Fast food chains grew all over the world, thanks to a phenomenon: the franchise business model. We all know and love McDonald’s. It is a common household name all round the world. McDonald’s is the largest food chain in the world. It has about 37,000 outlets in more than 115 countries. Their global presence and popularity is possible because of franchisees around the world.
Franchisees are companies that are in contract with a franchise to sell their goods while abiding to their established standards. The franchise business model increased the reach of McDonald’s and similar food chains. This newly established reach meant that their customer base increased and so did sales in the long run.
These franchisees use the name of McDonald’s to sell their products. However, they are not owned by McDonald’s. They can sell the products of McDonald’s as long as they maintain the standards set by the parent company.
This might sound astonishing, but around 80% of all restaurants and food chains are franchises of their respective parent companies. The success of McDonald’s and the wide adoption of this business model shows that the franchise business model is lucrative.
Let’s start with the basics and inform you about things such as franchise.
What is A Franchise in A Franchise Business Model?
To understand what a franchise is, it is necessary to understand franchisor and franchisee. We will use McDonald’s again as an example. McDonald’s is an American fast food company. However, you see their branches in different parts of the world. The owners of these branches are the franchisee, and McDonald’s is the franchisor.
Hence, a franchise is a contract agreed between a franchiser, who is the owner of the brand, and franchisee. A franchisee can be an individual or a corporate company that agrees to the set standards of the franchiser so that they can use the knowledge, products, trademarks and other proprietary things of the franchiser to sell their products in a certain region.
To make it sound simple, a franchise allows the franchisee to use the following things:
- Use the franchisor’s brand name
- Use the trademarks and patents of the brand
- Operating knowledge
- Marketing strategies of the franchisor
- Software and other IT systems of the franchisor
- Proprietary knowledge of the brand
Hence, this leaves us with an important question. How do they work?
How does the Franchise Business Model Work?
Like we mentioned before, franchise is an agreement between a franchisor and franchisee.
A franchisor is the brand that is looking to expand their business without making huge investments and with minimal involvement of their own.
Also, a franchisee is an individual or a corporate company that is willing to buy the rights to sell the products of a brand in a region. Moreover, the rights allow them to use proprietary material and marketing campaigns of the franchiser.
A franchisee uses the demand and goodwill of the brand to sell products of the franchiser to make profit. A franchisee is not an entrepreneur as they do not work on a new idea.
How do they operate then?
The operating model of a franchise is rather simple. The franchise agreement makes the franchisee eligible to use proprietary information and sell products under the name of the franchisor. The services are rendered under the name of the franchising brand.
There is a licensing cost that needs to be paid by the franchisee. A franchisee cannot operate without paying this fee. This fee depends on the demand and popularity of the franchiser. Furthermore, aspects such as the reach of the brand, their marketing strategies and scale of the brand are key factors that determine the licensing fee.
However, the licensing fee is not the only fee that needs to be paid. The franchisee is also required by the agreement to pay an ongoing royalty fee to the brand. This royalty fee is a percentage of the gross sales made by the franchisee. This percentage is decided when the franchise agreement is being penned down.
In addition, a franchisee is obligated to follow all the conditions mentioned in the franchise agreement. Moreover, they need to use the operation manuals that are provided by the brands. The franchisor provide special on-field training to make sure that the quality of service is up to the mark. This training may be provided through different means.
Lastly, the franchisee is expected to maintain the quality of service, price, product, discounts etc. that are introduced by the brand.
What Does the Brand Do in A Franchise Business Model?
The franchise business model sustains itself on the demand and popularity of the brand. A franchiser works hard enough to create demand and popularity of the brand so that it can be further franchised to others.
Franchisees help the brands to expand their business. Moreover, they also increase the revenue of the parent company. On the other hand, the franchisee uses the demand of the franchisor to make sales. It is easier to sustain a business that has a set demand and supply.
Lastly, the brands are responsible for marketing the products that are sold by franchisees.
What Makes Franchising Business Model Better than A New Business?
You may often hear that buying a franchise might be a safer investment than starting a business from scratch.
The market already exists
It is easy to sell things that have an established market and demand for them. The franchisee do not need to spend time and other resources in creating marketing strategies to sell their products. It is the brand’s job to take care of those things.
In addition to that, if there is definite demand of a service, it is easier to get sales.
Only Need to Follow an Operational Procedure
Franchisees are expected to follow standard protocols of operation that are regulated by the brand. No research and development is expected from the franchisee. They just need to follow the set rules to make profit.
There is less risk involved
Franchising involves less risk because of an already established market for those products. You already have the list of things that need to be taken care of.
Franchising is the act of buying rights from a brand to sell their products in a certain region. It is a model that involves two parties: franchisors and franchisees.
McDonald’s is an example of the franchise business model.