Franchising is a type of business that is operated by an entity known as the franchisor, who grants the franchisee exclusive rights to sell or market a product or service under a specific brand in a certain geographical area. This legal agreement allows the franchisee to use the production, commercialization, and marketing processes, as well as to benefit from the reputation and prestige of the brand.
In exchange for the rights to use the franchisor’s business model, the product or service in combination with training, support, and operational instructions, the franchisee pays a fee to the franchisor. Typically, this fee (known as a royalty) is a certain monthly amount or percentage of sales.
- Advantages and challenges
For the franchisor, starting and operating a new branch to expand the business involves a lot of time and financial investment. The franchise business model helps a brand to expand without having to cope with these limitations.
For the franchisee, this business model has plenty of advantages. Firstly, the franchisor has already invested much time and money in creating a market for their product. So the franchisee will have the benefits of working for an established brand with existing demand. In addition, franchisors often offer various other benefits such as financing programs, help with finding a location, in-person or online training, marketing, and advertising campaigns, and so on.
Moreover, franchisees also have access to an entire network of fellow franchisees, who may be able to offer advice or offer you a solution to a common problem. As most franchises are cost-efficient and demonstrate high degrees of operational excellence, this leads to lower production costs, which is reflected in reduced final prices for the customers. Since franchises must follow set guidelines, they tend to focus on the quality of the product or services, as well as on customer satisfaction.
Nevertheless, this business model also includes some challenges for franchisees as they are restricted in some ways by the franchisor. Unlike an independent business, the franchises are controlled by the headquarters who ensure that the established guidelines are met for the proper functioning of the business. This means that there are certain restrictions in terms of decision-making at both the operational and management levels.
- Evolution over time
Franchising can be dated back to the middle ages, when local titled landowner would grant rights to the peasants or serfs to conduct business on their domain. Modern-day franchising is believed to have started in the 18th century with Benjamin Franklin, who entered into the first franchise agreement with Thomas Whitmarsh to provide printing services in South Carolina. In the early 1850s, Isaac M. Singer again used the franchising model to distribute the Singer sewing machines. But, it would be another century before Mcdonald’s would make the franchising model truly popular.
The development of technology, digital transformations, and global platforms across the entire value chain fostered the deployment of new accelerated franchise-type growth models. Moreover, this model took advantage of cloud computing that improved communication between the network.
- Key figures
Today, there are thousands of franchises across hundreds of industries and sectors. According to a U.S. government report, the franchise industry employed 21 million people and generated $2.3 trillion of economic activity in 2018. The biggest global franchise is McDonald’s that has over 30 000 franchisees worldwide and generated 21.000 billion of revenue in 2019.
- Products or services adapted to this model
The franchising model can be used in basically every sector and for a variety of products/services as it is merely an organizational form for companies. Nevertheless, the products or services adapted to this model are mostly offered to consumers (B2C) as a franchising model enables to reach a wide range of geographically dispersed customers. This business model is most used for fast-food and other restaurants, retail stores, and hotels.
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