Two New Business Models
Alright, the following are not “new” business models, but I have penned a name for these successful business models which does serve an important function. By naming and defining a business model, we can then study it, improve it, and learn from them much sooner.
Here are the two business models: the Franfiliate© Model and the Franstributor© Model. Both these models concern franchisors putting a spin on the traditional model. Franchising is important in the world of business models because at the core of selling a franchise is selling a superior business model for use by the franchisee. These two new models offer some differences from the traditional McDonald’s or Hampton Inn business model.
Traditional franchises extend a brand and national marketing to the franchisee so the bulk of the work to be done by the franchisee is operational. A McDonald’s or Merry Maids franchisee does not need to engage in much marketing or selling as corporate takes care of this (with the franchisee’s royalties of course). This leaves the bulk of the work for franchisees in the operational arena: hiring employees, training, management, etc.
From the perspective of the franchisors, traditionally they have several revenue sources:
- Sale of initial franchise
- Ongoing royalties for use of the brand and business model
- Aggregation of marketing. Franchisors charge a marketing royalty from all franchises which is aggregated to purchase nationwide television or other media not affordable to a single franchisee. Franchisors can profit from agency fees, administration fees, or free/cheap marketing for company stores.
- Annual franchisee conventions
- Back office fees
- Billing and collection fees
- Other revenue sources depending on business needs of franchisees
Traditional franchisors derive most of their profit from renting a brand and business model in exchange for a royalty. The Franfiliate and Franstributor business models derive profits for franchisors in much different ways.
The Franfiliate Model
This model is closer to an affiliate model than a traditional franchise. A pure affiliate model pays commissions for lead generation or sales. In these traditional affiliate relationships, payment is made much like a sales representative. A lead is generated by the affiliate and then given to the company for the sales functions. If the sale is made, an affiliate commission is paid. The affiliate business model is used extensively on the web by companies like Amazon, Google, Constant Contact, and Legal Zoom. Internet sites pay affiliates for a combination of website visits, clicks or a percentage of the item purchased. For instance, some high traffic website can earn hundreds of thousands of dollars in Amazon commissions annually for displaying Amazon items on their site.
The Franfiliate business model takes the sales commission aspect of the affiliate model and adds a local presence, extension of the brand to the franchisee, and control of franchisee’s operations by the franchisor. Examples of companies using the Franfiliate business model are:
- Crestcom International creates high quality video training materials from business area experts. The franchisee’s primary responsibility is to sell seats in monthly group training sessions to watch the video-based training sessions.
- Valpak (#404 in the current Franchise 500) uses a franchise model to sell mail coupon packs vs. Groupon who uses an Internet affiliate model.
- ProFlowers uses an affiliate model and centralized shipping for its business model vs. FlowerTent franchises selling some local flowers and similar mail order items.
- Weight Watchers used to franchise but has switched to a pure affiliate model as the Internet yield more influence over their business model. The company is actively buying back franchise locations.
- Proforma (#77 in current Franchise 500) sells ad specialties and maintains no inventory. Franchisees aggregate orders through the franchisor.
When would a business prefer the Franfiliate model over a simple affiliate model or a traditional franchise? All franchises enjoy the benefits of a motivated owner-operator. In many instances, the motivated owner operator significantly outperforms an employee. Take this to an extreme where a commission sales staff might fail or be too expensive and you have a good fit for a Franfiliate.
The Franfiliate model also works when the franchisor needs more than just sales. The franchisor may want a small local office, inventory, administrative help, or other general business functions that are not normally in the realm of a salesperson’s responsibilities. In these instances,
Here’s the easy way to recognize the Franfiliate model – if the business model could be rearranged to a commission sales structure and come close to working, it’s the Franfilliate model.
Some companies have stretched the traditional bounds of franchising using the Franfiliate model. Other companies should consider doing so. For instance, Legal Zoom has a powerful brand in the self-service and non-lawyer serviced law arena. Legal Zoom has an opportunity to open local offices carrying the brand which offer additional services but also sell existing products – an affiliate.
Stay tuned for our next post on the Franstributor business model.
