Licensing vs. franchising: which route will you go down?

By Sarah McAllister, Head of Marketing (New Business), Linguaphone Group

We have all come across the big retail franchise chains, McDonalds, Pizza Hut, Subway; chances are that you’ve been into one of these in the last couple of days. But how many of us have come across ‘licensing’ and are there any differences to both the customer and the business?

Firstly, let’s look at Franchising.

From a corporate perspective, franchising is a good way to develop your business with new outlets in new markets while transferring some of the risk and profits (return) to another person. It also allows individuals to set up a business with an existing and established brand with access to supplies, equipment, a ready-made supply chain provided by the Franchisor (such as with retail franchises) and centralised marketing activities. All of those have the benefits of being relatively quick to set up, which brings in revenue faster for both the franchisor and the franchisee. Franchising usually involves some initial fee for the purchase of franchise rights, a royalty payment based on revenue and of course, purchase of stock. Certain franchising models will also offer some form of initial service training and support.

Franchising can mean losing your existing company brand identity if you have one as you are likely to only be able to promote the franchise brand you’ve bought (e.g. Subway, etc.). For some companies this may not be a particularly big issue, whereas others may have spent a great deal of time building it up, only to have it lost in a franchise agreement.

Franchising can also limit the amount of control you have over the growth of the business, as the key mechanisms to generate growth, such as marketing, are often operated centrally by the franchisor with little or no input from the franchisees. Operating a franchise can also put you in competition with the brand you are working for. Many of us have been in a city centre where we can see two branded restaurants on the same street, and these could be franchised by different individuals competing against each other with the same product.

Equally, there may be limitations on the price you can charge for products, meaning that your income will always be directly linked to the volume of sales. Licensing, on the other hand, will often give you the opportunity to be much more flexible on product pricing, allowing you to price the same product differently for diverse market segments. From a commercial perspective this allows you the option to pursue more lucrative target segments, which can make a real difference to the business, especially in the early years.

But what is Licensing?

Some of you may have come across licensing in the IT sector. Companies such as Microsoft for example may license their software and trademarks. Master licensing would also normally offer a level of product training and often involves a number of licenses within a given territory creating internal competition. However, licensing typically doesn’t tie people into buying equipment from the Licensor in the same way that Franchising does, letting the licensee to source equipment such as PCs locally which usually is the more cost effective option.

Both franchising and licensing allow a partner to use the Franchisor or Licensor’s intellectual property and know-how of the product or service across the market.

However, licensing can also allow the licensee to use their own expertise in the market to develop best the business, reach their targets and promote to customers groups within that market. For as we know in the education sector, what works in India, is not necessarily going to be right for Japan. Similarly, Brazil is going to offer very different market opportunities and challenges in comparison to Poland.

Just as with Franchising, a Licensing agreement is likely to have fees for the exclusive rights to use the license and intellectual property in the market, as well as costs for supplies and royalties.

For some Small and Medium Enterprises (SMEs) licensing can be a giant leap into the business ‘big league’ as it allows expansion and/or diversification across a market with little or no research and development. Effectively, you can buy a ready-made, tried and tested business with the freedom to expand it in a way you see it fits throughout your license territory and to compliment or augment existing operations. Perhaps this places a greater responsibility on the licensor to ensure that they have the right partner, but also a greater concern on the partner to really take hold of the business and ensure that it grows.

So, does that mean that once the licensor sells you a license you’re left alone to sink or swim? Well, yes and no! Yes, in the sense that you’re in control, but many forward thinking Licensors will recognise that if your business works well then that has a positive effect on their business too. With this in mind, an increasing number of licensors are offering the kind of support that franchisors have traditionally given. For example, in-country training and visits, as well as marketing and business consultancy support which move the concept away from an ‘entirely hands off approach’ and bring it to a real sense of partnership that perhaps entrepreneurs may have associated licensing with in the past.

Unlike some licensors and particularly franchisors, the Linguaphone Group does not traditionally appoint multiple licensees within a country. For our Direct English and Pingu’s English Master Licensing program our partners enjoy exclusive rights to the particular territory they have contracted with us on.

So, perhaps the real difference between franchising and licensing is the amount of control you have over the business. Franchisees have a lot provided for them and perhaps arguably little in terms of strategic decision-making to do. For many this is an ideal proposition. On the other hand, licensing offer much more freedom in terms of development of the business, which those with a track record of business may find to be a much more palatable option.

The Linguaphone Group’s licensing programs could be considered to combine the best of both worlds. Our partners have exclusive rights over the area with flexible business model and the option to sub-license across the territory. We offer full training on our first-class English language systems. We provide a full range of marketing and PR support not just for launch but on an on-going basis, as well as regular business consultancy. The team here works closely with our partners, even before we contract, to develop a strong business model, pricing structure and implementation plan that is right for the market. Combining the best elements of a structured franchise system with the additional flexibility of licensing model that can be tailored on a market specific basis is hopefully what will be the best recipe for success.

Essentially, there’s is no right or wrong answer here on which route to take your business down. It is entirely up to you to do your own research, but let me leave you with a couple of final thoughts that you might want to consider. – “How much skill, experience and capability does my current business have and how much freedom and support does it needs?

About the Linguaphone Group

With 109 years of experience, Linguaphone Group is a world leading global language training provider. They deliver a first class range of language programs under the internationally recognised Pingu’s English, Linguaphone and Direct English brand names. Based in the UK, the Group has an impressive network of licensed partners and distributors delivering some of the best English language programs to adults and children worldwide.

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