October 20, 2005

Difference between a brand and a franchise

I have always thought that a strong brand equates to a strong franchise (profitable businesses). However over the course of time, I think I have started to understand that both are necessarily not the same

For ex: Brands like Starbucks, Tiffany, coke etc are strong brands and good franchise (earning huge profits for the companies). But at the same time there are strong brands such as Mercedes, Taj (?), titan etc which are not very profitable franchises for their companies.

I am still not absolutely sure of the reason behind it. Maybe each case is different.

Please share your thoughts with me on this


Bruce said...

Here's my abstract opinion (there are a LOT of ways of looking at this one question). A brand/franchise/whatever is something which signals a contract with the customer. It's a popular solution to the prisoner's dilemma problem that plagues all economic transactions to some extent. Game theory deals with this subject very well.

A vendor spends a great deal of time and money developing an easily recognizable public image that is protected by law (from having other vendors use the same image). That image slowly becomes a reputation, but it also signals a commitment from the vendor not to cheat the customer quickly and then run away. The average consumer must keep track of a very large and growing number of brands and franchises. They don't want to have to do the enormous work to validate a vendor every time they want to make an economic purchase. A brand/franchise allows them to make quick decisions, often in unknown places. So in a sense, a brand/franchise becomes a contract between the buyer and the vendor. The cost in establishing the brand (and also the value in not destroying it) is a fuzzy guarantee placed into the public by the vendor.

When you have a comodity product or service, that brand becomes less important. Someone stands by the side of the road with a rock that you want to buy. They have no brand, but all you want is a rock which is easily verified during the purchase. Anyone spending lots of money to establish a brand is at a cost disadvantage to someone who just gathers rocks and stands at the side of the road. For that reason, comodity markets are won by whoever has the lowest cost. If the market demands 10,000 rocks, then you essentially line up the vendors from lowest cost to highest cost. You start with the lowest cost and work your way up until you buy 10,000 rocks (well, it's more complicated than that due to the supply/demand curve). The market price essentially becomes the highest cost rock among the 10,000.

So call it a brand or franchise or whatever, it's really a sort of contract. It's very important that the law upholds the property rights of the brand or everything breaks down. In fact, it's always important for property rights to be upheld for economic activity to be efficient and effective. India has come a long way over the years and I suspect it will become a very major economic superpower so long as it continues on the path of free markets and property rights.

Rohit said...

great comment bruce !
nice explaination of a commodity product/ service

i have trying figure out two questions for some time
- what makes a strong brand a profitable franchise (like a coke) v/s a mercedes which is a strong brand but not too profitable

- why is it that some industries inspite of strong brands are not too profitable (ex : auto ) v/s say cereals or colas where most of the companies are profitable

Bruce said...

What makes a strong brand? Well, one view is covered very well in The 22 Immutable Laws of Marketing. But a better answer is to look at your own behavior and where you rely on brand. Buffett made some comments about Coca Cola that make a lot of sense. One type of very good brand is small, repeat purchases that are almost habit.

When you look at what a brand is all about (a contract), then you can ask yourself when is that contract valuable from the vendor's perspective. One good thing is lots of confusion and doubt in the minds of customers. Another is a long delay before the customer finds out whether what they bought was good quality vs poor quality.

George said...

This is a very interesting topic. I posted my comments about it over at my blog, Fat Pitch Financials. It would be nice to put together a set of criteria by which to gage how likely a brand will lead to a franchise.