What Is a Virtual Franchise, and How Is It Changing the D2C Space?

Virtual franchises have finally come of age. In the past, it seemed like you could count on actors and other celebrities to all of a sudden start a perfume company or a clothing company. A few opened franchised restaurants if they had a big enough following.

Nowadays you don’t have to be an actor or a celebrity. You don’t even need to start a new company and start building brick & mortar locations. Today all you need is a trendy idea, some cash, and to connect with the right people.

The business world is changing daily. With more people reaching for their smartphones or other devices to shop, order groceries, takeout dinners, and more, it is quickly becoming apparent that staying afloat in this world requires making some changes.

In the past, if you wanted to open a business that was part of a chain, you needed a brick-and-mortar building. Today, you can open a virtual franchise. The concept is the same; you partner with the franchise owner to have the opportunity to own and manage an online presence rather than a physical building.

So, how is this new business design affecting the direct-to-consumer playing field? The article here will help you understand this new business model, how it works, and how it can benefit you.

Table of Contents

  1. D2C Overview
  2. Virtual Franchise Overview and Advantages
  3. Combining Virtual Franchising and D2C
  4. So how does Virtual Franchising affect D2C?
    1. Virtual Franchise Models
    2. Pure-Play Franchisee
    3. Pure-Play Franchisor
    4. Shared eCommerce
    5. Distribution Model
    6. Virtual Franchises and Marketing
    7. Local or Not Local
  5. Conclusion

 

D2C Overview

Online shopping has, in the majority of instances, cut out the middleman when consumers purchase products. Companies store, market, and ship their products directly to consumers without the use of wholesalers and distributors, just to name a few.

The online company may use a fulfillment center to assist them with their operations, but it is not a necessity, only a convenience. D2C companies are more in tune with their customers than manufacturers who sell to brick-and-mortar stores. These manufacturers rely on statistics and information gathered by the stores, which are generalized and not as specific as the data a D2C business can collect from its sales.

On the other hand, the D2C business model has to accommodate sales of every size, from one unit to multiple units. Bulk products are not always an option. Joe Consumer doesn’t want a pallet of shoes, and he only needs one pair. This is a consideration for any business considering D2C.

Virtual Franchise Overview and Advantages

A virtual franchise opens up a whole new way of owning a business that has already created name recognition. Name recognition reduces many of the risks associated with starting a new business and the marketing involved in making the business profitable. The parent company has done the hard work; they have made a successful company with a brand that people know and want, you are buying a virtual presence in that company.

Virtual franchising allows you to be your own boss from home or anywhere you have an internet connection. The initial startup cost in a virtual franchise is much less than a brick-and-mortar franchise. For example, you don’t pay for:

  • The building and all associated costs, i.e., electricity, water, Internet
  • Equipment is minimal, a computer and printer are the essentials
  • No employee and associated costs for employees (unless you have an assistant)
  • Marketing, most franchises have already done the hard work, and omnichannel marketing is in place.

A virtual franchise is more adaptable and flexible than traditional franchises. You can set your hours and change as the world around you changes. If you need to move, your computer or laptop moves with you, making your business portable.

Combining Virtual Franchising and D2C

Combining virtual franchising and D2C is becoming the new, fast way to expand businesses with a mouse click. The recent pandemic and sheltering-in-place orders put a strain on small and large businesses, particularly those directly sold to consumers, like restaurants and apparel stores.

As more and more people opt to shop online, businesses are taking a new look at how to adapt to this online world. Virtual franchising is one easy way to get products to consumers without a middleman and at the same time offer business opportunities to other companies.

The most recognized example is in the restaurant business. In December, the NY Times published an in-depth look at virtual franchising using restaurants. This is the easiest and best way to explain virtual franchising.

Using the article for the basic idea and some fake names, here is the premise: one restaurant with name recognition franchises its product or products (in this case, a signature burger) to any brick-and-mortar restaurants that want to get in on the products. The parent company provides the franchisee with all the branded supplies needed for the burger, along with the menu and recipe. The franchisee makes and delivers the burgers when ordered through online food services. The parent company receives a percentage of the burger sales.

So, if you go online and want to order Joe’s Messy Burger, you find that you can get it delivered from DineandDash – what you don’t see is that the delivery app is picking it up at the local Martha’s Kitchen.

So how does Virtual Franchising affect D2C?

Virtual franchising opens the door for consumers to get the products and services they know and trust without leaving the comfort of their home and without missing out because the business isn’t in their area. For instance, you move out of the area where Joe’s burger is located, and you can’t get the burger. With virtual franchising, a quick web search says you can have it delivered; that’s the magic in virtual franchising.

D2C can be a challenging market; it’s not like sending products to stores where people window shop and buy on impulse. Online shopping is normally targeted; consumers typically have a specific product in mind when online shopping.

Virtual franchising is the best of both worlds. You own a business with a product that consumers already know and love. You don’t have to provide the marketing for the product; the franchisor has already done that for the brand.  You simply supply the product to the consumer.

Consumers don’t see or care where the product is coming from; they know they are getting the quality product that they associate with the brand name. Virtual franchising makes it possible for consumers to get more brands online than were available in the past, opening up a whole new world for businesses to add to their offerings and keep revenue flowing even during downtimes for brick-and-mortar shops.

The possible downside to virtual franchising and D2C is consistency in products. The franchisor, depending on how the franchise agreement is worded and modeled, may not always know if the product being delivered to the consumer is consistent with the product being marketed by the franchisor.

