It has been said that in business nothing happens until a sale is made. In franchising, this statement could not be more accurate. Most people in retail businesses have to be concerned with sales at the store level. The franchisor has the additional burden of ensuring that there is a steady flow of sales of franchises in the system.
The franchise system will not be profitable for the franchisor until a number of franchised units are operating. The first franchisees in a system will not realize the benefits of group advertising, group purchasing power or trademark recognition until the number of franchisees in the system grows. Therefore, the early development of an effective franchise marketing capability is a first priority in a new franchise system.
As with other aspects of a franchise expansion, the new franchisor will likely be very inexperienced in franchise marketing. Questions arise such as: Where does one find prospective franchisees? How can prospective franchisees be attracted to buy a particular franchise? What information should be given to interested parties? What should the franchisor look for in evaluating a franchisee? How do you “close” a franchise sale? Etc.
Often, the new franchisor has some prior relationship or familiarity with the first franchisees in the system. For example, existing store managers or other personnel can be a handy source of first franchisees. This type of franchise sale is not representative of the franchise selling the franchisor will ultimately have to do for the bulk of the franchises in the system. These first sales are sometimes based on special deals because of these relationships and because of the franchisor’s desire to “get the ball rolling.”
Eventually the franchisor must begin marketing franchises to unrelated and unconnected third parties. When this happens, the franchisor quickly becomes aware of the fact that franchise marketing is a specialized kind of marketing and not nearly as easy as first thought. Early mistakes in the marketing of the franchise can create future problems.
If the system grows at a modest pace, the franchisor, without prior franchise marketing skills, may be able to develop those skills as the system expands. However, the early mistakes such as choosing the wrong franchisees, making the wrong promises or giving away too much (such as granting too large territories) can be major headaches and costly to deal with in the future.
Even when a franchise becomes a hot commodity and the franchisor has little trouble attracting interested people, franchise marketing is a difficult task. Choosing the best from a large number of applicants can be very time consuming and will require sophisticated screening techniques and efficient closing procedures to keep costs in line and economize on scarce manpower.
For those new franchisors who cannot develop the needed expertise on their own, there are three alternatives. The franchisor can attempt to recruit the appropriate individuals skilled in this area, hire a franchise consultant to assist in developing a franchise marketing capability within the franchisor’s organization, or employ the services of an independent franchise marketing organization.
It can be difficult to locate experienced franchise marketing people willing to accept the salary structure offered by the newer franchisors. In addition, in the early stages, the volume of franchise sales does not usually justify the full-time attention of the franchise marketing specialist.
There are franchise consultants who will work with the franchisor in establishing a viable franchise marketing department within the franchisor’s own organization. This most often entails establishing the correct franchisee profile for the system, creation of the franchise marketing brochure, development of the appropriate screening techniques, preparation of a franchise application form and questionnaire, and the training of the franchisor’s staff in the techniques of franchise selling.
There are advantages in keeping this function “in house.” For one thing, nobody knows the particular business like the franchisor and his staff, which enables the franchisor to more accurately assess the various prospects. Further, misrepresentations during the selling process can be powerful time bombs capable of serious damage in the future and can be better minimized when the franchisor directly controls the selling process.
The main disadvantage in this approach is the cost factor. It is very difficult to accurately assess the true costs for each franchise sale, but there are direct costs such as advertising and travel, and indirect costs which include office overhead, salaries, time taken away from other duties and the consultant’s fees. The cost to a franchisor for each franchise sale can often be as high as $10,000 to $15,000. Each situation should be looked at on its own merits, but as a general proposition, proper “in-house” franchise marketing becomes more cost-effective as the franchise system grows.
Franchise marketing becomes cost-effective with time
The other alternative is to establish a relationship with a competent independent franchise marketing company. Some of these companies will provide a franchise sales service and charge a fee based on a percentage of the front-end franchise fee charged by the franchisor. Others combine franchise sales with consulting services for a combination of fee for services and commissions on sales. The commissions payable to such independent franchise marketing companies vary from 20% to 50% of the front-end franchise fee charged by the franchisor.
The fee charged by such independents will vary according to the degree of their involvement in the selling process. That is, the fee will be lower if the franchise sales company limits its activities to merely advertising for and obtaining applications from prospective franchisees. It will be higher if the company takes part in the entire screening and selling process right through to the final negotiations.
The granting or not of an exclusive to the marketing company will also influence the commission structure. In choosing an independent franchise marketing company, the franchisor should obviously look for competence in the area, but should also be concerned with choosing a company with compatible philosophies and attitudes.
Regardless of the franchise marketing mechanism chosen, the franchise selling process must be attended to with great care and attention. Even where the franchisor uses the services of a trusted franchise marketing organization, the franchisor must become intimately involved in the final selection process. The franchisor should devote the same efforts to selecting a franchisee as choosing a junior partner or key employee.
by Edward N. Levitt