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The most vital decision potential business owners must make when considering a franchise is determining the kind of business they need to run. There are 1000’s of brands and concepts, but franchises generally fall under two business models: “brick-and-mortar” and “service-based.”
Think about a franchise you know. One that gives services that you simply use over and once more. Is this a hair salon? Fitness studio? Lawn care company? Removal and garbage collection service?
They are all franchises, but in terms of business model, hair salons and fitness studios fall under one umbrella – location-based businesses with retail stores where the customer receives service at a fixed location. Meanwhile, lawn care and moving services firms fall under a different umbrella – service-based brands – that do not have a customer-facing storefront or property and the service is provided at the customer’s location.
Here are some of the key differences between brick-and-mortar and service-based businesses, so you will be higher informed when selecting a franchise model.
1. Investment cost
Real estate is what typically drives franchise investment costs. The more intensive the use of the property, the higher the level of investment. Location-based and brick-and-mortar franchises typically have higher initial investments. Building a retail space could be expensive. Imagine a fitness studio – you would like bikes and machines, but also modern sound systems, TVs, changing rooms, showers, etc. Not to mention the floor and interior design.
On the other hand, a service-based brand doesn’t necessarily require real estate (some may even be home-based). Some service brands require warehouse space to store vehicles or equipment positioned at the customer’s location. Less visible and cheaper industrial spaces are ideal for these franchises. Typically, these spaces require few improvements compared to a customer-facing retail space.
So what investment costs are you able to expect for each of those options for a single unit or territory? While this is not definitive (there are all the time exceptions), typical ranges are:
- Land-based: over $250,000
- Service-based brands: under $300,000
2. Acceleration time
Start-up time goes hand in hand with investment costs. The time it takes to achieve positive monthly money flow and establish repeat business indicates vital benchmarks for any sustainable business. When it comes to speed, service-based brands are more likely to grow quickly due to lower initial investment costs and lower fixed overhead costs. Consider a moving service brand. Once you have the equipment and employees, your monthly operating costs shall be more closely tied to revenue growth; due to this fact, these models can often achieve money flow more quickly.
Alternatively, a brick-and-mortar brand (similar to a salon) will have high initial investment costs (trade space, individual stations, chairs, mirrors, hair washing/drying stations, etc.) and will likely take time to develop a strong customer base in a specific community. However, over time, they have a tendency to have more repeat business and sustainable income streams.
3. Scalability
Brick-and-mortar businesses are typically more scalable. Once you have one successful franchise, it’s easier to manage and build your empire by spreading costs across multiple locations. However, keep in mind that due to expensive initial investments, construction costs shall be similar each time you open a latest location.
With a service-based brand, as an alternative of building more physical locations, you’ll be able to expand and increase the penetration of your territories. While this is not without additional costs (factor in gas money, employees having to sustain with demand, more frequent equipment maintenance, etc.), it does require additional investment as your revenue justifies it and creates economies of scale. By purchasing additional territories in a service-based brand, you scale your revenue and income multiplier without the same proportional increase in capital investment.
4. Technology
An area that is relatively equal in terms of usability and accessibility is technology. Technology has transformed franchising in recent years. In particular, repetitive but crucial tasks have been streamlined and simplified through technology. In the case of stationary brands, it often happens that customers directly plan services (hairdressing visits, fitness class reservations, etc.). For service-based brands, customers can book service requests and employees can perform real-time tasks to maintain business continuity, similar to ordering parts, creating estimates, etc.
5. Location risk
Location is key for stationary franchise brands. Finding a balance often involves finding a property that is inside an acceptable price range and in a popular location that ensures consistent repeat business. You shall be offering services at a fixed location, so the further you are from the customer, the less likely the customer will go to your location. For example, a fitness studio needs to be convenient so that customers can come to your location three to 4 times a week. Ideally, the more often a customer would love to visit your franchise, the higher density is needed for the same market radius.
For a service-based brand, location is not as vital to overall success. Since you or your employees will travel to the client’s location, there is no risk in location selection and you’ll be able to penetrate deeper into the market. However, it is value noting that if you are expanding into multiple territories, you could want to consider renting an additional warehouse or warehouse space to optimize efficiency.
6. Recession-proof
Finally, one factor to consider is your franchise’s recession-proof nature. Stationary brands often offer more discretionary services. These are indeed on a regular basis services – hair care, nail salon, etc. – but they are not all the time considered essential services in on a regular basis life. On the other hand, service-based brands are often essential, on a regular basis services that need to be provided despite changing market trends – for example, HVAC, plumbing, yard care or renovation.
Ultimately, there is no one franchise that matches all potential franchisees. However, by understanding the basics of those general categories, you’ll be able to begin to consider which kind of business model most accurately fits your small business goals.