Ultimately, the franchisor is the one damaged by negative impact; most consumers don’t look beyond the name of the business to determine if the company is a franchisee. All they see is Joe’s Burger wasn’t delivered the way it used to be. This makes it important for franchisors to consider how they want to set up their franchise to protect their name.

Virtual Franchise Models

There are many different ways the eCommerce franchise business model can be set up; however, the four most common models are

  • Pure-Play Franchisor
  • Pure-Play Franchisee
  • Shared e-Commerce
  • Distributed e-Commerce

Each of these business models has advantages and disadvantages that should be considered before making a decision on which is best for your business plans.

Pure-Play Franchisee

The pure-play franchisor is a model where the franchisor retains possession of the online model, and the franchise has the physical business. In this model, the two parties are restricted from infringing on each other’s territory.

Pure-Play Franchisor

In the pure-play franchise model, the franchisee is allowed to have an online presence and be in charge of their eCommerce. The franchisee does not have to follow the franchisor’s marketing or sales plan.

Shared eCommerce

In this model, the franchisor maintains control, but the franchise has more input in the online presence.  Franchisees with a physical location work with the franchisor in maintaining eCommerce and supporting the marketing strategy. This method will keep the brand more uniform across the board than the others.

Distribution Model

This is somewhat of a mixed model. The franchisee is in control of their eCommerce website and operates it independently of the franchisor. This model gives franchisees the most freedom with their business. The franchisee can choose the items they want to include on their site and which channels they choose to market. The franchisor maintains overall marketing control and content.

No matter which virtual franchise model is considered, the final decision will have an impact on the end-user, the consumer. Virtual franchisees that stray from the brand can cause confusion in the brand’s reputation. As discussed earlier, consumers may make a decision to stop using a product or service based on their experience with a franchise rather than the original company. When setting up a virtual franchise, both parties should have legal counsel and know explicitly what is expected from each other.

Virtual Franchises and Marketing

Owning a virtual franchise does not mean the work is over. You need to market the franchise, and in today’s world of multiple devices, platforms, and social media accounts, you need to make sure you are reaching customers across every channel. Omnichannel marketing, as this is called, is critical for customer relations.

Your customers need to know that no matter what they use to access your site and buy your products, the experience will be the same. A person may be on their laptop one day looking at your products and then move to their smartphone later. If the experience is not seamless, it can have negative impacts, and you could lose sales.

If you are the franchisor and your agreement with your franchisees is that you maintain the marketing and online presence while the franchisee fulfills the orders, you need to make sure that the brand stays the same across all marketing campaigns. The customer does not need to know that there are multiple franchises under your brand.

Work with an agency that understands omnichannel marketing and will listen to your needs. Look at the best omnichannel marketing plans, such as Disney, and see how this works.

Local or Not Local

There is one aspect of the virtual franchise’s impact on D2C that is debatable. Many consumers want to shop locally and keep their money in the local economy. Virtual franchises make it somewhat difficult to determine if the business is local or not. Even though the product may be delivered by a local company directly to the consumer’s door, the franchise may be owned by someone hundreds of miles away.

Regardless of whether or not the money stays local, virtual franchises will continue to grow, and consumers will continue to shop online. In the end, D2C is a convenience that is not going to stop the average consumer.

Conclusion

Virtual franchising and direct-to-consumer eCommerce can be an ideal solution for business owners and consumers if the franchisor and franchisee work together to make sure customers have a seamless experience with consistency in products and service. It is vital to understand that the two affect each other in terms of customer review and retention.

These are the details that should be covered under the franchise agreement before setting up the franchise. Both sides need to be aware of what is and is not allowed and what the consequences of going outside the scope of the contract are in terms of the business.

Technology is advancing every day, and consumers are spending more online than ever before with no end in sight, especially in light of the recent pandemic. Utilizing the virtual franchise model to sustain business and to meet consumer needs is a win-win situation for the franchisor, franchisee, consumer, and delivery companies.

Virtual franchises have opened the door for more products than ever before to be available on the Internet and delivered to the consumer’s front door rather than the consumer having to travel to shop. These franchises also eliminate going to the brick-and-mortar shop only to discover that the product is out of stock.

It is not hard to see that virtual franchises are here to stay and that these business models can be modified to meet the needs of various business types. Working together is the key to a successful franchisor-franchisee relationship.

 

About the Author

For over 25 years, Jay Sung has been a passionate leader in driving sustainable growth through direct-to-consumer, e-commerce, and customer acquisition strategies. Mr. Sung oversees corporate branding and growth initiatives utilizing a continuously evolving toolkit of digital marketing strategies and technologies to drive innovative direct marketing programs for portfolio companies – from startups to Fortune 500 organizations.

Previously, Mr. Sung served as the Chief Marketing Officer for Guthy-Renker, a $1.3 billion industry leader in the direct-to-consumer health and beauty market. He is best known for developing consumer acquisition and marketing strategies for leading brands such as Meaningful Beauty® with Cindy Crawford, Wen® Haircare by Chaz Dean, IT Cosmetics™, and many others. In addition, he served as the CEO of such well-known brands as The Proactiv Company and Lot18.

Mr. Sung lives in Los Angeles, enjoying all Southern California has to offer. You’ll frequently find him reading the latest business journal, cooking, or practicing the piano to relax. Mr. Sung earned his Bachelor of Science degree in economics with a double concentration in marketing and accounting from the Wharton School at the University of Pennsylvania.

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