For many years, franchising has been a successful business strategy that appeals to both seasoned business owners and newcomers. It gives franchisors a means of growing their company by forming alliances with people who share their values. It offers an organised strategy for franchisees to launch a company with a well-known brand and a tested operational structure.
However, the number of models and structures might be confusing for those who are unfamiliar with franchising. Businesses from a variety of industries use franchising, and every model has a different strategy. There are different types of franchise models that exist in India. The most popular franchise models in India are examined in this article to assist you in choosing the one that best fits your company’s objectives.
Now we dive into details.
How Does Franchising Work?
Franchising is a business agreement where one company (the franchisor) allows another (the franchisee) to sell goods or services under its name. The franchisor provides trademarks, marketing support, proprietary knowledge, and operational guidance.
In return, the franchisee pays royalties and may also pay an initial franchise fee. This arrangement benefits both parties: the franchisor expands their brand, while the franchisee gains access to a ready-made business structure.
In India, the demand for branded goods and services has fueled rapid growth in franchising, particularly in sectors like food, retail, healthcare, and education.
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Different Types of Franchise Models
COCO Franchise Model
The Company Owned Company Operated (COCO) franchise model ensures that the franchisor owns and manages the business in a particular area. In this setup, the franchisor is responsible for all operational and capital expenses. For example, a brand might set up a chain of stores where the franchisee plays the role of a dealer.
This model suits franchisors who:
- Have a sufficient budget to handle costs, such as testing innovative marketing campaigns.
- Wish to try out business development strategies at company-run outlets before transferring the framework to franchisees.
A flagship store established under the COCO model often serves as a testing ground for marketing, infrastructure, and operational strategies, eventually forming the basis for future franchises.
Advantages
The COCO model offers the following benefits:
- It allows franchisors to expand their brand in new regions, enhancing recognition and visibility.
- It provides a platform to showcase the brand’s offerings to potential franchisees.
- Profits are maximised since there are no partners sharing the revenue.
This model also enables companies to establish their presence in areas where finding franchisees may be challenging.
Disadvantages
However, there are potential drawbacks:
- The stores are run by employees hired by the franchisee rather than the brand owner, potentially affecting service quality and efficiency.
- Resources that could be used for core business operations may instead be allocated to opening and maintaining company stores.
For larger brands looking to strengthen their footprint across cities or countries, the COCO model can be an effective strategy.
COFO Franchise Model
The Company Owned Franchise Operated (COFO) model delegates a significant portion of operational responsibilities to the franchisee. Under this model, franchisees bear certain operational costs, such as salaries, utility bills, and other related expenses. Meanwhile, the franchisor focuses on aspects like choosing the store’s location and covering capital costs.
Key Features of the COFO Model
- Reduced operational costs for the franchisor.
- Franchisees handle day-to-day management.
- Franchisors can scale their operations without directly managing every outlet.
This model is more suited for franchisees with access to considerable resources. They purchase not only the brand but also the management system and marketing blueprint. Substantial initial investments are often required before profits are realised.
Advantages
This approach benefits both franchisors and franchisees in several ways:
- Individual outlets are often more successful as franchisees manage them with entrepreneurial zeal.
- Operational costs are entirely borne by the franchisee, reducing the financial burden on the franchisor.
- The franchisor saves time and resources by outsourcing operational tasks to franchisees.
Disadvantages
There are potential downsides to the COFO model:
- The franchisee’s performance heavily influences customer perception of the brand. Poor service or subpar advertising can damage the brand’s reputation.
- Franchisees’ resignation or exit can disrupt the outlet chain.
- Franchisees’ profit margins might be lower as they bear the operating costs while sharing revenue with the franchisor.
This model is generally better suited for well-established franchise companies with a solid management system.
FOCO Franchise Model
The Franchise Invested Company Operated (FOCO) model flips the script by having the franchisor handle all operational tasks, while the franchisee assumes responsibility for capital and property-related expenses. Franchisees also cover other associated costs, including maintenance.
Key Features of the FOCO Model
- Minimal costs for the franchisor make it attractive for both emerging and established brands.
- Franchisees earn a larger share of profits as they handle most of the financial burden.
- The franchisor earns through royalties or fees rather than direct profit-sharing.
This model is ideal for large, established brands aiming to expand with minimal risk. However, it’s a less suitable option for small franchisees unable to make significant upfront investments.
Advantages
The FOCO model presents notable benefits for franchisees:
- Franchisees do not need to build a management team, as operational tasks are handled by the franchisor.
- A strong brand presence, loyal customer base, and tested marketing strategies are already in place.
- Operating costs are borne by the franchisor, offering significant financial relief to franchisees.
Disadvantages
Despite its appeal, the FOCO model has challenges:
- Recouping the initial investment might take time, especially in the early stages when expenses could outweigh revenue.
- Franchisees may lack direct involvement in day-to-day operations, limiting their control over the business.
- This model is unsuitable for franchisees planning to lease properties for their retail outlets.
Franchisees looking for long-term investment opportunities in established brands might find this model a good fit.
FOFO Franchise Model
The Franchise Owned Franchise Operated (FOFO) model is among the most popular franchising setups. It allows franchisees to purchase a ready-made brand, offering them a quicker return on investment and greater control over daily operations. This model simplifies management for the franchisee and fosters quicker profitability.
Key Features of the FOFO Model
- Franchisee owns and operates the business under the franchisor’s brand.
- Franchisor provides branding and operational support.
- Franchisees bear setup and operational costs.
Advantages
The FOFO model is highly beneficial for franchisees due to:
- Flexibility in scaling the business to new heights.
- Suitability for franchisees with limited budgets, as most expenses are borne by the franchisee.
- Faster return on investment compared to other models.
For these reasons, FOFO is a top choice for investors looking for reliable franchising opportunities.
Disadvantages
However, potential franchisees should remain cautious:
- The risk of failure is significant, especially for those without experience.
- A high initial investment does not guarantee success, and inexperienced franchisees may struggle with business operations.
Investors must conduct thorough research and ensure they are prepared for the challenges that come with the FOFO model.
Conclusion
Franchising is a tried and true strategy for companies looking to reach a wider audience while reaping the rewards of improved brand awareness and the effectiveness of standardized operating procedures.
As we’ve seen, a franchise can be set up in a variety of ways, each catering to different business requirements and preferences. But keep in mind that, regardless of the franchise model that suits you best, you must also create and carry out a thoughtfully planned marketing strategy to ensure your company grows.
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Also read: The Importance Of Financial Planning For Entrepreneurs
Frequently Asked Questions (FAQs)
What is a franchise?
A franchise is a licence given by a brand owner to a person or business organisation to use the company’s secret information, procedures, and trademarks and to sell goods and services under the brand name in a designated area.
What is the income of a franchisor?
A franchisor mentions three types of payments in the franchise agreement. These cover continuous royalties from the operation’s sales, training or business advising fees, and the franchisee purchasing the trademark rights.
What factors contribute to the success of a franchise?
Your choice of franchise type or the brand you work for or with will have a big impact on your business’s success. Well-known and favoured brands will ensure commercial success.
Are start-ups and franchises the same thing?
Startups are businesses founded by entrepreneurs with a single concept. Franchises, on the other hand, are companies whose owners give others the right to use their brand to grow and expand.
