Posted in Marketing and Strategy Terms, Total Reads: 687
Franchising refers to the act of a body (franchisor) allowing another body (franchisee) to use its trademark and name to carry on the business activity. This is made available in the form of a license from the franchisor permitting the franchisee to use the business’s name and resources. The franchisee may also use other resources of the franchisor such as their business processes, knowledge etc. This helps the franchisee to better sell the product or service under the franchisor’s name.
In exchange, the franchisee pays a start-up fee and an annual licensing fee to the franchisor. The franchisor sometimes also provides training and advisory services to the franchisee to ensure quality output and maintain the image of the brand. For this it receives management fee from the franchisee over the royalty paid for using the name.
The advantage to the franchisee is that the business is already well established and has a good brand name. The franchisee need not spend on building brand name and customer recognition. It requires small investment compared to a new business and the entrant doesn’t face much resistance.
The franchisor gets the fee and also the business gets diversified geographically catering to more no. of customers.
However, the business may sink with any harm to the brand name due to any franchisee.
This franchise system is very common method of business in fast food shops.
For example, McDonalds was originally set up in the US. However, it now has shops all over the world. It has licensed franchisee rights to various bodies to use their business model and run under their name and cater to the customers worldwide. This has helped the franchisor expand its footprint globally.