Franchising is a business strategy and a specific marketing strategy that involves a business organization or franchisor licensing its business model, operational procedures, and intellectual properties such as trademarks, as well as providing the rights to sell its branded goods or services to a third-party or the franchisee in exchange for fees and compliance to an agreement.
The business strategy provides several benefits or advantages centered on enabling a franchisor to expand its business or enter a new geographic market while providing franchisees with business opportunities. Of course, it has inherent risks and disadvantages.
Pros: The Benefits or Advantages of Franchising for Franchisors and Franchisees
From the side of franchisors, franchising is an expansion strategy, a foreign market entry mode or market entry strategy, and/or a distribution strategy. These benefits allow a business organization to enter or expand into new markets and distribute its goods or services with minimal costs associated with expansion and operations. Funds for entry or expansion come from external financial resources.
On the other hand, from the side of franchisees, the benefits of franchising center on lowered business development and marketing costs due to the established business model and branding of the franchisor. Franchisees can essentially capitalize on the capabilities and competitiveness of the franchisor.
Established fast-food restaurants in the United States such as Dunkin, KFC, McDonald’s, and Subway have demonstrated the advantages of franchising. They have successfully expanded across the U.S. and to other geographic markets elsewhere in the world, thus becoming prominent American global brands.
The brand value of established franchisors is naturally transferable to the franchises. For example, individuals or organizations that have a McDonald’s or KFC franchise enjoy the benefits of operating a business that has a strong brand recall and solid marketing strategy.
Note that franchising also allows a franchisor to gain insights from local markets. Franchisees have a better understanding of the local market in which they operate and the customers they serve. Both franchisors and franchisees can share build upon these insights to improve their brand, products, and customer service.
Another advantage of franchising involves its role in society and the local economy. This business strategy promotes entrepreneurship. Rather than conceptualizing a new business idea and designing their own business model, individuals who want to invest their money on a profitable venture or own a viable business can simply look for a reputable franchisor.
Cons: The Risks and Disadvantages of Franchising for Franchisors and Franchisees
Control is a notable risk and primary disadvantage of franchising from the side of franchisors. They need to promote quality control to ensure product consistency and uniform customer experience across its entire franchise network. They also need to ensure that franchisees adhere to marketing guidelines to ensure consistency in messaging and branding. Poor products or customer experience from a single franchisee can affect the entire brand of the franchisor.
For small to medium franchisors, controlling franchisees can be difficult. Distance can make monitoring difficult. A workaround to this challenge is to set up regional offices or subsidiaries tasked to monitor the performance, operation, and behavior of franchisees regularly. Of course, this means additional costs.
The need to adhere to the standards can also be regarded as a disadvantage of franchising for both franchisors and franchisees. A franchisor needs to control the entire franchise network to ensure quality and consistency. However, it must also recognize the need for franchisees to have some degree of independence.
Some individuals or organizations seeking to operate their own business might be discouraged by the strict standards of a franchisor. For those who want to maintain a higher degree of business independence, as well as creativity with regard to product development and marketing, franchising may not be a suitable investment route for them.
Another disadvantage of franchising for franchisees is cost. Franchising from established organizations such as Subway and McDonald’s is very expensive. Note that aside from royalty fees for the trademark and intellectual property, franchisees are also obliged to pay for the training and advisory services provided by the franchisors, as well as a percentage of their sales. Hence, franchising for individuals or organizations with limited financial resources.
There is an option to franchise from lesser popular organizations. However, the fact that their business models and brands are not as prominent as larger franchisors can translate to risks. It is also worth mentioning that some brands are only a product of fads and momentary hypes. This is the reason why an individual or organization needs to have strong business acumen and market insights before franchising.
