Licensing vs Franchising

Licensing refers to an arrangement between licensor and licensee where the latter party would acquire the right to use products and goods, where the ownership remains with the licensor. In contrast, franchising refers to an arrangement between franchisor and franchisee where the latter will enjoy the right of a business on behalf of the franchiser instead of a fee where the franchisor closely controls the processes. Therefore, it is generally seen that licensing is for products and goods. In contrast, the franchising model is used more in the 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 and franchising.

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 worldwide. Many merchandises bear these characteristics, like bags, cups, bottles, etc.; Walt Disney is not the sole manufacturer of this merchandise. Hence, apart from Walt Disney manufacturing these products, anyone agrees with the former to gain a right to use these characters on its merchandise for some consideration and sell the same. This kind of arrangement is referred to as licensing.

Suppose you feel like eating a pizza instead of a homemade pizza offered by your mother; the obvious choices that come to your mind are Pizza Hut, Dominos, etc. You want pizza at these outlets because they sell amazing variety and quality pizza. They have made their mark in the industry by exclusively selling pizzas. In addition, they have their signature dishes which no other pizza outlet in the market can provide. As a result, they enjoy a market reputation for pizza.

These characteristics are why Pizza Hut/ Dominos cannot enter a licensing agreement with an interested party and allow them to use its name to sell their pizza recipe. Instead, the brand value 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 use their name and learn the technical know-how, the art, skill, and knowledge of making the product the same way they would have in exchange for the royalty.

That, in return, ensures Pizza hut that it can penetrate different markets without compromising the quality of service. In turn, the franchisee benefits from the economies of scale that come 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 one party (hereafter referred to as the franchisor) permits another party (hereafter referred to as the franchisee) to use its brand name or business model for a fee conduct the business as an independent branch of the franchisor.
2. Licensing: It is an agreement between two parties where one party (hereafter referred to as the licensor) sells another party (hereafter referred to as the licensee) the rights to use its intellectual property or manufacture the licensor's products in exchange for a royalty.

General Association

• Licensing deals with products and 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. The licensor, however, has no autonomy over the licensor's business.
• The franchisor exercises enormous control over the franchisee's business regarding the quality of service provided, marketing and selling strategies, etc.

Process

• Licensing is governed by a licensing agreement, which involves a one-time transfer of property or rights for a fee. The licensor provides no technical support or assistance in most cases.
• Franchising is governed by an elaborate agreement specifying the responsibilities and duties of both the parties involved. The franchisor assists in setting up the service provider with adequate skill and knowledge to emanate its brand to the customers.

Though both shares 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. However, franchising is a much broader concept since it consists of the franchisor's greater degree of control.

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

Overall, both forms are a pretty safe and legit mode of doing business since it is built upon the solid foundation of the brand value attached to the product. In addition, it can be used as a launchpad by any potential new entrant to access an already saturated marketplace.