Because profit margins are notoriously slim in the hospitality business, restaurants, bars and cafés are always looking for ways to increase revenue or reduce costs to maximise the bottom line.
But there’s only so much you can do to increase what you make without increasing what you charge.
It’s a kind of paradox: your success could actually hamper your growth because once you’ve found that secret formula that works – competitive pricing, consistent food and service quality and regular patronage from customers who are also your fans – you risk upsetting the balance if you change anything.
If you’ve gotten to a great place with your venue, the logical way to get bigger is to expand into new locations, and do what you’ve done well already in other places.
Of course, this is not without its own set of issues, most notably the enormous sum of money it takes to open a new site. For the business owner who’s been through the kind of spending spree required to set up shop, the idea of a second location can seem daunting. And that’s where licensing and franchising can be good routes to take.
With both of these options, it’s someone else who takes on the financial risk of opening the new location while paying royalties or fees to you, the owner of the concept.
A new location set up in this way won’t make you as much money as opening your own second storefront, but it also doesn’t cost you nearly as much to get going, in money or time.
To help you decide what’s a better option for your brand, we look at how these two business models work, what the important differences are, and offer some insight from one of our customers that’s tried both out.
Licensing vs. franchising: what’s the difference?
In both cases, you’ll be expanding your brand without owning any of the new locations. The chief difference between the two is how much involvement and control you’ll have over them, and there are pros and cons to each choice.
What licensing is: an easier way to get additional revenue with your brand
With a licensing model, you’re basically entering into a contract that grants the right to use your intellectual property (IP) to another person or business. For a hospitality business, that includes things like your brand name, logo, recipes, and some processes.
There’s no template for how much or how little rights you can grant them, nor are there any hard and fast rules as to how much you should receive in royalties. All of that gets worked out during contract negotiations.
An example of a licensing model is seen in Uber, which licenses the rights to use Google’s Maps software in its ride-hailing app, and on its food delivery service Uber Eats. This way, Uber doesn’t have to create a maps software from scratch before going to market, and can focus on its core offering – connecting their drivers with their customers.
What licensing isn’t: a model you have much control over
In a license agreement, you typically lack control over performance, operations, or standards. There are reasons potential licensees go down this path – it saves them the time and money that’s required to create a brand or product that works, and what they’re licensing could only form a small part of the overall business they want to set up.
The downside of this is the potential lack of enforceable uniformity in your product and brand messaging. And without any oversight, it only takes one licensee doing things poorly to ruin the brand name for everyone else.
On the plus side, entering into a licence agreement is much less costly for you, in terms of both time and money. Once the deal is signed, the licensee goes off and mostly does their own thing, and the royalties you collect can become a steady source of passive income on top of the revenue you’re earning with your own venue.