In common, franchising, distribution and agency mean the same thing and are often loosely used. However, they mean different meanings.
The two terms, distribution and agency, have the more traditional form of distributing goods or services. Under these, the principal is not allowed to exert the real control over the distributor or the agent.
Here, the franchising differs from the distributorship and the agency in the sense that it allows the franchisor to exercise higher degree of control over the franchisee. As a matter of fact, the franchisor has a right to say in all important matters like branding, methodology and mergers.
Franchising arrangements are broadly classified into three types:
- Product Franchising.
- Manufacturing Franchising
- Business-Format Franchising
This is the earliest type of franchising. Under this, dealers were given the right to distribute goods for a manufacturer.
For this right, the dealer pays a fee for the right to sell the trademarked goods of the producer. Product franchising was used, perhaps for the first time, by the Singer Corporation during the 1800s to distribute its sewing machines. This practice subsequently became popular in the petroleum and automobile industries also.
Under this arrangement, the franchisor (manufacturer) gives the dealer (bottler) the exclusive right to produce and distribute the product in a particular area. This type of franchising is commonly used in soft-drink industry.
Business Format Franchising
This is recent type of franchising and is the most popular one at present. This is the type that most people today mean when they use the term franchising.
In the United States, this form accounts for nearly three-fourth of all franchised outlets. Business-format franchising is an arrangement under which the franchisor offers a wide range of services to the franchisee, including marketing, advertising, strategic planning, training, production of operation manuals and standards and quality-control guidance.