Licensing and franchising are sometimes confused to be the same. But they are different, in simple words licensing typically deals with the businesses of products while franchising typically deals with the businesses providing services to the customers.
Licensing involves a licensor and licensee, the former gives the right to the later to use the brand’s trademarks. However, franchising involves a franchiser and a franchisee, the former gives the later the right of using the brand’s name, products, and services, or to open a duplicate business.
Comparing the degree of control between the two methods, the franchisee gets a higher degree of control in terms of operating the business. On the contrary, the licensee is more limited and is restricted than the franchisee. Legally, the franchise agreement is more complicated as it involves many activities, unlike licensing which only gives the right of using the trademark. Both the terms along with their differences have been discussed in detail in this article. You can also look at the Licensing and franchising example shared below to understand the two terms practically.
What is franchising?
Franchising is a business technique used to grow the business. It involves an agreement between a franchisor and a franchisee. A franchisor is the one who owns the business and gives the right of starting a duplicate business on his business name to the franchisee.
The franchisor essentially gives the right of using the brand’s name, products and services of the business, and its intellectual property. The franchisee opens up a separate branch under the same name, products, and services. The franchisee is liable to pay a certain amount of fee to the real owner that is the franchisor for opening the business.
This type of business involves many complications that need to be taken care of. The interesting thing about the franchise is whether you visit one franchise or the other, they all feel the same way. You won’t be able to know that these are run by different people under the franchise agreement.
Horizontal and vertical integration
Whenever there comes the word franchise, the most common example that pops up in mind is “McDonald’s”. It is due to the fact that McDonald’s is one of the largest franchises and has a lot of restaurants. Other examples include Burger King, Pizza Hut, Subway, etc. mostly, the franchising is done by the businesses providing services.
What is licensing?
Licensing is also another technique used for growing the business. It is a legal but limited relationship between the two parties. It grants the right to the other party to use the company’s trademarks. The licensing is done between a licensor and a licensee. A licensor is the one who owns the trademarks of the brand, while a licensee is the one who gets the right from the licensor to use the trademarks.
Licensing is also done by paying the fee. The licensee pays the licensor a royalty fee on which they mutually have agreed. Licensing is a limited relationship because it does not provide the licensee with a right to control the underlying business.
A famous example of licensing can be “Disney”. It granted McDonald’s the right to use the trademarks of Disney’s characters for their Happy Meals. This has helped both the businesses Disney and McDonald’s to grow together. This strategy created a kind of intrigue among the kids’ customers of McDonald’s to purchase their Happy Meals for getting a Disney character.
Also, Calvin Klein has been involved in licensing. It has granted many businesses the right to use its trademark. Through this, the unpopular businesses get their products sold easily with a famous brand’s trademarks. Calvin Klein products are produced under licensing agreement.
Licensing and franchising in international business
Licensing and franchising have been helping many businesses to expand their reach globally. Businesses allow other firms to establish a business in their name or use their trademark in return for royalty fees or an increased number of sales. The McDonald’s example can make it very clear how the business has become a globally recognized and used brand, through the technique of franchising.
Also, if franchising and licensing are done effectively the businesses can reach new heights of success. Through the increased reach of customers, the businesses can earn a great reward in the form of money as well as in the form of brand popularity. Licensing and franchising are two of the most famous methods of doing business internationally.
Coca-Cola licensing example
A big name in providing soft drinks has also been involved in licensing named “Coca-Cola”. Coca-Cola was involved in food licensing. It has collaborated with Italian makers of Tic Tac. The Tic Tac has launched in around 70 countries with the trademark of Coca-Cola. Coca-Cola also signed licensing agreement for Russia with the ELC brands.
Difference between licensing and franchising
Licensing and franchising are the two different terms, still, these terms are sometimes used together. That is why it’s important to know the difference between the two methods of doing international business. Their major differences have been discussed below:
Degree of control and limitations
A licensee gets a less degree of control and is limited to doing certain activities. It is because he is only given the right of using the other company’s trademark. While the franchisee, as compared to the licensee is free to get control of the underlying business and is bound with fewer limitations. It is because he can open a separate branch under the business’s name and operate it on his own.
Type of business
Most often, the businesses that get into the license agreements deal with products, because the use of trademarks is more important in products. For example, a brand name on a cloth will be catchier than on service. While the businesses that get into the franchise agreements usually deal with services such as chain restaurants or hotels etc.
The franchise agreement is more complicated than the franchise agreement. It is due to the fact that under a franchise agreement the business gets the control of the operating entire franchise, which contains many sub-activities within itself. While in the other case the licensee only gets the right to use trademarks.
Both licensing and franchising are different, but they are adopted for a similar aim of expanding the reach internationally along with increasing profits. Both are effective techniques for growing the business, however, you must consider the goals and needs of your business before adopting any of these two strategies.
If you are interested in becoming a franchisee or licensee, look from the perspective of using another brand’s name in return for some fee. But if you are thinking of becoming a licensor or franchisor, think from the perspective of giving someone this right of using your brand’s name. Lastly, you can always learn from the big names (some of them are mentioned in the article as examples) and how they have grown in the world of business using these techniques!