For the past twenty years the key concepts of
franchising have been under going evolution and transformation. Management 2000 has had the good fortune of
being in the middle of those developments.
This involvement has helped us understand the importance of these
concepts for franchise companies. It
has resulted in our commitment to helping companies understand franchising so
its full power can be unleashed. The
purpose of this article is:
1. To
establish unified thinking about
franchising and the language that must reflect that understanding.
2. To
identify how a company can use franchising as a strategy to accomplish its
Mission.
3. To
recognize the implication of these changes for companies that franchise and for
their franchised partners.
Unified
Thinking
Since it’s
my own business, I can do what I want with it.
I’m the best judge of knowing what I ought to do.
This seems logical, doesn’t it?
However, such a response in a franchised organization
is the result of a misunderstanding of franchising, which is often the root of
many of the problems that beset franchise companies today.
To be successful in a franchise system, all those
involved, the home office, its staff, the franchise and its employees, must
have a collective understanding, that is, unified
thinking, about franchising, what it is, why it is, and what it seeks to
accomplish.
Purpose of
Franchising
Franchising is a marketing and distribution
system. Sometimes the system
distributes a product. Sometimes the
system delivers a service. But always
the
product or service is delivered as an experience to
the customer. Always it results in
customer perceptions of whether or not they want to do business with you again
and whether or not they will speak well of you resulting in new customers.
Individual, independent companies also deliver
products and services; but the strength of franchising is in numbers:
1. The
more products and services that are delivered under the same name, the same
Brand, the greater the consumer recognition.
2. The
greater the name recognition, the more likely the consumer is to use or
patronize that Brand or service when they have a need.
3. The
more likely consumers are to use a Brand name product or service, the faster
that Brand can capture the market (increase market share).
Purpose Of
Business
If you were asked,
What is the
purpose of a business?
You would probably say,
To make money, or To make a
profit.
But money and profit are the result of something else.
That Asomething else@ is customers.
That’s the purpose of business:
To get and keep customers. Thus, it can be seen, the purpose of
franchising and the purpose of business are the same: To get and keep customers.
Purpose of
A Franchise Company
A company’s Mission Statement defines who and what it
is, why it is in business. An example
of a Mission Statement is:
To Win
Customers For Life
Thus, it can be seen, the purpose of franchising, the
purpose of business, and the purpose of a franchise company is the same: To get and keep customers.
Function of
Brand
Brand repetition is a critical requirement for
creating a real or perceived image in the minds of consumers about what a Brand
name stands for. (McDonald’s knows this.
According to Nation’s Restaurant
News, they spend $3.2 million a day
on marketing.)
Franchisees don’t automatically perceive that
widespread availability of the Brand promotes their own interests. They are more likely to see it as advancing
the company’s interests, rather than their own. But if you understand the marketing objective that is, capturing
market share, then, rather than viewing fellow Franchisees as competitors, you
can see each one as a strategic-partner committed to establishing the company
as the dominant Brand in all markets entered. Focusing on the marketing
objective of franchising lets you cultivate an understanding of ‘growing” the
company system wide. By increasing
consumer awareness, when customers need or want to buy, your company is at the
top of their minds. This is how the
Mission Statement is fulfilled.
Retention is increased, frequency increases, customer satisfaction is
raised and referrals are made; sales are made; and everyone enjoys a greater
return on their investment.
Because of Brand recognition, customers develop certain
expectations, about the quality of the product, the caliber of service, the
professionalism of the staff, and so on. The objective for a franchise company
is to meet these expectations by managing them. Every time. The way they do this is through consistent application
of the same operating system, wherever a unit is located.
An operating system is a way of doing business that, over
time, proves (or disproves) it can work. When everyone in the system,
everywhere in the country, is following the operating system, the public’s
experience is reinforced. They come to understand there will be no surprises
when they buy. They know they’ll
receive the same quality and service, no matter which office they call, or
store they shop, or service they buy.
It is in every franchise’s best interest to observe the
operating system, every time. Not just
the first time, or not just until they “have it down,” but every time, not for their sake, but for the customer’s sake, because it fulfills the
buyer’s expectation. Following the operating system increases the value of the
Brand because every time a customer has an experience with it, it’s positive.
