Parameters of Comparison | Franchising | Licensing |
| Definition | Franchises are businesses that use successful formulas to ensure rapid growth. | Licensing is just a way where entrepreneurs are given the right to use a particular product or service. |
| Prime Start-up Capital | Franchises demand an essential prime start-up capital. | Licensing does not demand an essential prime start-up capital. |
| Agreement Pliability | Franchising agreements are less pliable. | Licensing agreements are more pliable. |
| Agreement Period | The Franchising agreements have a minimum length of period. | Licensing agreements do not have a minimum length of period. |
| Inceptive Cost | Franchising has a low inceptive cost. | Licensing has a higher inceptive cost. |
What is Franchising?
A Franchise is a business that uses an established or successful formula to ensure profitability or rapid growth. They can be based on skill, product line, or service. Several different types of Franchises can be found in many industries. By Franchising, it is easier for a salesperson to make a sale of a franchise than it is for one to make a sale of the same product or service.
The Franchising agreements typically have a minimum length of time, and the actual business is run independently from its parent company. The company that owns the Franchise handles almost all aspects of the day-to-day operations. This includes hiring and training employees, purchasing equipment and supplies, and making most marketing decisions for the operation.
Franchising gives the power to an actual owner of the business form. For example, a successful lawyer who wants to expand his business might consult with an investment banker for finance. A visit to a popular practicing attorney at a prominent firm might provide the inspiration this future franchisee needs. Then, he or she may develop a business model and pitch it to other practicing attorneys seeking investors. If the idea is accepted, the attorney is now tasked with building the new law office and hiring staff.
What is Licensing?
Licensing is usually done with a company to help them increase their market share and allow others access to their concept or strategy. However, with Licensing, the entrepreneur is just one of many who are given the right to use a particular product or service. A person can find many different types of licensing out there, and they range from audio format licensing, food, auto parts, consulting services, as well as financial services. Some of the key elements are:
- Development of a new patented or proprietary product or service.
- Quality product delivery and customer satisfaction.
- Cost competitive pricing
- Branding and marketing for the service, product, or business concept.
- Employees’ training ideas and plans for the future growth of the business.
Licensing is a way to start with a proven business model and brand image. For example, instead of having to come up with a new name for their company, the licensee can use the already established name. In this case, the licensee will have to pay fees to the owner of that name each year to utilize it.
The elements of licensing include the licensor, licensee, and the materials or products being licensed. It is important to note that things like the condition of the material being licensed and a party seeking to use intellectual property rights owned by another party to be licensed before using them, so they are clear on what they can and cannot do with that material.
Main Differences Between Franchising and Licensing
- Franchises are businesses that use successful formulas to ensure rapid growth, whereas, Licensing is just a way where entrepreneurs are given the right to use a particular product or service.
- Franchises demand an essential prime start-up capital, whereas, Licensing does not demand an essential prime start-up capital.
- Franchising agreements are less pliable, whereas, Licensing agreements are more pliable.
- The Franchising agreements have a minimum length of period, whereas, Licensing agreements do not have a minimum length of period.
- Franchising has a low inceptive cost, whereas, Licensing has a higher inceptive cost.
Conclusion
Franchising and Licensing is popular strategy for entrepreneurs. However, these are two completely different strategies. Entering Franchising and Licensing makes it easier for an entrepreneur to operate their business without having to worry about additional regulations and power over the franchisee by issuing directives regarding how they can conduct their business, as well as how they should spend money.
If you’re looking for a business model to replicate, Franchising might be your best option, or if you are someone who is looking for a profitable business during their first year without having to spend any money with a higher initial price, then Licensing might be your best option.
References
- https://www.tandfonline.com/doi/abs/10.1080/1046669X.2012.700248
- https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/illlr62§ion=8
- https://www.emerald.com/insight/content/doi/10.1108/07363769810210377/full/