Ch. 16Franchising

as a Marketing Channel

Major Topics0. Basics

I.Why?

II.Before you sign up as a franchisee

III.A Franchise Contract*

IV.The Plural Form**

V.Concerns and Challenges*

12 - 3

A system of marketing and distribution where an independent businessperson (the franchisee) is granted the right to market the goods and services of another (the franchisor)

©McGraw-Hill Companies, Inc. 2002

Major Challenges in Most Service

Businesses

1. Intangibility of Services: Differentiation through customer contact, decor, atmosphere, and other tangible cues.

2. Discretionary nature of service purchases: Convenience by location and hours of operation

3. Labor Intensity: Interaction with customers

4. Quality control is harder

5. Focus on operational issues

6. Small Size of many service firms

1. Easy capital generation and higher motivation

2. Expand to Multiple locations Easily3. Standardized systems and

procedures4. Training improves labor and

management skills5. Marketing is centralized and

promotion is system-wide6. Service tangibility is increased.

Product/trade name franchising◦Ex)

Business format franchising*◦Ex)

12 - 6©McGraw-Hill Companies, Inc. 2002

12 - 7

Combination of Three Relationships:

Legal Operations

Marketing

©McGraw-Hill Companies, Inc. 2002

12 - 8

©McGraw-Hill Companies, Inc. 2002

I. Getting Help through the Start-Up Package I. Site SelectionII. Facility DesignIII. Lease NegotiationIV. Operational ManualsV. Management TrainingVI. Employee Training

II. Getting Ongoing Supports from the ChainI. Field SupervisionII. Management ReportsIII. Merchandising and Promotional MaterialsIV. National AdvertisingV. Auditing and Record Keeping

Local market conditions Self-evaluation Investigate the franchise Study the disclosure document Check out the disclosures Question earnings claims Obtain professional advice Know your legal rights

12 - 9©McGraw-Hill Companies, Inc. 2002

12 -

10

• Nail the Numbers. Franchisors should give franchisees a detailedstatement of financial conditions and expectations no later than twoweeks before any money is scheduled to change hands.

• Measure Management. Franchisees should seek and scrutinize disclosure forms that describe at least the last 10 years of work historyof each of the franchisor’s officers and key managers.

• Cross-Examine Current Franchisees. Prospective franchisees should obtain a list of all franchisees, including those who have recently left. Randomly calling and visiting several will keep prospects from being steered toward franchisor favorites. Serving several days as an apprentice in one or two stores will yield tremendous insights.• Comb the Contract. Franchise agreements establish control

over most aspects of the business. Attorneys with franchising experience should look for inequities in the agreements and help franchisees secure a better deal.

©McGraw-Hill Companies, Inc. 2002

12 -

11

©McGraw-Hill Companies, Inc. 2002

I. Define Rights and Responsibilities Giving and Taking Hostages

II. The Payment System: Two-part system (Initial Investment + Royalty*)

III. Who will be the Landlord?

IV. Termination Clause

12 -

12

©McGraw-Hill Companies, Inc. 2002

1. Modeling: Chain Franchisees

2. Socialization: Chain Franchisees

3. Interfirm Ratcheting: Chain and Franchisee

4. Mutual Learning: Chain and Franchisee

Franchisees:◦ Belief in guaranteed profit◦ Loss of franchise◦ Encroachment◦ Loss of independence◦ Conditions in franchise

agreement◦ Spending promotional

dollars◦ Pricing structures

Franchisors:◦ Profits◦ Franchisees that “sit

on a market”◦ Accurate reports of

gross sales◦ Franchisees that

reveal trade secrets, strategies, etc.

12 -

13

©McGraw-Hill Companies, Inc. 2002

1. Survival

2. Gaining and Keeping Cooperative Atmosphere

3. Inherent Goal Conflict: Sales Focus versus Profit Focus*

TYPICAL SALES-TO-PROFIT RELATIONSHIPS FOR FRANCHISORS AND FRANCHISEES

Profits

Sales

Franchisor

Franchisee

S*B*

Adapted from Carmen and Klein (1986)