It is also important that within the franchise system, every
franchise has confidence that everyone else
in the system is conducting business in exactly the same way, so anyone who
uses your services, no matter where they are located, has the same experience
with every Unit they frequent.
Language
shapes behavior. That means, the words you use reflect the way you think. The way you think determines how you
act. The language used to discuss
business and franchising shapes the relationship between the Franchiser and
Franchisees.
Franchisees
don’t own the franchise. They are licensed to use the Brand and
operating system for a period of x-number
of years. In fact they are not just
licensed to use in the sense of an option to use but in the sense of being
obliged to use. When you hear words
like buy, sell, and own, be
careful. It’s sales talk. Most of the
literature you read also uses this Aselling@ kind of terminology. But let’s
explore the effects of the “buying” and “selling” language and look at its
impact.
! If I sell
you something, that means you bought it.
! If you
bought it, you own it.
! If you own
it, you can do what you want with it.
These “buy”
“sell” words create an “owner” mentality. Once someone believes they “own” the
franchise, it leads them, understandably, to believe the business is theirs to
do with what they want. Included in,
doing what they want, often means making changes in the operating system,
which, in turn, distorts the company’s whole purpose in having a franchised
organization in the first place.
The “owner” mentality has
other effects, as well. It leads people
to believe that because they “own” the franchise, everyone else is a
competitor, not just the true competitors, but fellow Franchisees as well! This distorts another purpose of having a
franchised organization, widespread name recognition for purposes of market
dominance.
If Franchisees believe they
are independent, and independent “owners” at that, they don’t see themselves as
a part of a whole. Since they don’t see themselves as part of a whole, why
should they care what others are doing?
Why should anyone care what they
are doing? Compliance is not an issue
for the Franchisee. It’s only an issue to the Franchiser.
Of course, this approach
puts the field staff at a distinct disadvantage. It obliges them to come to
terms with Franchisees about how they should be “running” their business, the
very business the Franchisees believe they
own!
Understandably, Franchisees become resentful. They feel,
Who is this guy? What is he doing in my
store? How can he possibly know what I
should do to run my business?
Franchisers---yours included---cannot
“sell” a franchise. Franchisers grant licenses
to Franchisees, much the way the state grants you a license to drive. It is very instructive to look at the
concept of things licensed: lawyers,
doctors, pilots. All licensed. Why are they licensed? The licensing body when they issue a license
has a minimal assurance the customers of the one licensed are either protected
or assured of a minimally correct product or experience. All licenses have certain things in
common. They are: for a specific period
of time, renewable, not able to be sold without the licensing body’s approval,
involve systems to follow, initial training, and most importantly the goal of
licensing is to fulfill the goals of the licensor. The goals of the one licensed are not the primary concern of the
licensor. If they get what they want
and need as licensees so much the better.
The fact that a franchise
license is not sold and the Franchisee does not buy the license is supported by
the following facts:
!· A Franchisee cannot incorporate using the
Franchiser’s name because the Franchisee does not own the name.
· Should the Franchisee want to exit the business,
the franchise license is not sold; rather, the franchise license is transferred
upon approval of the franchiser. The Franchisee enters into a separate
transaction to sell the assets of the business (such as the equipment).
· The franchise agreement has a stated term and must be
renewed if the Franchisee is to continue in business under the franchiser Brand
name. If a Franchisee owned the license, it would not need to be renewed.
The franchiser owns these things: The Brand name, the operating system and the
markets they select to enter. The
franchisee owns their company. But
instead of operating it as an independently branded unit, chooses instead to
use a dba, your name. For a fee, the
Franchisee is licensed and obligated to
use your Brand name and operating system in a defined and proscribed way, in a
defined market, for a designated period of time, to develop market share for
the franchise system and to accomplish your business goals while pursuing their
own personal and business goals through the investment they’ve made.
Franchisers have lost sight of this entirely.
In theory the Franchisee, using the Brand and
operating system, is able to get and keep more customers and, thereby, increase
revenues, more than they could had they not used the Brand name and the
already-established operating system.
In other words, they could have hung out a shingle saying “Karl’s
Karpet,” but they will probably do better using a recognized name like yours.
If a franchisee doesn’t own the franchise, just what
is the relationship with the Franchiser? The franchisees are strategic-partners
(partners in your strategy) in an interdependent relationship in which both
work for the same business objective, which is to dominate markets by getting
and keeping customers. They are
self-employed and in business with your company’s marketing and operating
philosophies, strategies and systems.
