23 Aug What Is The Difference Between Franchising And Licensing?
It’s easy to become confused between franchising and licensing because on the surface they sound remarkably similar. When you delve deeper, you’ll notice there are many key differences between the two, than can impact the manner in which your brand is used and how much control you have over it. At The Franchise Institute, we encourage people to consider the two options carefully before they decide which once suits their interest best. Here’s a brief explanation about the difference between the two concepts.
What is Franchising?
When you franchise your company, you give the franchisee the rights to use your brand, your products, operation system, and even your marketing strategy. In essence, you hand a readymade business to them so they don’t have to start from scratch. Customers who’re familiar with your brand and products will purchase products from the new franchise; so you’ll also give them access to an established customer base.
In exchange for this, you get upfront payment for the franchise, monthly or annual fees, or royalties from the franchisee. This is a great way to expand your business and earn more revenue from your brand.
Things to Note about Franchising
- You retain considerable amount of control over your trademarks and branding.
- It takes more time to set up because you need to organize your internal operations and standardise everything before you franchise your business.
- It is more affordable than opening new stores in different locations on your own dime.
- Franchisors take steps to ensure branches don’t cannibalise each other so every branch is given a specific operations’ territory.
- Franchises are also required to register and are governed by a different set of rules than licenses.
What is Licensing?
When you sell licenses to your intellectual property, you allow the licensee to use your trademarks, designs, patents, and trade secrets. This doesn’t transfer ownership because you’ll just grant them the right to your branding or products. In exchange of the license, you get royalties, upfront payments, and monthly or annual fees, based on your agreement with the licensee. Licensing helps you minimize risk of failure because you don’t have to invest too much money into the venture.
Things to Note About Licensing
- Licensing is easier to set up because you don’t really have to register or alter any of the internal processes to accommodate other branches.
- You have less control over the brand because you don’t train the licensors or bind them to your rules on how to use the intellectual property unless it’s specifically stated in the contract. The licensor can set everything from the marketing campaigns to the price according to their preference.
- Licensors don’t have much control over the license as you can sell it to competing businesses in the same area of influence. This doesn’t prevent businesses from cannibalising one another but that isn’t really a license owner’s priority.
You can choose franchising or licensing based on your own preferences and requirements, however, we do recommend franchising. Yes, there is more effort and expense involved, but you control the brand to a great extent and that ensures your franchises can’t compromise the quality and reputation of your brand and intellectual property. Success of licensing and franchising depends largely on the reputation of the brand so it’s vital to ensure you retain some control over it.
If you want to know more about franchising or want some advice, feel free to get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form and we’ll reply as soon as we can.
Thanks for reading,
The Franchise Institute Team
1300 855 435