Question

Explain the advantages a franchisor gains through franchising which are related to 'expansion risk' and 'cost advantages' that result from extensive buying power.

Answer 1

1. Reduced Expansion Risk: 
   • Franchising allows the franchisor to expand their business with minimal financial risk.
   • The franchisee invests their capital for setting up and operating the new outlets, reducing the franchisor's burden of investment and operational risk.
2. Cost Advantages from Extensive Buying Power: 
   
   • With multiple franchisees operating under the same brand, the franchisor can benefit from bulk purchasing of raw materials, equipment, and supplies.
   • This extensive buying power reduces costs per unit, ensuring economies of scale that benefit both the franchisor and the franchisees.