CHAPTER 16Franchise Marketing Channels

Part 4: Additional Perspectives on Marketing Channels

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Objective

Franchise channels as a particular type of marketing

channel• Important and growing channel type

• Franchise channels have huge and growing role in making products and services available to tens of millions of consumers.

• Nature of the relationship among channel members is unique – franchisees are captive

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Objective Key Franchise Concepts & Terms2

Franchise: A legal agreement between two independent

parties whereby one of those parties grants a license to the

other party to sell a trademarked product or service.

Product Distribution Franchise: A licensed product (or

service) that can be sold by the franchisee. (e.g., GM and

Ford)

Business Format Franchise: A licensed product or

service, but the franchisor also provides the complete

system or format for operating the business. (e.g.,

McDonalds)

Key Franchise Concepts & TermsSingle-Unit-Franchise: In this type of

structure, the franchisor grants the franchisee

the right to own and operate one unit. This is

the most common and simplest form of

franchise channel structure.

Multi-Unit-Franchise: Under this structure,

the franchisor grants the franchisee the right to

own and operate more than one unit at the

outset of the relationship.

Key Franchise Concepts & Terms

Franchise Fee: A franchise fee is typically a

one-time flat fee paid by the franchisee to the

franchisor usually when the franchisee signs

the franchise contract.

Royalty Fee: Royalty fees are required

payments by franchisees to franchisors in the

form of regular and continuous royalty fees for

as long as they hold the franchise.

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Objective Scope and Importance of

Franchise Channels

By 2005 the total output of franchise channels measured in dollars

• was almost $881 billion per year,

• accounting for 4.4 percent of the private-sector output of the United States,

• composed of over 909,000 franchise business establishments, with

• 11,029,000 jobs provided compared to 8,995,000 jobs from durable goods manufacturing

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Objective Rationale Underlying Franchise

Channels

Advantages for Franchisor to Franchise:

1. Capital advantages

2. Potential to reduce distribution costs

3. Possible high level of managerial motivation fostered by franchising.

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Objective

Disadvantages Associated with Franchise Channels

Disadvantages for Franchisor to Franchise:

1. Limited flexibility of the franchisor

2. Overly high franchisee expectations,

3. Increased governmental scrutiny by state and federal regulators.

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Rationale Underlying Franchise Channels

Advantages for Franchisee to Franchise:

1. Uncertainty is reduced

2. Often offer well-known products or services

3. Many franchisors offer initial and continuing assistance to their franchisees

4. Relatively inexpensive way to start a business

5. Prospects for adequate returns often higher than is the case for independent businesses

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Disadvantages for Franchisee to Franchise:

1. Limited independence of the franchisee

2. Royalty fees

3. The negative halo effect – reputations and images of multiple “businesses” are connected

Disadvantages Associated with Franchise Channels

7-Eleven, Inc. operates the world’s largest convenience store retailer franchise. In business for over eight decades, 7-Eleven has thousands of stores all over the world and boasts that it has an instantlyrecognizable, world-famous trademark. Yet 7-Eleven says that it can provide prospective franchisees with the opportunity to own a true neighborhood business. 7-Eleven believes that its ordering system, POS scanning system, and other technologies enable franchisees to have customized product assortments that reflect the localized needs and preferences of customers. Thus, franchisees can always have the products customers want whenever they step into a local store. 7-Eleven also promises to prepare its franchisees for success by providing initial and ongoing training, financial assistance, payroll services, twice-a-week consulting services and other support.

Does 7-Eleven’s model live up to the statement often heard in franchising circles that: “Franchising lets you go into business for yourself but not by yourself?” Discuss.

Discussion Question #2

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Channel Design & Franchise Channels

• Franchise channels offer a high degree of control

• Permits independent highly motivated channel members

• Feasibility contingent on industry and/or products & services being offered

Channel Management Implications of Franchise

Channels

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Selection of Franchise Channel Members

• Objective selection criteria such as financial strength and experience

• Franchisor paradox: Need franchisees who are independent and creative on one hand and have the capacity to take direction on the other

Channel Management Implications of Franchise

Channels

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Motivation of Franchisees

• Differs from motivation of channel members in conventional channels

• Need to convince franchisees to adhere to the franchise plan

• Franchisor should make effort to understand franchisee needs and problems

Channel Management Implications of Franchise

Channels

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Managing the Marketing Mix in Franchise Channels

• Pre-packaged nature of franchise model predefines much of marketing mix

• Marketing mix less fluid than in conventional channels

Channel Management Implications of Franchise

Channels

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Conventional Channel Factors to note:

• Degree of control

• Importance of channel members

• Nature of the product

• Number of channel members

In franchise channels, “degree of control” &

“importance of channel members” are key

Channel Management Implications of Franchise

Channels

H&R Block is by far the largest franchisor of tax preparation services with over 4,500 franchisees. Startup costs range from about $35,000 to $100,000 and there is no franchise fee. But the royalty rate on all revenues generated by the franchisees is 30 percent—one of the highest rates in franchising for any type of franchise business. H&R Block franchisees are not permitted to operate from home or even in kiosks in stores and malls. Instead, they must operate from a store or office format. Franchisees receive substantial training from H&R Block based on the expertise and systems developed by H&R Block over half a century.

Is H&R Block’s royalty rate too high? Why or why not? Discuss in terms of what support the franchisor offers to the franchisee, the nature of the service provided by the franchisee, and the franchisee’s obligations to the franchisor.

Discussion Question #5