Licensing vs Franchise: Difference Between Licensing vs Franchising
Updated on Mar 17, 2023 | 8 min read | 6.9k views
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Updated on Mar 17, 2023 | 8 min read | 6.9k views
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Licensing and franchising both have their benefits and drawbacks in terms of business. The right way to determine which model works for you is by examining the number of factors that may work best for your company. In this blog, we will dive into some of the best models at work and help you to negotiate the most suitable alternative for your business.
Let’s traverse into the world of licensing and franchising. We will look at franchising and licensing differences with their own examples and determine what makes them so distinct. We will also be examining the financial implications of each model.
To understand licensing, we must examine the parties involved, i.e. the licensee and licensor.
The licensee is the one that holds the license.
The licensor is the one granting the license to the licensee.
Licensing is the agreement between two parties, typically the licensee and the licensor. It permits the licensee to use intellectual property in their authority. But what is the endgame here?
The licensee has to pay a fee or royalty to the licensor, which marks a trade. Usually, intellectual property includes things like trademarks, copyrights, trade secrets, and patents. Knowing that you know about licensing, let’s discuss how it benefits both parties —individual or organisation.
The licensor can quickly generate revenue by controlling how their intellectual property is used. On the other hand, the licensee gains access to valuable assets. This asset can be used in the positive by the licensor’s wit. It includes their expertise, brand recognition, and reputation.
Yes, licensing itself carries several arrangements which suit various businesses. Let’s discuss the different types of licensing arrangements.
Licensing is a profitable way of generating revenues, as seen in a report by LicenseGlobal, claiming $54B in retail sales by The Walt Disney Company. It made the highest-ranking company in 2022, like WarnerMedia and Hasbro.
Now that we have discussed the figures that licensing brings let’s look at some well-known examples.
Franchising is a great way to introduce a new product or service to the current market. A franchisor can quickly test a product by offering franchises to different buyers. At the same time, it also ensures meeting customers’ needs and demands and helps the product or service improve throughout the timeline.
It is a business model which allows the franchisor to grant the licensee the right to market a product or service. They can do so using the business system approved by the franchisor. The franchisor receives a flat fee or a percentage of sales in return for these marketing and sales.
Franchising is a smart way for entrepreneurs to make a good deal from their business idea. It helps business owners profit from an established, proven business model. Moreover, the franchisee organisation can capitalise on brand recognition and resources.
To summarise, franchising is a business model in which the franchisor grants the license to use its brand. In exchange, the franchisor receives a percentage of the revenue or a flat fee, as discussed openly by the franchisor and the franchisee.
By caring for the resources and recognition the franchisor offers, franchisees start a business with comparatively lesser risks and gain quicker outcomes.
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When discussing licensing and franchising, it is vital to note that both have differences. Let’s discuss these differences using a few key pointers –
A franchise agreement outlines protocols and principles on business operations, brand trademarks, and business location.
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Licensing can be profitable given the right circumstances and the ideal industry. Software licensing alone is expected to see a $14.34B hike by 2023. The pointers below summarise the advantages and disadvantages of licensing and franchising.
As summarised, licensing and franchising constitute two uniquely different business models for expanding any business. While licensing takes care of intellectual products or property, franchising employs selling a business model.
Depending on the business model, one can take on the role of a franchisor or a licensor. It is important to note that licensing can be cost-effective and lower risks indefinitely. On the other hand, relying on franchising would mean a more significant investment and time commitment to yield better ROI.
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