In the franchising industry, Franchising and Licensing are often used interchangeably. Many get confused between the two. Franchising refers to the arrangement between a franchisor and a franchisee where the latter enjoys the ownership of a business for a fee, and the former controls the processes. In contrast, Licensing is the arrangement between a Licensor and a Licensee where the latter party would gain the right to utilize products and items where the ownership remains with the Licensor.
Difference between Franchising and Licensing
What is Franchising?
Since we referred to Domino’s, let’s use this to illustrate Franchising. Domino’s has a market name because of all its amazing pizzas. People would choose a Domino’s over a homemade pizza any day. Now, if you have to open a pizza shop, you will have to work very hard to achieve success. You have to create a unique pizza that will attract foodies to your pizza center. You have to invest in marketing to make it a global brand. But, if you enter into an agreement with Domino’s, you have to follow the already successful process and sustain the success. This arrangement is Franchising in which you own a brand by bypassing the grime of building a business from scratch.
What is Licensing?
Let’s use Walt Disney as an example to illustrate Licensing. These Disney characters like Mickey Mouse, Donald Duck, and others are the intellectual properties of Walt Disney. These characters cannot be replicated like you can bake a Domino’s pizza if you know their recipe. However, you will notice the use of these characters in merchandise. If anyone apart from Walt Disney has to use these characters on their merchandise, they must secure an agreement from Walt Disney, which is called the License.
Franchising is a franchise agreement in which the franchisor and the franchisee come to an agreement in which the franchisor grants the franchisee the use of the brand name or business model for a fee to run a business independently of your franchisor.
Example: One of the fastest-growing franchises in the mosquito control industry, Mosquito Joe, is a market leader. Mosquito Joe offers home and commercial customers mosquito, tick, and flea extermination services, restoring the enjoyment of being outside. Mosquito Joe’s estimated annual revenue is currently $98.9M per year, and estimated revenue per employee is $251,000
Licensing is an agreement between the Licensor and the Licensee. The Licensor sells another party the rights to use its intellectual property or manufacture the Licensor’s products in exchange for royalty or other payment models.
Example: With retail sales of $5.1 billion in 2020, the Pokémon Company ranks eighth, with $900 million growth from the previous year. As it approaches its 25th anniversary this year, Pokémon attributes retail sales to the expansion of the franchise, which now encompasses everything from games and apps to the popular trading card game to animation and movies, and everything in between.