Economic Model Review

A periodic review of a franchise system\’s economic model is important – to ensure it is optimal, for both franchisor and franchisees alike, for the future.

Examples of key fee areas or sources of revenue under consideration should include:

• Initial franchise premiums or fees
• Franchise royalties
• Wholesale margin and/or supplier rebates
• Local marketing fees
• Group marketing fees
• Renewal fees
• Assignment / transfer fees
• Other fees, such as conference levies, technology fees, and so on.

Decisions on fees and how they are calculated are important as they impact franchisor and franchisee returns. Economic model decisions go on to have far-reaching consequences, typically at least the duration of the current term of the franchise agreement and, in many cases, the total combined terms of the franchise agreement.

It is also important to note that decisions on the economic model can impact incentives and the nature of the franchise relationship. Depending on how configured, an economic model can breed mistrust – an issue often exacerbated by high franchisor rebate / margin retention.

For some companies, they simply didn\’t get it right to begin with – often because they lacked a proper detailed assessment conducted by capable specialists. Put simply, many companies suffer from not conducting a Franchising Feasibility Assessment prior to franchising in the first place.

For many companies, circumstances and strategies commonly change with the passage of time – either necessitating or making reviewing the economic model more important. Examples include recognition that:

• Some routine or specialist tasks, previously a franchisee responsibility, are better completed by the franchisor where scale efficiencies can accrue and/or capabilities are best provided. This may necessitate, for example, a need to increase fees that may be more than offset by reduced franchisee staffing or improved task performance.
• New products or services added have different margin structures to those historically promoted as part of the franchise. Particularly where new products or services comprise lower-margins, the need for a differential / revised fee structure is increased.
• Increased franchisee monitoring support is more optimal for franchisee and This is a common issue we have addressed, often following a comprehensive Franchise System Review, and sometimes necessitates an increased franchise royalty and/or other related fees.

Bottom line, franchise systems need to be looking at ways to optimise and in many cases adapt their business models to secure a brighter future – for franchisor and franchisees.

Regular economic model reviews are important and in some cases absolutely vital. But always, if changes are needed, considerable planning must be undertaken – as change to a franchise system’s economic model is a ‘substantial’ and often unpopular change.

Relevant questions:

• When did you last formally review your franchise fee structure to ensure it is optimal?

About the Franchising Best Practice 500 Series

This is part of a series of franchising best practices. Franchize Consultants is sharing and publishing these best practices weekly for the betterment of franchising. We know that better knowledge and execution of franchising best practices leads to bigger and more valuable franchisor and franchisee businesses.

We have assembled the first 40 best practices into The Best Practice Handbook, which is available for purchase.