These 3 are as different as day and night
Looking to expand your business? There are many options out there for a brand’s growth. The question remains, what is best for your organization? Many a time, people misinterpret franchising, licensing and brand licensing as the same thing due to lack of know-how. That’s not the case. The absence of the right information leads them to choose an option which might be the best suited for their organization.
Brand growth comes from a greater concentration of one product in a given market. For example, as more people drink Coca-Cola, the greater the product market penetration and growth. Brand extension occurs when a brand owner creates new versions of the core product. For Coca-Cola, this means offering other versions such as Coca-Cola lite, Coke Zero, Caffeine Free Coke and Orange Vanilla Coke.
Brand expansion occurs when a brand owner goes outside of its core category to create products in new categories. To follow the Coca-Cola example, this would mean Coca-Cola tee shirts, caps, shoes and sunglasses. Often brand owners, which have expertise in the category, will choose to extend their brands internally using their own resources.
This is true for Coca-Cola when they extend their brand. In many instances, however, a company will choose to license their brand to a third party (licensee) when they expand the brand into new categories. For Coca-Cola, the company licenses its brand to companies in each of the categories mentioned above.
Franchising VS Licensing
Licensees “rent” the brand from the owner, but are then expected to use their own expertise, capabilities and resources to innovate, produce, market and sell the officially licensed product. The licensor has no say in how these steps are done. The only say they have is in the use of the trademarks and how the brand is built into the product.
In the brand expansion example above, licensees designed the Coca-Cola tee shirts, caps, shoes and sunglasses. They then had these products manufactured; they sold them to a retailer, delivered the product and paid a percentage of their sales to the licensor. Most likely there would be a separate and distinct company making and selling each Coca-Cola branded product and they would each follow their own methods in how this would be done.
In contrast, franchisees are expected to follow a model created by the franchisor with exacting specificity. The franchisee must replicate everything in the creation, sale and delivery of the product. For this right and expectation, they are required to pay a portion of their sales. One of the best examples of a franchisor model is McDonald’s.
Each McDonald’s, whether owned by the franchisor or franchisee, are expected to look exactly alike. The employees wear the same uniforms and are expected to treat the customer in an identical fashion. Finally, the food made is prepared exactly the same way, with the same ingredients, and is expected to have the same taste and consistency.