Choosing a Service Franchise or a Product Franchise
There are basically two types of businesses that can be offered by an individual. They can offer Products to their customers, which are tangible goods meant for the customers consumption, or they can offer them Services, which are intangible and work to make the life of the consumer easier and more convenient.
With technologies advancing rapidly and the global demands of consumers changing, there is a very thin line dividing the service and product segment of the consumers demands. An example of this can be the purchase of a car from an auto dealer. The dealer not only offers the vehicle at a competitive rate but now has to offer different services as well, such as financing options, after-sales services, ready documentation and other non- tangible services. This kind of merging has made it very difficult to draw a clear line as to the service and product industry but for the sake of argument we will consider a theoretical perspective where you have to choose a traditional product franchise or a service franchise.
The Product Franchise Industry
Most of the franchises offering Product oriented goods have very stringent rules. Since their brand is associated with a tangible good they must guarantee the desired quality from the consumer’s expectation. Franchisees must purchase the goods from a designated supplier and must keep items in their inventory as suggested by the franchisor. This can be company regulated policies or simply to help the franchisor launch some of their new products.
A product oriented company has to consider various important aspects, one of which is Location. Where the franchisee is located plays a major role in determining their financial success. Costs associated with delivery of the products, ease of access for customers to reach the product and visibility of the product become more relevant for Product Oriented Industries. So if you have the option of picking out the prime location for your business then Product Oriented franchises are feasible. However if you have some specific geographic location available to you then you might need to consider the nature of the industry which you are planning on entering.
Sometimes for a product oriented industry skilled labor plays a very important role. You need to have the proper technically adept labor ready at hand to actually manufacture the product or handle it with proper care. Therefore you need to realize whether the labor is available nearby to address the concerns otherwise entering a product industry would be unwise. Finding whether the skill is available is simple as you can search for universities or colleges with certain programs in the vicinity, consider the population of the area, and the infrastructure of the area with roads and proper mass transit channels can be good indicators of the possibility of finding the corresponding skills of employees.
Pros and Cons of a Product Franchise:
Usually Product oriented franchises deal with fast food and other food businesses. They may range into other domains such as technology products as well. The benefit of franchises based on products is that pricing concerns are not so major. The marketing campaigns are managed by the franchisor as well. Therefore the major responsibility of the franchisee is simply to keep his inventory levels updated and provide consumers with a place where to purchase from.
Another positive for this type of business is that the owner or franchisee is providing some kind of visible difference to the community and is actually participating and creating something of value for customers. If the product is appealing then the franchisee has the chance to make large volumes in relatively little time.
One major problem with Product oriented franchises is that they are often dependent on the tide of consumer perceptions. Lets take the example of Starbucks. Starbucks entered the coffee industry with a bang and before you knew it Starbucks was boasting a mission of having “one Starbucks at every corner”. However with the slump in the economy and the premium prices of their products, the sales eventually declined so much that many Starbucks had to shut down their operations! Therefore your success and failure can be very short lived and franchisees must realize that there are cyclical patterns for product sales.
THE SERVICE FRANCHISE INDUSTRY
Service oriented industries have a greater number of franchises but the problem lies in the fact that they are not as memorable or popular as the product oriented ones. Real estate agencies, financial advisory offices, and consultation services have very specific niches and operate on a smaller scale as compared to a food franchise such as Dickey's Barbecue Pit or Subway.
This type of industry caters to the basic services which people look toward in the course of their daily transactions and for certain instances where they need professional advice or specialized services which require technical knowledge. Plumbing services, home improvement projects and other services fall into this category.
Since most people prefer starting their own business when services are related, it comes as no surprise that Service franchises are relatively fewer in number and do not have the sheer presence of the Product franchises. Service oriented businesses are easier to launch therefore labor and geography isn’t a major concern since you could operate your business from your home or on the internet. Since the nature of the work is more specialized and usually the owner of the business handles the functions (at least initially), labor doesn’t play as much of a role in choosing a service oriented business.
Pros and Cons of a Service Franchise:
Most Service Oriented Franchises are lesser known so an equal amount of effort is required to build up awareness and building up the brand locally. Though with a proper marketing campaign and with a little exposure the franchisee might be able to highlight the franchise as being affiliated with a larger network hence improving their credibility when compared to mom and pop players in the market.
The initial outlay is cheaper for a Service Oriented franchise as compared to that of a Product Franchise since the office can be rented cheap or could be managed from home. Compared to a Product Franchise, starting a Service oriented franchise is much more economical. While most popular Product franchises cost six figures and higher to build out, a good Service franchise might be started up for $50,000 or less.
Another positive side to running a Service Franchise is that working hours can be more flexible; since you would be managing yourself and a few other skilled workers, you can establish your own schedules and work on a system prepared by yourself.
In a Service Franchise you will have to manage your own marketing and operations and it is typically more independent than a Product Oriented Franchise. This also means that you would get hardly any support from the franchisor and you would have to manage your entire operations while staying under the brand name of someone else.
Running a Service Oriented Franchise depends majorly on the skills and capability of the owner. If you personally cannot create a disciplined schedule and you require nudges from others to get anything accomplished then it is highly unlikely that you would be able to succeed running your own Service Oriented franchise. If you are not sure that you can manage your personal and professional life and possess the discipline to manage your time wisely you should avoid entering a Service Oriented business.
Choosing which type of industry to enter is a very important part of starting your search for a franchise to buy. You must examine your personal preferences and personality strengths and weaknesses, you must investigate the requirements for the franchise such as investment required for opening an office or restaurant, the working hours that you would need to commit to, and also the initial capital investment you’d be required to show before getting the lease for the franchise.
Both industries have their own possibility of leading to a successful career within them but in the end it comes down to the personal preference of the owner and which model and system best matches the individual’s strengths.
A Break Down of Franchise Royalty Fees
When you first start your franchise you typically pay a franchise fee upfront. This will cover a variety of things that depend on the franchise you're dealing with, but often it will go towards initial training, marketing, and the rights to use the franchises logos, names, systems, and products. But that's not the only fee that franchisees will pay to a franchise. In addition to the initial franchise fees, the vast majority of franchises will charge their franchisees royalties that can come in one form or another. These royalties will often go towards ongoing training, sales of goods directly from franchisor to franchisee, and advertising and marketing efforts. The exact terms for these royalties are set out in your franchise agreement, but they come in a few common forms.
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