Discounted Franchise Fees: Is it a Good Idea?

The following article was written by franchisEssentials Guest Author, Joe Caruso. Joe is a respected franchise veteran with 19 years of extensive franchise management and development experience, spending the better part of his career in C-level positions, most recently as Chief Development Officer at Kidde Academy. He is quite active in franchise circles and frequently participates in LinkedIn franchise group discussions and at many franchise-related events from Washington D.C. to Philadelphia. Joe routinely shares his perspective and insight that has proven beneficial to several franchisEssentials startup and emerging franchise clients. We look forward to his continued participation and contributions.

Franchise Fee Giveaways!

Of course you’ve heard about the recent franchise fee giveaways that some franchisors have publicly announced. Is it a good idea? Does it diminish the brand to prospective franchisees? What does it mean to existing franchisees that invested at full price?

Certainly not charging a franchise fee might seem like an attractive offer to prospective franchisees. And franchisors that usually take this approach argue – “we make our money from royalties not franchise fees”. While that belief might rationalize the decision to forgo upfront fees it doesn’t sufficiently address the realities of franchise recruitment and the relative expenses. A franchisor might make “its money” from royalties, but it pays for selling costs, lead generation marketing, legal compliance and development sales/support personnel typically from upfront franchise fees.

Logic of forgoing upfront fees escapes me. It seems to me if your cost per sale is for example $15K, your franchise fee is $30K and you want to sell more franchises you could instead of giving away your upfront franchise fee you might invest more money in your franchise recruitment marketing budget?

What are your thoughts?

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4 thoughts on “Discounted Franchise Fees: Is it a Good Idea?

  1. Lowering the franchise fee is an admission of failure by the franchisor that it can attract financially qualified individuals.

    This by itself speaks volumes about the underlying business model – nobody with money need apply to be a franchisee.

  2. Hello Paul and Joe,

    What a fantastic conversation starter. Understanding that much depends on the nature and entry cost of the franchise, here are some of the things I’d be considering questions like these:

    Is price the real problem if the network isn’t attracting enough prospects or conversion rates are low? Perhaps the market has changed or it could be to do with the offering, the total package? Rather than focus on price, how can we make the offering so profitable and attractive to today’s buyer that fewer leads are needed?

    And if entry price is the problem then we should look at the whole package and the efficiency of the franchisor not simply the franchise fee.

    Different marketing might be a solution, however a decision ‘spend more $’ to get the same target level of sales simply increases the cost base of the system. That money has to come from somewhere – so what is going to be cut: services or franchisor profit? Either is likely unattractive. And as the payoff through royalty comes over the long term there are risks for the overall model if unit growth does not occur.

    In terms of lead gen, it seems there’s a huge opportunity for franchises to go on-line to connect with prospects by sharing more of what’s going on in the network – giving a real taste of the franchise community. It’s low dollar cost and seems perfect for building a pool of interested propects (though of course it’s a long term strategy). I’d like to see more of this from C-suite execs and franchisee evangelists.

    Also, I believe one of the issues for prospects is safety/ risk reduction for prospects. Franchises that provide full (attractive) financial performance representations (revenue and expenses) will have a better opportunity to convert. Plus, this places franchisor attention on the long term viability of the system and is a win for all.

    Post GFC we can’t assume things will work the way they did before. We all need to look at our business models with fresh eyes and not apply the old metrics without thought.

    Perhaps, rather, we can consider how we can make systems work (for all) with fewer prospects, fewer new franchises, in a world where strong sustainable profit margins are critical, risk profiles have changed and where transparency is on everyone’s mind.

    Thanks for starting this conversation.

    Kate | @kategroom

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