Franchisees are sometimes resistant to franchisor promotions that include lower pricing. The reason is fairly straightforward and it's a situation I've faced with franchise programs I've managed.
Since a franchisee pays a royalty based upon a percentage of sales, franchisees are protective of their gross margin since the fees are a true fixed cost. For example, if a franchisee pays a total of 9% in royalty and advertising fund fees as a percentage of sales, this is a fixed cost of doing business. If however, lower pricing reduces the franchisee gross margin percent but increases sales a franchisee will pay more fees to the franchisor and could generate less gross margin dollars. A franchisee needs to increase sales to a point whereby the added gross margin dollars make up for the increased fees paid to the franchisor. It's this risk of paying more royalty fees while receiving less gross margin dollars that causes some franchisees to resist reducing prices to increase sales. In order to overcome objections on the part of franchisees some franchise agreements have provisions requiring franchisees to participate in promotions and advertising campaigns. Absent this provision franchisees are free to opt out of promotional pricing programs. I would point out; that there are some franchisors that have a declining royalty schedule related to sales however, these arrangements are the exception.
Recognizing this relationship between pricing, franchisee fees and gross margin dollars a franchisor can configure a program that can provide an incentive to franchisees to participate in price promotions. As a result participation should be higher and franchisees will appreciate the concept.
An effective program is to allow franchisees that participate to receive a rebate of 50% of their additional royalty payments during the promotional period. In other words, if the franchisee pays $300 in added fees they would receive a rebate of $150. This rebate percent could be higher or lower based upon the anticipated reduction in gross margin dollars that a franchisee would receive or depending upon how aggressive the promotional pricing is. The key objective is to return some portion of incremental fees that the franchisees are paying as a result of achieving higher sales. Under this scenario it's a win-win for both franchisor and franchisee!
Following are variations on this approach:
· Waive advertising fund payments during the program period
· Reduce the royalty fee by 5-10%
· Provide a rebate to franchisees that reach a minimum sales threshold
· Share the reduction in franchisee gross margin dollars resulting from the promotion
· Have prizes for highest sales increases
Historically, franchisees are often reluctant to participate in marketing programs that reflect reduced pricing. This aversion is based upon the fundamental relationship between franchise fees being a fixed percent of sales and franchisee gross margin being variable. To overcome this factor, franchisors should be willing to implement marketing and sales programs that invite more franchisee participation.
