Licensing vs Franchising

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Differences Between Licensing Vs Franchising

These two jargons are usually synonymously used while marketing or selling a product whose brand value is not typically owned by the seller; however, there is a very fine line of difference between these two modes of business. Today we attempt to understand the differences between Licensing vs Franchising.

What is Licensing?

To understand Licensing, let us take the example of Walt Disney. It is the registered owner of cartoon characters like Mickey Mouse, Donald Duck etc., these characters are nothing but the outcome of an artist’s imagination which is now popular around the world. There are many merchandises which bear these characters on it; like bags, caps, bottles etc.; now Walt Disney is not the sole manufacturer of these merchandises. Hence anyone apart from Walt Disney manufacturing these products enters into an agreement with the former to gain a right to use these characters on its merchandise for some consideration & sell the same. This kind of arrangement is referred to as licensing.

What is Franchising?

Now suppose you feel like eating a pizza, as opposed to a home-made pizza offered by your mother; the obvious choices that come in your mind are Pizza Hut, Dominos etc. The reason you want to have pizza at these outlets can be ; they are known for selling amazing variety & quality of pizza, they have made their mark in the industry by exclusively selling pizzas, they have their own signature dishes which no other pizza outlet in the market can provide, they enjoy a market reputation when it comes to pizza. These characteristics are the very reason why Pizza Hut/ Dominos cannot enter into a licensing agreement with an interested party & allow them to use its name to sell their own recipe of pizza. The brand value which is built after years of struggle is at stake for these niche companies. Hence they enter into a franchising agreement; wherein they allow other individuals to not only use their name but also learn the technical know-how, the art, skill & knowledge of making the product exactly the same way as they themselves would have in exchange for the royalty. This in return ensures Pizza hut that it can penetrate different markets without a compromise in quality of service and the franchisee, in turn, is benefitted by the economies of scale that comes with an already established brand.

Hence putting the above in a tighter perspective, we can define the terms as

Franchising: It is an agreement between two parties where the, one party (henceforth referred as the franchisor), permits another party (henceforth referred as the franchisee) to use its brand name or business model for a fee in order to conduct the business as an independent branch of the franchisor.
Licensing: It is an agreement between two parties where the, one party (henceforth referred as the Licensor), sells another party (henceforth referred as the Licensee) the rights to use its intellectual property or manufacture the licensor’s products in exchange of royalty.

Licensing Vs Franchising Infographics

Here we provide you with the top 5 difference between Licensing and Franchising

Licensing Vs Franchising – Key Difference

The key difference between Licensing and Franchising are as follows –

General Association
Licensing deals with Products & Goods like software patented technologies etc.	Franchising is mostly related to service business like food chains, service centers of automobiles etc.
Degree of Control
The licensee is governed by the licensors terms of use as prescribed in the licensing agreement for the licensed product. Licensor, however, has no autonomy over the business of the licensor	Franchisor exercises enormous control over the business of the franchisee in terms of quality of service provided, marketing & selling strategies etc.
Process
Licensing is governed by a licensing agreement, which involves a one-time transfer of property or rights for a fee. There is no technical support or assistance provided by the licensor in most cases.	Franchising is governed by an elaborate agreement specifying the responsibilities & duties of both the parties involved. The franchisor assists in setting up the service provider with adequate skill & knowledge to emanate its brand to the customers

Licensing Vs Franchising Head to Head Difference

Let’s now look at the head to head difference between Licensing and Franchising

Basis – Licensing vs Franchising	Licensing	Franchising
Business Model	Deals with Products & Goods	Deals with providing Services
Ownership	Ownership of the ultimate product is with the licensee, he only buys the right to use a certain patented / original product of licensor in exchange of royalty	Ownership of the business is with the franchisee, he purchases the right to run the same business on behalf of the franchisor in exchange of fees
Legal regulations	Standard agreement governed by contracts law between the parties	Stricter compliance requirements governed by Companies laws & other federal laws of international business (if dealing with a party outside the country)
Advantages	Licensor gets Vertical integration in the market without heavy capital investment & enhances its brand value Licensee gets access to market relying on a strong brand & eliminating competition	Franchisor gets access to the geographically diversified marketplace without compromising on brand value. Franchisee gets continual support from franchisor to extend an already successful business.
Disadvantages	Licensor does not have control over the ultimate use of its intellectual property rights.	Heavy initial investment by the franchisee to meet the quality standards of the franchisor. The degree of autonomy is very less for the franchisee in the operational matters of the business

Licensing Vs Franchising – Conclusion

Though both Licensing and Franchising share similar advantages, licensing can be called as a subset of franchising; i.e. a typical franchising arrangement would involve numerous licensing agreements to transfer use of intellectual property rights. Franchising is a much broader concept since it involves a greater degree of control by the franchisor.

Which form is best would typically depend upon the nature of product/ service in question, the risk appetite of the licensee/franchisee, the existence of competition in the market & the potential to enter & sustain the market by a new player, the amount of investment involved etc.

Overall both forms are pretty safe & legit mode of doing a business since it’s built upon the solid foundation of the brand value attached to the product and can be used as a Launchpad by any potential new entrant to gain access in an already saturated marketplace.