5.03 – Identifying Three Types of Franchising
The Three Basic Types of Franchising
Franchising comes in three primary forms, each with unique characteristics and applications:
- Traditional or product-distribution franchising
- Business-format franchising
- Social franchising
Traditional Franchising
Traditional franchising is commonly found in industries like soft drinks, automobiles, mobile homes, automobile accessories, and gasoline. In this model, the franchisee sells products manufactured by the franchisor. Examples include Coca-Cola, Ford Motor Company, and John Deere.
Although traditional franchises resemble supplier-dealer relationships, the distinction lies in the degree of the relationship. Traditional franchisees may handle the franchisor’s products on an exclusive or semi-exclusive basis, unlike suppliers who might carry multiple competing products. For instance, Tempur-Pedic mattresses are sold by national dealers who also offer other bedding brands.
Traditional franchisees are closely linked to the franchisor’s brand and generally receive more services than a dealer would from a supplier. This includes pre-sale preparation (like Coca-Cola’s bottling process) and post-sale servicing (such as Ford’s maintenance programs).
In a traditional product-distribution franchise, the franchisor licenses its trademark and logo to franchisees but doesn’t provide a complete business system. This model, measured by total sales, is larger than business-format franchising.
Business-Format Franchising
Business-format franchising involves a complete system for delivering the franchisor’s product or service. The key difference from traditional franchising is that business-format franchisees operate based on a system defined by the franchisor, who sets brand standards. The franchisee independently manages day-to-day operations to meet these standards.
For example, McDonald’s franchises a system of delivering hamburgers, not just the hamburgers themselves. This format is prevalent, with most franchise locations in the United States falling under this category.
Consistency in execution to brand standards is crucial for success. Examples of business-format franchises include Interim HealthCare, Sport Clips, PostNet, PuroClean, Twin Peaks, and Firehouse Subs. The franchisor provides detailed operational manuals, training, and support, enabling franchisees to manage their businesses effectively.
Although the franchisor supplies a comprehensive business system, franchisees are responsible for managing daily operations. This includes human resources, where franchisees independently hire, pay, and manage their staff without interference from the franchisor. Consequently, franchisors and franchisees are not considered joint employers and are not liable for each other’s actions.
Social Franchising
Social franchising is the newest form of franchising, applying business-format techniques to deliver products and services to people living at the base of the economic pyramid (BOP). BOP refers to those living on less than $2.50 per day. Social franchises focus on providing essential needs like safe drinking water, food, healthcare, education, sanitation, and energy, traditionally managed by governments, churches, and NGOs.
NGOs play a crucial role in delivering these services but often lack the sustainability and brand standards found in social franchising. Social franchises benefit from franchising elements such as agreements, manuals, training, support, consistent supply chains, brand standards, and enforcement.
However, a significant challenge for social franchises and NGOs is the consumers’ inability to afford products and services, relying heavily on donations. NGOs often face sustainability issues due to a top-down structure that doesn’t focus on maintaining commercial standards.
Social franchise systems evolve similarly to commercial franchises, driven by consumer and competitive changes. In contrast, NGOs change based on donor directives, affecting their sustainability.
Examples of social franchises include Living Goods and VisionSpring. For more details on social franchising, visit Social Sector Franchising.
By understanding these three types of franchising, one can better navigate the opportunities and challenges each model presents.
