What is a franchise? What is the franchise business model?
Franchising has evolved as one of the most popular and effective ways of developing businesses in the market. Whether you want to expand your existing business or to own your own business as an entrepreneur, franchising offers the best. If franchising also catches your interest, first you must know what exactly is a franchise and how the franchise business model works. Here is a detailed description that will help you understand what a franchise business model is and how it can benefit you.
What is a Franchise?
A franchise is a type of authorization that a business operator (franchisee) obtains to gain access to a business’s proprietary knowledge, and methods. So as a result, the franchisee can sell the product under the business’s name and provide services to the customers. In this way, the operator can use the brand name, derivatives, and operational methods of the franchisor, avoiding the risks associated with starting a new business. In exchange for obtaining a franchise, the franchisee has to pay an initial start-up and annual licensing fee to the franchisor.
What is a franchise business model?
The franchise business model is based on a reciprocal relationship between the franchisor and the franchisee. Let’s explore how a franchise business model works:
Role of the Franchisor:
To Expand the Business System: The major role of a franchisor in a franchise business model is that he is accountable for expanding a successful business system that can not be replicated by anybody. From branding to marketing strategies, operational procedures to customer service standards, everything is governed by the franchisor.
Support and Training: When a franchise business has been set up, the franchisor provides initial and continuous support to the franchisees. They provide comprehensive training programs, marketing assistance, and operational guidance, which will help the franchisees to have a successful business.
Quality Control: The franchisor also sets the guidelines and conducts regular audits to make sure the consistency of the brand remains the same. They also put actions into maintaining quality standards and provide the best derivative recommendations for the franchisees.
Role of the Franchisee:
Investment and Fees: The major role of a franchisee is to make an initial investment, which includes the franchise fee and start-up costs such as equipment, inventory, and location expenses. In addition, the franchisee pays ongoing royalties or fees to the franchisor, typically a percentage of their total sales.
Business Operations: The franchisee supervises the regular operations of the business, following the guidelines and procedures established by the franchisor. Besides, the franchisee is responsible for recruiting staff, managing inventory, and assuring ultimate customer satisfaction.
Local Marketing: The franchisee mostly handles the local marketing efforts to attract customers in their specific area, while the franchisor may run national or regional marketing campaigns, to expand their business.
Types of Franchise Business Models?
Once you understand a franchise business model, now it’s turn to know about their types. Franchise businesses can be categorized into different types based on their nature and functioning. So let’s discuss the major types of franchise business models in detail:
- Job Franchise:
The job franchise is a home-based franchise model that is taken by a single person who wants to solely begin and operate a small franchised business. It is the lowest investment franchise model that can be started on a small scale. In buying this franchise, the franchisee sells products or delivers services to their target customers. The franchisee is generally required to purchase limited stock, minimal equipment, and often a vehicle. A wide range of services comes into this model, such as plumbing, cleaning, travel agency, real estate, coffee van, domestic lawn care services, children’s clubs, classes, etc.
2. Business Format Franchise:
Business format franchise is the most popular business model which allows a franchisee to use the trademark of the franchisors. By buying this franchise, a person can use the franchisor’s product distribution model and market strategies to promote their own business. McDonald’s, Subway, and Dunkin Donuts are some of the most common examples of the business format franchise technique.
3. Product Distribution Franchise:
In the product product distribution franchise model, the franchisor is the manufacturer of the products while the franchisee is responsible for selling them. Under this franchise, the franchisees get the right to sell the franchisors’ products within the designated territories. This model is quite similar to a supplier-dealer relationship but has a few differences. However, the product distribution franchise is less all-encompassing in comparison to the business-format model.
4. Investment Franchise
When it comes to knowing about franchise business models and its types, investment franchises are worth discussing. It is the most expensive franchise business model as it requires a large amount of investment. The people who choose an investment franchise usually allow the franchisor to look after the working of their business. While some franchisees hire their management crew to operate the business. Moreover, the return on the investment franchise business model is highly profitable. Some of the common examples of investment franchises include hotels, gym brands, large restaurants, and various other retail franchises.
5. Conversion Franchise:
A conversion franchise business model refers to a modification of typical franchise relationships, where various small existing franchises are brought under one big franchise. Then their businesses operate according to the conditions of the master franchise and take on their business model. The franchisees usually adopt trademarks, training systems, advertising and marketing programs, and crucial client service measures. Some well-known examples of the conversion franchise business model include Century 21, Ace Hardware, and Nathan’s Famous Hot Dogs.
What Are the Significant Benefits of a Franchise Business Model?
So now you may have a clear idea of what a franchise business model is. Well, the franchise business model is a highly beneficial approach for both the franchisee and the franchisor. So let’s discuss the benefits in detail to decide whether franchising is good for you.
The benefits are divided into two parts for better insight: benefits for the franchisor and benefits for the franchisee.
Benefits associated with a Franchisor
- Access to capital: The franchisor generally collects the franchising fees from franchisees at zero interest. So Franchising the business has a significant potential to make a lot of capital from the franchise fees. The franchisors can use this capital for the further expansion of their business.
- Rapid growth and extension: It has become very necessary and competitive at the same time to expand the market share in such an ever-developing country. However, it has become much easier with the franchise business model as it allows the rapid extension and growth of the businesses.
- Allow Entrepreneurship: The franchise model allows entrepreneurship for the franchisors as they can choose entrepreneurs inspired by capital, profits, and ownership. Moreover, it helps them to operate a franchise successfully.
- Greater Buying Power: A franchisor holds greater buying power in the market. As they represent multiple franchisees, they can better negotiate with the suppliers using this number, getting more compensation and discounts in bulk.
Benefits associated with a Franchisee
- Effective start-up without experience– The franchise business model allows franchisees to effectively set up a business without any previous experience. A franchisor itself provides the required assistance and training for opening a franchise.
- Better Success Rate: Experience backing professionals, less expenditure on branding, and better brand reputation combine in a franchise model, resulting in a successful business.
- Independence: When buying a franchise, a franchisee gets independent business ownership from a prominent business. Thus they can enjoy all the benefits and yields without any interruptions.
- Easy Capital Access: An entrepreneur can have easy capital access when getting a franchise. The franchisors usually have various associations with different banks that provide business loans. Hence, through a franchisor, a franchisee can easily get a loan for financial assistance in times of need.
Challenges Of The Franchise Business Model
Undoubtedly the franchise business model offers many benefits, but it also comes with its own set of challenges. Here we have listed some challenges that you may have to face while opening a franchise.
Initial Costs: The initial cost consists of the fees you pay for the franchisor to secure the rights within the franchise zone as well as the costs of the equipment and real estate. It is undoubtedly rigid to handle when starting a new business and can be a disincentive to some potential franchisees who wish to begin their businesses with little capital.
Lack of Independence: Another challenge franchisees have to face is that they have to operate under the set guidelines and procedures established by the franchisor which may limit their freedom in deciding how to run the business.
Performance Variability: The overall success of a particular franchise can be different depending on factors such as location, market conditions, and the franchisee’s management skills. Where everything is the result of the franchisee’s hard work without anything to do with the franchisor, giving a fixed percentage of their income to the franchisor is a big challenge.
Conclusion
A franchise can be an influential way to formulate a business and accomplish entrepreneurial success in the industry. But before getting into a franchise business, you must know what a franchise business model is. It is essential to contemplate the benefits and challenges of the franchise carefully. So that you can determine whether a franchise is the right way for your business expedition or not. No matter, if you want to become a franchisee or develop your business through franchising, comprehending the delicacies of the franchise business model is a must to make an informed decision.