Defining Social Enterprise Franchising

Authored by: Carl & Andi Kosnar

WHAT IS SOCIAL SECTOR FRANCHISING?

Commercial franchising and social franchising are variations on the same basic strategy for expanding a business. They differ in three ways:

The type of the products and services offered by the business being franchised.
The profile of the target customer.
Core purpose.

Social franchised businesses, like those operated by traditional NGOs (nongovernmental organizations) are primarily developed to offer products and services that people need — not simply want — such as healthcare, safe drinking water, sanitation, clean energy, and education. These are social enterprises whose creation is targeted to achieve goals such as those set in the 2030 Sustainable Development Goals established by the United Nations (https://sustainabledevelopment.un.org/sdgs).

With the exception of the different profile of the targeted consumer, social sector franchises and commercial franchises are quite similar. In contrast to the customer who walks into a McDonald’s or a Marriott, the consumer targeted by social franchise systems often cannot afford to pay the entire cost of the goods and services they need. Because of that, social franchisors are usually unable to generate the royalty and other revenue and fees necessary to independently sustain the overall business.

Being independently sustainable is the hallmark of commercial franchising. That is the significant difference between social and commercial franchisors.

WHY USE FRANCHISING TO SCALE A SOCIAL ENTERPRISE?

A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social, and environmental well-being — this may include maximizing social impact alongside profits for external shareholders. What differentiates social enterprises from other organizations is that their social mission is more essential to their success than potential profit. Franchising is a way to achieve a social impact on a large scale because franchising achieves three key scaling elements that other methods of distribution usually do not -

It standardizes what people do so that when they perform services, they do it in a manner that achieves the result sought — such as effective quality care in the case of primary care.
There is something to replicate because the format of the business has been tested and operating procedures have been put in place. Scaling does not just mean opening more locations, but replicating a successful standardized unit.
If the first two are accomplished, then economies of scale may be exploited to bring down costs while standards continue to be met.

I stress these three elements because the root problem in poor countries is that many conditions, that we might find substandard in an industrialized world, are acceptable because they are unavailable or in short supply. Unlike in rich countries, where standards drive the quality of most things in commerce, it is often the mere availability of the product and service that drives purchasing decisions at the “base of the pyramid (BOP),” economically. The compliance with standards is what delivers the greatest social impact. In both commercial and social franchise systems, the following elements exist:

The franchisor licenses to a franchisee its brand, system, and methods of doing business.
The franchisee operates and manages their independently owned business to the brand-standards of the franchisor.
The end-user customer benefits from the consistency and quality standards set and enforced by the franchisor.
The business owner (franchisee) is selected and supported by the franchise system.
As an independently owned and managed business, the franchisee earns a living and creates equity for themselves and for their families.
The franchise system creates jobs in underserved communities.
The franchise system creates consumer brand awareness, and its capability to be effective and economically efficient can make it sustainable.

Even though the franchise system requires a funding source to overcome poverty at the consumer level, it may also require subsidies to support franchisee development. At a foundational level, just as with any well-structured commercial franchise, social franchises are designed, developed, and managed to achieve financial sustainability.

It is the endemic economic difference in the markets they serve that creates the challenge for social franchisors. Instead of living off of the royalty and other continuing fees paid by franchisees from the local sale of their products and services, the franchise system requires substantial economic support from donors or other economic sponsors until it can create critical mass and achieve internal sustainability. Even though social franchisors have the capability of achieving their goals more effectively than a traditional NGO, the economic realities of the market they share are the same.

WHAT COMMERCIAL FRANCHISE METHODS CAN BE APPLIED TO SOCIAL FRANCHISES?

There are multiple ways to apply commercial franchising to social franchising. Four common distribution models are:

Distribution of products.
Fractional franchises are add-on products or services to an existing business model.
Business format franchising, such as restaurants.
Technology-Transfer Licensing. However, proceed cautiously because there are laws that govern the franchising model and define what constitutes franchising; some agreements end up being viewed as franchising by government agencies that oversee franchising service providers and products, even if they were originally drawn up as licensing agreements.

Each method is used to achieve different outcomes and to maximize local opportunities. These models can be used concurrently depending on the needs and opportunities available to the franchise system. What differentiates the use of each are the intended stakeholder and the intended benefits, including: the consumer, the franchisee, and the franchisor. Additional stakeholders that may benefit can also be donors, investors, bankers, and other financial institutions, including local governments.