Licensing vs Franchising

Difference Between Licensing and Franchising

Licensing refers to an arrangement between licensor and licensee where latter party would acquire the right to use products and goods where the ownership remains with the licensor whereas Franchising refers to an arrangement between franchiser and franchisee where the latter will enjoy the ownership of a business on behalf of the franchiser in lieu of a fee where the processes are closely controlled by franchisor therefore it is generally seen that licensing is for products and goods whereas the franchising model is used more in service providing industry.

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, cups, bottles, etc.; now Walt Disney is not the sole manufacturer of this merchandise. 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.

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Source: Licensing vs Franchising (wallstreetmojo.com)

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 marketsPenetrate Different MarketsMarket penetration is calculated as how much the product or service is being used compared to its total market and how it creates a position in the market, especially in the primary stages of setting up the business.read more 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

  1. 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.
  2. Licensing: It is an agreement between two parties where the, one party (henceforth referred to as the Licensor), sells another party (henceforth referred to as the Licensee) the rights to use its intellectual property or manufacture the licensor’s products in exchange of royalty.

Licensing vs Franchising Infographics

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Source: Licensing vs Franchising (wallstreetmojo.com)

Key Difference Between Licensing and Franchising

General Association

  • Licensing deals with Products & Goods like software patented technologies etc.
  • Franchising is mostly related to service businesses like food chains, service centers of automobiles, etc.

Degree of Control

  • The licensee is governed by the licensor’s 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

Comparative Table

Basis LicensingFranchising
Business ModelDeals with Products & GoodsDeals with providing Services
OwnershipOwnership 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 royaltyOwnership 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 regulationsStandard agreement governed by contracts law between the partiesStricter compliance requirements governed by Companies laws & other federal laws of international business (if dealing with a party outside the country)
AdvantagesLicensor gets Vertical integration in the market without heavy capital investmentHeavy Capital InvestmentCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more & enhances its brand value Licensee gets access to market relying on a strong brand & eliminating competitionFranchisor gets access to the geographically diversified marketplace without compromising on brand value. Franchisee gets continual support from the franchisor to extend an already successful business.
DisadvantagesLicensor does not have control over the ultimate use of its intellectual property rights.The 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

Conclusion

Though both share similar advantages, licensing can be called a subset of franchising; i.e. a typical franchising arrangement would involve numerous licensing agreements to transfer the 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 appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more 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 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.

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