These include an operating system, a Brand name that has value in the
consumers’ eyes and ongoing support to help build the business.
Although the Franchisee is ultimately accountable for
the decisions made that determine the success or failure of their individual
investment, the Franchiser provides them with resources (time, people, and
material) to help them think the way they need to think to make their
investment successful.
The Franchiser’s success is coupled with the
strategic-partners= consistent delivery of the operating system. The
strategic-partner’s success is coupled with the Franchiser’s continual
improvement of the operating system, staying tuned to what customers want,
conducting research and development, strengthening Brand awareness, and
providing competent support services to help them build and grow their
business.
Without the
correct understanding of franchising, it is easy to be unclear about the
various fees. Unless a clear purpose is perceived, Franchisees conclude there
is no purpose. Understanding the fees
is another area that requires unified thinking among candidates, new
Franchisees and long time strategic-partners.
The initial franchise fee
is placed in a general fund and used to pay some of the expenses of the
business operation, all of which, and this is a key point, protect the Franchisee’s
investment:
· The expense
of selecting quality Franchisees who will work hard to develop the Brand and
grow the system.
· Initial
training of Franchisees so they understand what it means to profitably operate
their business, which ultimately contributes to the profitability of every
other franchise.
· The ongoing
legal expenses involved in protecting the integrity of the franchise, including
registering and protecting the trademark and trade name.
· Accounting
fees.
· Conducting
ongoing research and development of new products and/or services.
· Opening
marketing assistance.
· Employee
salaries and benefits.
· General and
administrative expenses.
· Field
Consultations.
The true reason for royalty fees is one of the most
misunderstood aspects in all of franchising. Franchisees often believe royalty
fees are paid for the ongoing support supplied to them by their Consultant and
the company. They mistakenly take this as an indication of a guarantee that the
company and Field Consultant will make them a financial success. They look on the franchiser as their vendor;
“what are you doing for me lately.”
Sooner or
later, however, the Field Consultants start to look like the most expensive
consultants the Franchisee has ever known, either because the Franchisee
perceives they are no longer needed or because the franchise isn’t making
enough money to warrant having them. As long as Franchisees have this
perception about the purpose of the royalties there will come a point at which,
no matter what or how much the Coordinator does for the Franchisee, it’s not
enough. This does harm to the long-term Consultant/Franchisee relationship.
Let’s look
at the real purpose of the royalty fee specified in the franchiser franchisee
agreement. Royalties are paid because the franchises, both system wide and
locally, are able to generate revenues during the period just ended, due to:
!· The Brand’s ability to drive customers to the units
!· The Operating System’s ability to satisfy customers
and help the franchisee to operate efficiently and effectively
!· The training and support and vendor systems which
allow economies of scale and savings
Think again
of McDonald’s: If there were some small
hamlet in some small state that had no
McDonald’s, and a sign appeared saying, “McDonald’s Coming,” what would be the
effect on that potential Franchisee’s business? Customers would be lining up (in their minds) even before the
restaurant broke ground! That’s the
power of system wide Brand recognition.
The
franchise agreement states what the royalty is and when it’s due. There is no
statement connecting the royalty with any services provided, because that’s not
what it’s for. This royalty does not come from the franchisees’ money. The franchiser’s and the franchisees’ money
comes from the customers. The customer
pays both parties. The franchisee does
not pay the franchiser. The franchisee
remits part of the customer’s money to their strategic-partner, the franchiser.
The last area of unified thinking among Franchisees,
and the most important one to your future success, is in creating a
customer-driven culture.
The best franchise company will realize the key to
its success lies with making the customer experience the center of everything
it does. A customer-driven company
(Disney, Ritz Carlton, Nordstrom’s, Saturn, Mercedes, British Airways,
ServiceMaster, CitiCorp, Southwest Airlines) understands their only security in
the future is the customer and their perceptions of the service
experience. To this end there are
emerging new key operating ratios.
These new operating ratios make measurable the customer centered
philosophies that emerged in the 1980's and 1990's. These will replace, in importance, existing key operating
ratios. These new key operating ratios
are possible because of technology.
Here they are:
· The number of new customers system wide and at each unit