Franchising and E-commerce: Which Online Business Model Is Right for You?

May 26, 2017

Developing a successful e-commerce strategy does not come without intimidating challenges.

By Michael Leconte

As seen from the rather smooth and mostly self-regulated realm of franchising, the world of e-commerce seems like a virtual Wild West where everything — the good, the bad, and the ugly — is possible.

To keep doing business as usual, however, is an increasingly dwindling option. That’s because the traditional frontier between physical and virtual stores is fading fast, as consumers adopt hybrid buying habits.

How can businesses move from a traditional brick-and-mortar franchise distribution system to a full-fledged e-commerce franchise setup? And how can they please everyone in the loop — the franchisor, its franchisees, and their customers?

In a sense, choosing the right online business model is no different than what an organization did when it first determined which distribution and revenue growth model would best suit its brand.

Let’s look at four online business models:

The “pure-play franchisor” model: the franchisor reserves the e-commerce channel on its global online platform.

The “pure-play franchisee” model: franchisees handle their own online business at the local level.

The “shared e-commerce” model: franchisors retain control of the e-commerce channel but let franchisees be part of the overall online selling strategy.

The “distributed e-commerce” model: franchisors provide standalone, branded websites that are marketed and operated locally
by franchisees.

There are many subsets within these models, but the above-mentioned examples offer a good first look at the advantages and drawbacks companies may face, as well as key points to consider before adopting any of them.

The Pure-Play Franchisor Model

Legally, nothing stops the franchisor from retaining exclusivity over online sales, as long as franchise agreements (state and franchise disclosure documents) define in good faith the franchisor’s and franchisees’ respective rights.

Fully centralized by nature, the pure-play franchisor model allows franchisors to face the same challenges of any other online business: licensing, setting up and operating an e-commerce platform and business, including fulfillment, marketing, and online customer support.

On the surface, this model seems like an easy way to achieve e-commerce deployment at the franchise level. But franchisors should be wary of widening a franchisor-franchisee gap where online sales are perceived by franchisees as siphoning local sales from covered territories, especially if companies run exclusive online promotions.

Most franchisors have settled for this approach, and if your organization is leaning toward this model, it might still want to consider purchasing a shopping cart that will let it evolve toward the other models described below. Flexibility is your best ally.

The Pure-Play Franchisee Model

The pure-play franchisee model takes a dramatically different approach, as it transfers the task of handling e-commerce operations to
the franchisee.

In this scenario, the franchisor grants multi-channel rights to franchisees, which operate their own transactional web stores, maintain a local catalog, and run their own promotions. This model raises a number of potential challenges. They include a possible online sales encroachment over other franchisees’ licensed territories, to uneven customer experiences from one web store to another, to possible internet consumer confusion.

However, transferring most, if not all, of the investment and operational costs over to franchisees takes much of the e-commerce burden off the franchisor’s shoulders. And for a business model built around minimizing capital requirements for expansion, there’s a clear appeal to the “laissez-faire” approach, as it allows the most motivated franchisees to fund online efforts and compete for the global online pie.

To circumvent issues, this model requires making opt-in provisions in the original franchisee agreement, along with a separate e-commerce agreement containing all legal, technical and commercial specifications, including domain licence, content and intellectual property rights.

This model can be used as an incentive for franchisees to crack the online sales formula over an initial set period before granting an exclusive “internet franchise territory.” Both franchisor and the awarded franchisee then jointly operate the successful
web store.

The Shared E-commerce Model

The shared e-commerce model is a variation of the pure-play franchisor model. It considers the growing awareness and will of franchisees to be part of the internet enterprise, or at least to acknowledge, if only financially, the role brick-and-mortar representation plays in supporting the overall brand’s e-commerce strategy.

Simply put, the franchisor can propose a fixed or volume-based financial agreement with franchisees, in compensation for competing with physical sales to customers in the franchisees’ territory.

Additionally, franchisors can help franchisees become an integral part of the e-commerce strategy by integrating online sales within their local brick-and-mortar strategy, both upstream and downstream.

This, for example, can translate into “showrooming,” where franchisees can show customers at their physical location more product options, and complete online back orders through a centralized e-commerce website.

In all cases, this model recognizes the crucial role franchisees play in the franchisor’s online success. Although the latter keeps a firm hold on the e-commerce component of the global sales strategy, franchisees can contribute from pre-sales to local fulfilment and customer service.

The Distributed E-commerce Model

The distributed e-commerce model attempts to bridge the gaps between the above-mentioned models.

The idea is to position franchisees at the center of the e-commerce success rather than merely compensating franchisees for their contribution to online sales. In this scenario franchisees own and operate their own transactional websites on their own domain, taking charge of catalog management, local marketing, and customer service.

To the outside world, the franchisee becomes the true commercial arm of the brand, both in the physical and virtual worlds. In the backend, though, the franchisor exerts complete brand and pricing control, and limits orders to the franchisees licensed territory.

The franchisor also supplies global marketing power, top-down value-added content, and a centralized online catalog that can be automatically synchronized and optimized for local sales.

Franchisees can enrich their local web stores with additional content. And, when allowed by the franchisor supplying the technical environment, franchisees can supplement the standard catalog with their own products. This model, therefore, works well to support not only manufacturers’ retail networks but also hybrid franchising models and multi-brand franchisees with complementary products.

Developing an effective strategy for e-commerce does not come without intimidating challenges. Before organizations embark on the best online business model, they should weigh several factors. In addition to analyzing legal discrepancies between markets, the evolving nature of consumer habits, and tax regulations, companies should consider a framework that allows for constant adjustments at all levels.

As SeoSamba developed the first distributed shopping cart and CRM for franchise networks, we ran into some roadblocks. With this experience in mind, we urge franchises to remain flexible when sourcing their e-commerce frameworks. That ingredient, perhaps more than any other, is the key to the enduring success of their e-commerce endeavors.

Michel Leconte is CEO of SeoSamba, a high performance marketing automation platform that offers risk-free and turn-key franchise recruitment and local lead generation packages. He’s also a regular speaker at conferences around the world.