A major decision potential business owners must make when considering a franchise is determining what type of business they should run. There are thousands of brands and concepts, but franchises generally fall under two business models: “brick-and-mortar” and “service-based.”
Think about a franchise you know. Any franchise. Possibly one that offers services that you use consistently. Is it a hair salon? A fitness studio? A lawn care company? Maybe a moving service?
All of these are franchises, but in terms of a business model, the hair salon and fitness studio fall under one umbrella — location-based businesses with retail storefronts where the customer receives the service at a fixed-base location. Meanwhile, the lawn care company and moving service fall under another umbrella — service-based brands — which do not have a storefront or customer-facing real estate 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, as well as the criteria to build one, so you are more informed when choosing a franchise model.
1. Investment cost
Real estate is what usually drives franchising investment costs. The more real estate intensive, the greater the investment level. Location-based, brick-and-mortar franchises generally have higher initial investments. Building the retail space can be pricey. Picture a fitness studio — you need equipment, like bikes or pilates machines, but also a high-tech sound system, televisions, changing rooms, showers, etc. Not to mention the flooring, interior architecture (walls, stage, various rooms), trade dress and more.
On the other hand, a service-based brand doesn’t necessarily require real estate (some may even operate from a home office). Some service-based brands require storage space to house vehicles or equipment that are deployed at the customer’s location. Less visible and lower cost industrial spaces are ideal for these franchises. Typically, these spaces require few leasehold improvements compared to a customer-facing retail space.
So what can you expect the investment costs to be for each of these options for a single unit or territory?
While it isn’t definitive (there are always exceptions), common ranges are:
- Brick-and-mortar: $250,000+
- Service-based brands: under $300,000
2. Ramp-up time
Ramp-up time goes hand-in-hand with investment costs. The time it takes to ramp up to a monthly positive cash flow and establish repeat business both indicate important benchmarks for any sustainable business. In terms of speed, service-based brands are more likely to ramp up quickly because of a lower investment cost upfront and lower fixed overhead costs. Let’s consider a moving service brand. Once you have the equipment and employees in place, the month-over-month operation costs are more closely linked to revenue growth; thus, these models can often grow to cash flow more quickly.
Alternatively, a brick-and-mortar brand (like a salon) will have high upfront investment costs (retail space, individual stations, chairs, mirrors, hair wash/dry stations, etc.) and will likely take time to establish a strong customer base in a particular community. But they tend to have more repeat business and durable income streams over time.
3. Scalability
Brick-and-mortar businesses are typically more scalable. Once you have a single successful franchise, it’s easier to manage and build an empire by spreading costs over multiple locations. But remember, due to the costly initial investments, building costs will be similar each time you open a new location.
With a service-based brand, rather than building more physical locations to expand, you can expand your territory and drive more penetration within your territories. While this isn’t without additional costs (consider gas money, employees to keep up with demand, more frequent equipment maintenance, etc.), it requires incremental investments since 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
One area that is relatively equal in terms of usefulness and accessibility is technology. In recent years, technology has transformed the franchise world. Specifically, repeatable but necessary tasks have been streamlined and simplified through technology. For brick-and-mortar brands, it’s common to see customers scheduling services directly (hair appointments, fitness class bookings, etc.). For service-based brands, customers can book service calls, and employees can perform tasks in real time to keep business moving, such as ordering parts, creating estimates, etc.
5. Location risk
Location is key for brick-and-mortar franchise brands. It’s often a balancing act of finding real estate that is within an acceptable price range and in a popular location that creates consistent repeat business. You will be offering services in a fixed location, so the further away you are from the customer, the less likely the customer will travel to your location. For example, a fitness studio needs to be convenient for customers to come to your location three to four times per week. The more frequently a customer would ideally like to visit your franchise, the higher density is needed for the same market radius.
For a service-based brand, location is not as important for overall success. Since you or your employees will be traveling to the customer’s location, there is no site selection risk and you are free to penetrate deeper and deeper into a market. However, it is worth noting that, if you do expand to multiple territories, you may want to consider renting additional warehouse or storage space to optimize efficiency.
6. Recession resistance
Lastly, one factor to consider lies in the recession resistance of your franchise. Brick-and-mortar brands often offer more discretionary services. These are everyday services to be sure — hair care, nail salon, etc. — but they are not always considered everyday essential services. On the other hand, service-based brands often are essential everyday services that must be performed despite fluctuating market trends — think HVAC, plumbing, yard care or restoration.
At the end of the day, there is no one-size-fits-all franchise for every potential franchisee. But by understanding the basics of these umbrella categories, you can start to consider which business model type matches most closely with your business goals.
This article was originally published on Entrepreneur.com
David Busker is the Founder of FranchiseVision and a senior consultant with FranChoice, the premier national network of franchise consultants. David helps candidates exploring franchise ownership to set their criteria and matches them with the perfect franchise, then supports and guides them through due diligence and franchise signing. You can learn more about David at FranchiseVision.
