Agencies enjoy widespread popularity in the UK, rivalled only by franchises. But what sets these two business models apart?
Agencies have, over the years, been among the most efficient means of distribution and marketing for businesses – large and small alike. From multi-billion pound tyre companies to budding healthcare and wellness brands, businesses have successfully woven a network of agents to retrench a number of overheads like logistics, utilities and storage. Furthermore, agencies have helped businesses reap the rewards of indirect marketing through effortless ‘word of mouth’ campaigns.
The popularity that agencies have enjoyed over decades has recently been challenged by the franchising model of business . While it can be argued that franchising is a distant offshoot of agent-driven business models, there remain strong points of differences between the two. Before we discuss these differences between agencies and franchises, it’s important to clearly define what agencies are and how they operate.
What is an Agency?
An agency is a specially appointed business portal through which products and services are sold to the end consumer. The birth of agencies can be attributed to the logistics and capital related constraints faced by manufacturing businesses – especially the medium sized ones.
For example, a mid-sized copper equipment manufacturer may not have at their disposal enough capital to establish wider presence than their local district. Furthermore, using the traditional channels of distribution will only proportionately shrink their profit margins. A viable solution to this is to appoint agents in various markets to acquire newer customers at lower costs. Thus, agencies act as representatives of the parent business. In the recent years, many businesses – from Amazon to eBay – have successfully built online networks of independent ‘affiliates’ that use the agency model of business in a peculiar, 21st century way.
How Do Agencies Make Money?
Agencies have a straightforward revenue model that can be expanded laterally and vertically with little to no constraints. This revenue model, typically commission based, allows for greater incentives and lesser exposure to risks. Such business models also allow for added incentives in the form of ‘slab-wise’ commission structure.
For example, the commission afforded to an agency can increase from 1% for the first 1,000 sales to 1.5% for every subsequent sale.
Agencies vs Franchises
Franchises as well as agencies have limited to no ownership stake in the parent business. However, franchises are tied to the franchisor through the Franchise Agreement , while agencies are not wholly answerable to the parent business. Similarly, franchises do own some of the operational assets and all of the products and services being sold. On the other hand, agencies only facilitate the sale of products, without ever owning the products themselves.
Costs involved in opening a franchise are typically on the higher side than the costs involved in opening an agency of similar size. This is partly because of the licensing agreements that form the backbone of Franchise Agreements.
The revenue models for franchises and agencies greatly differ from each other. Franchises rely on sales that are channelled via brand promotion. The goodwill associated with the brand is often the prime force behind these sales. Agencies, however, rely heavily on the quality of the product and the innate knowledge of local markets. Since the revenue for agencies is directly linked to their sales performance, agencies tend to invest their profits into additional marketing.
Relationship with the Parent Brand
It is quite common for agencies to deal with a chain of distributors, instead of the parent brand or the manufacturer. So, their relationship with the parent brand isn’t as complicated as the relationship between the franchisor and the franchisee.
Agencies are best-suited for individuals or businesses that are familiar with a given market. Franchises, on the contrary, can be run successfully even by novice businesses, with enough help and support from the franchisor. If you are thinking about running a franchise business, the best time to get started is now, and the best place to guide your search is our guide to choosing the correct franchise.