When franchising is better than licensing?

Franchising is one of the fastest-growing concepts in the world of business right now. If appropriately used, franchising is beneficial for both the franchiser and the franchisee. Franchising is generally considered an older concept than licensing, partially because licensing took off with the rise of the entertainment industry in the early 1900s.

We will be comparing both franchising and licensing in this article, and then ultimately come to the verdict on why franchising is better than licensing.

A brief introduction to licensing

Licensing is a concept that refers to borrowing of individual rights from a more prominent company to allow to use, share, or modify a particular product or brand according to the needs. Licensing has gained a lot of traction in the modern era of digital computing, where digital licenses for almost every product in the market are available.

Licensing is done on many different platforms. Even the government itself enforces licensing of individual rights to the citizens. You might have heard of driver’s licenses, as well as licenses to operate specific machinery and vehicles. Licensing is far more popular than franchising for the government and most public sector.

Here are the major types of licensing right now:

Software licensing

Software licensing, as the name suggests, is the right to use a piece of computer software. Software licensing is protected under various acts, like the GNU General Public License.

Software licensing is becoming ever-so-popular because it makes technology software affordable for the general public. Usually, software licensing is given protection with the help of DRMs (Digital Rights Management), albeit indirectly.

Patent licensing

A licensor can grant permission to a licensee to perform specific tasks that might otherwise be company property through patent licensing. Patent licensing is usually a limited-time license but is usually revoked as soon as a patent expires.

Patent licensing usually allows products made through that particular product, and the products to be sold independently without any concern to the owner of the patent. Most patents, however, do not allow – or at least promote – changes inside the patent itself for customizing.

Brand licensing

Like franchising, brand licensing allows licensees to use a brand’s name as they wish until they have the license. Although these licenses do come with their own set of conditions, they are usually less strict than brand franchising.

Think of it as brand licensing allowing a smaller company to work under you, but more freely while franchising absorbs and reforms the underlying principles of that company.

Licensing vs Franchising

There has always been a long debate between licensing and franchising. Here both terms have been used in each other’s places. Licensing is mostly sharing the usability of a particular product with only limited rights, while the owner keeps the ownership. Franchising is a way for businesses to scale and improve their reach while also helping independent franchisees improve their business. We prepared a list of differences that there are.

Limitations

Licensing is a brief and limited relationship between two parties that can be broken up if one of the parties break up any of the agreements above. In many cases, it is the owner that terminates the license of a licensee, as the opposite is never actually seen. Licensing is usually limited in scope and does not involve utterly absorbing an entire company or the branch. It is usually limited to a few products, brands, or patents at a time.

Franchising is usually a long-term relationship between two companies, one being the franchisor and the other being the franchisee.

During the relationship, even if any of the parties break one of the agreements above. It is usually the franchisee that suffers. The franchiser almost always has the legal higher ground. Even after the term ends abruptly, a franchisee must pay the franchiser a certain amount of money as royalties. It is usually not the case unless stated otherwise in the agreement document(s).

Scope

The scope of licensing is usually minimal, as mentioned in limitations. Licensing can only cover a limited number of things. Even after a customer has licensed a product, they are usually only permitted to use it. The company that gave the license still retains the right to modify and change the product. It usually explains the beginning of the license agreement on whether the owner can change a product even after licensing it too.

Franchising, on the other hand, completely absorbs a franchisee company. The franchisee company can make a profit independently, but the franchiser shares a set amount that is given in the form of royalties. A franchisee can only make limited changes to its structure without the consent of the franchiser.

The franchiser reserves all rights to change the entire infrastructure of the franchisee, to ensure that they make the maximum profit.

Model

Licensing usually deals with the offering of products and goods. The most common example of this is the oldest known franchising example, which was ultimately licensing: sewing machines. Licensing offers a limited business model that only improves the relationship between company and customer. Most of the license agreements are done between consumer and retailer/owner.

Franchising, frankly, deals with providing services. A franchisor provides services of training and its infrastructure and advice to the franchisee on how to run a business. The franchisor must deal with all prevalent issues in the franchisee branch, and figure out how to properly optimize a branch, so it runs efficiently.

Size

They are licensing done between an owner and a customer. The owner can be anyone from a small-time business owner to a trillion-dollar corporate, while the customer can be a regular user, a company, or even a government.

Franchising did between two companies, where one company must be a more prominent company than the other. The bigger company is known as the franchiser, while the smaller company is called the franchisee. The franchisee usually gets absorbed into the franchiser company.

Simple terms

In very simple, yet vague terms, licensing is usually called borrowing for a set period or until a condition expires.

 

Franchising is like a mentor-mentee relationship where the franchisor is a more prominent company, and the franchisee is a smaller company.

When is franchising better than licensing?

Although many organizations favor licensing for being more comfortable to use, and more affordable, there are scenarios where franchising is preferred to licensing. Here are some conditions where such scenarios are more likely to happen:

Where legality is needed

Because of the very nature of licensing and franchising, most companies prefer franchising because stricter laws govern it. More than 38 countries have existing laws that regulate and ensure the stability of franchising, while many others also keep an active index.

Where marketing is required

Franchising is kind of like free marketing. A franchisor compels the franchisee to use their brand logo on their shops and products.

Most of the time, these franchisees are in different countries. Thus, franchising allows companies to efficiently market their products and services in different countries for free. It is what McDonald’s and most food-chain restaurants do.

Licensing does not necessarily cover the advertising of a product. It usually relies on customer satisfaction to sell and propagate.

Where profit is important

Unlike licensing, which can result in loss usually when enough licenses are not sold, franchising is almost always a profit for the company. In the worst-case scenario, a franchiser will get only the one-time payment from the franchisee. Still, in the best-case scenario, it will receive better marketing, as well as more royalties from the franchisee.

Rapid growth

Licensing only lasts if the product is updated and relevant to the current market. As soon as the demand for the product is gone, licensing for that product vanishes away.

In the case of licensing, rapid growth is never really seen in the long term.

Franchising almost always sees growth, and the growth increases exponentially. A franchiser contracts with a franchisee and increases its size. The franchisee then advertises and improves relations with the area for the franchiser, which allows the franchiser to open another branch – independent or through franchising – quickly. For big brands and companies that are looking for rapid growth with minimal risk, franchising is an excellent option.

To open more branches.

Licenses never lead to directly opening more branches of companies. It is true for many businesses like the real estate business and the automobile industry. By franchising, companies can open more branches in distant areas without investing a lot.

They only need to provide the base minimum training and facilities, and the branch should be ready to go.

These branches also offer risk-free profit monetarily, and the only risk that is involved in the direct harm to the company’s reputation in case something goes wrong in the franchisee.

Final Thoughts:

There are multiple other scenarios where franchising is more important and useful than licensing. We hope that this article was able to explain the concepts of both franchising and licensing correctly.