Article was published in Business Franchise AU & NZ Magazine Jan/Feb 2014
Where should I go?
How do I know my territory is sufficient to support me? Do I get what I am paying for?
Service franchises have a great range of entry costs, from free entry and a high level of royalties, to a high entry cost, with lower royalties, or a medium entry cost and a flat weekly or monthly payment. No matter which model you are working with, over a period of time you can estimate the payments to your Franchisor, and is this value for what you receive?
In the Service businesses, we often see large areas set out with very strict boundaries. The Financial institutions such as ANZ, Mortgage Choice, Aussie and CBA all have models like this, as they then allocate leads, and it needs to go to the right franchisee (who has paid for that area).
Often lower cost entry systems have less rigor around their territories, OR they have very well defined territories, and a more open policy in that only a certain number have ever been sold, and you can exclusively work your own patch, and then still work across any unallocated territory. The question comes though is what if they ever sold all their territories – would the franchisees actually have enough work to survive?
Many of the multi-disciplinary franchise systems like Jim’s and VIP tend to follow this model.
Within service franchises, there are the indoor ones such as:
If you like the outdoors, think of yourself as a bit “macho”… sun, rain, wind as well as an occasional day spent in the beautiful outdoors, maybe one of these is for you?
The Demand curve
The demand for household services is definitely stronger in higher Socio Economic areas according to our research and experience.
Smart Franchisors move away from what we call the “Beer and Pizza” map to a proper, statistical based system so we can give each franchisee similar opportunity within their territory
The “Beer and Pizza” map has traditionally been done with a black text on a large map, strongly influenced by some early entry, self centered Franchisees drinking beer (or red wine) and eating Pizza at the Franchisor’s expense. The down side of the Beer and Pizza map is that no data has been used, just a keen eye, and normally a group of self fulfilling designers!
Once we know which Drivers are good for the business, we can calculate a score for each post code. For example if 1 household was likely to spend $10 on your service on average, then a household in a high demographic area may be considered to spend $15 per household, and a household in a lower demographic area may spend $5 per household If each post code was equivalent in the number of households, say 10,000, then the higher area would offer you $150,000 of potential sales, whilst the lower socio economic area would only offer you $50,000 of potential sales.
Therefore if we decide to do this across the total market such as all of Melbourne, we may conclude the total market offers us 1,200,000 households at an average of $10 per household = $12,000,000.
Being a good franchise system, we may have concluded we want 30 franchises across Melbourne, so we want each franchise to have $400,000 of potential.
To balance the potential so each territory is similar, in a high socio economic area, when we add the post codes together to come up with $400,000 of potential, it may take 29,000 households, and in a lower socio economic area, we may need 50,000 households to give the same amount of opportunity for the franchisee.
This type of calculation can be done for any market, and rather than trying to adjust the franchise fee for a higher potential area, compared to a lower potential area, we believe it is better to keep the franchise fee constant, and adjust the area’s size, so each franchise area is considered to offer similar opportunity.
High vs. Low cost Franchises
There is no rule to set the cost of entry, royalties etc for a franchise system, more a couple of models that are generally followed.
If the system has some definite, exclusive IP, then there is an argument for a higher entry fee, as it probabaly has higher money earning potential. For example if I had an exclusive product, very well priced that was in strong demand, then I would expect to be able to ask more for potential franchisees to come on board. Often these products may be some vertical marketing where the Franchisor is also the exclusive supplier of the goods.
If on the other hand, if I was a very well organized house cleaning or lawn mowing franchise system, I would always be competing against an individual who felt they could do it themselves. This simply values the franchise as the value of gaining them work and a name they can use. (No doubt for example the Jim’s or VIP names have good customer recognition). This does keep the entry cost down for a franchisee, and does create more franchisee turnover (churning) as there is less to lose if they leave the Franchise System.
Our experience is that outdoor service businesses definitely have more opportunity in higher socio economic areas than lower ones; however a good Franchisor will balance the territories they create so that each area gives a similar amount of opportunity for the Franchisee. Funny how some Franchisors seek your commitment, but will not commit to their own system to set the territories up properly!
If your Franchisor is showing you a territory based on the “Beer and Pizza” map, ask yourself whether you should trust your investment to this Franchise System?
Peter Buckingham is the Managing Director of Spectrum Analysis Australia. He is a certified Management Consultant, and a Fellow of the FCA and IMC.