I’ve seen hundreds of businesses succeed at franchising, but I’ve also seen a number fail. While the paths taken by the successful are many and varied, the paths to franchise failure are surprisingly predictable.
Failure, like success, does not happen without reason. It happens because people made the wrong choices. Unfortunately, the mistakes we make in business are often avoidable.
Ready, Fire, Aim
Probably the single greatest mistake made by budding franchisors is a lack of planning. Too often, we find that new franchisors start out by asking their lawyers to draft their franchise legal documents without giving a thought to the importance of the business decisions that these documents contain.
Franchising is like business on steroids. Small mistakes get replicated over and over until they cause major failures.
A small mistake on a royalty – multiplied over 100 franchisees – can cost a franchisor tens of millions of rands. That is often the difference between success and failure.
There are dozens of these make-or-break decisions that an entrepreneur needs to make when structuring a franchise offer.
Closely related to the issue of planning is the ‘follow the leader’ mentality that often finds its way into the franchising process.
Many entrepreneurs will come to franchising after observing successful competitors, believing that success depends on duplicating their strategy. This could not be further from the truth.
Few of us are old enough to remember that when McDonald’s first arrived on the scene, it was promptly greeted by dozens of knock-off concepts that have long since disappeared. Why did Burger King succeed? It said, ‘Have it your way,’ and dared to be different.
Too often, we see franchisors whose business strategy seems to be to duplicate that of their largest and most successful competitor, only to find years later that the strategy failed miserably. The key to success can lie in differentiation.
But even if its competitor did a good job of planning – and there is no guarantee that it did – the new franchisor’s circumstances are different.
A different business model. Different management team. Different philosophy. Different market. Different investment requirement. Different training requirements. And if nothing else, different competitors.
Copying the industry leader’s strategy is not a strategy. It is often a recipe for disaster.
New franchisors typically have one thing in common: They are already running a successful business. The entrepreneurs who founded these businesses are almost universally resourceful, self-confident, and accustomed to substituting hard work for growth capital.
Odds are good that they built their first business without relying on outside help, so why would franchising be any different?
The business of franchising requires the franchisor to have or acquire expertise in a number of areas in which they probably have limited experience. These, to name a few, may include strategic planning, organisational development, financial analysis, franchise legal documentation, operations documentation, training, franchise marketing and franchise sales.
Related: Understanding the Terms of Agreement
I often see new franchisors relying on their internal resources and a local lawyer who does not specialise in franchising, only to repeat mistakes that were easily avoidable. Trial-and-error is an expensive way to learn franchising.
Failure to Budget
Franchising can be a low cost means of achieving rapid growth for your business. But it is not a ‘no cost’ means of growth.
To start franchising, new franchisors usually need to budget time and resources for the development of strategic plans, operations manuals and marketing materials.
They need to anticipate legal fees associated with the development of their contracts, disclosure documents and registrations.
They are likely to have accounting, printing, travel and other associated expenses as well. And they will need to invest in franchise marketing and in building the franchise organisation.
For franchisors who only want to sell a franchise or two and just get their feet wet, the investment in franchising can be minimal. But for a franchisor with aggressive growth goals, these costs can be significant.
Can’t Say ‘No’
One of the biggest mistakes in franchising can happen soon after the franchisor initiates its franchise sales efforts.
After spending a few million rand on the development of a new franchise programme, franchisors generally come out of the gates ready to sell. And when a marginal candidate comes to the door waving a cheque for R400 000, the first instinct may be to recapture some of the capital invested in franchising.
But these first few franchise sales can end up being the ones they regret in the future. Nothing is more important to franchise success (and to a brand) than the quality of its franchisees.
The best franchisors start with high standards from the outset, knowing that these franchisees will be brand ambassadors for years to come.
Perhaps the most ironic mistake made by new franchisors is that they do not fully understand the single most important tenet of franchising: Make your franchisees successful, and you will succeed as a franchisor.
Young franchisors may focus on how fast they can grow the business, when they should be focusing on making their franchisees successful.
Related: Franchise Or Start-Up?
Successful franchisees pay more royalties, require less support, provide great public relations, buy more franchises for themselves and promote the brand to prospective franchisees. Failing franchisees cost more, pay less and make it harder to sell and grow.
The greatest strength of franchising — the ability to grow largely unconstrained by the constant demand for investment capital – can also be its greatest weakness.
Sell faster than your ability to support your franchisees, and you’re likely to fail as a franchisor. Focus on their success, and odds are good that success will follow.
Factors To Consider Before Signing Up As A Franchisee
Franchising is a brilliant way to get into business with not many entrepreneurial skills as it comes with a roadmap to follow for success.
You’ve been considering entrepreneurship for a while, and now that you’ve finally raised some money and been approved for a loan, you’re ready to quit your 9-5 job to run your own business. You may even already have your eye on a particular franchise, but while franchising is considered an easier and more low risk way to get into business, are you suited to being a franchisee?
“The question is not ‘is franchising right for you’, but rather, are you right for franchising? Because if you don’t have the right attitude and skill set, it can be a very expensive mistake,” says small business expert and author Steve Strauss.
Franchising may seem like an easy way into entrepreneurship, but along with an established name and proven systems, come rules, regulations and little room for creativity. If you’re not ready to become a franchisee, but want to go into business for yourself, you may find yourself struggling to operate within the system’s blueprint.
Ask yourself these three questions before proceeding with the process of franchising:
1. Will you be able to follow the directions of the franchisor?
You’re buying into an existing and proven concept so it’s safe to assume that the franchisor knows best, and so you have to be open to learning and following guidelines for business success. If, for example, you have experience in advertising and think you have an improved technique of marketing the franchise, you may want to change the advertising material provided by the franchisor – don’t.
“Being a franchisee means following the directions of the franchisor, even when you think you know a better way,” advise experts from strategic and tactical advisory firm MSA Worldwide.
“In addition to initial training, you need to be prepared to accept coaching and advice from the franchisor on how you operate or market your location.”
2. Do you have the need to experiment?
Lou Groen may have had success in launching a new menu item that McDonald’s approved of in 1962, but not all franchisees are that lucky. Stick to the plan and limit deviations to the menu or anything that involves the customer experience.
If the franchisor’s concept doesn’t involve deliveries, offering them to your customers may cause issues for others within the franchise system. “If it’s not part of the franchisor’s concept, you’re deviating from the concept and therefore, no longer running your store as a franchise,” according to MSA. Franchising arguably limits innovation opportunities, so if you’re prone to implementing creative ideas and evolving business offerings based on said ideas, rather start your own independent business.
3. Are you a team player?
These first two questions you address should already lead to the realisation that everything you do affects everyone in the franchise chain. One bad experience at your establishment and suddenly, all the stores are affected by bad press or unsavoury social media attention.
“Other franchisees are relying upon you to offer to the consumer a consistent level of service, product quality, and brand message. You are going to have to work with others in the system in making decisions,” advise experts.
Remember that as part of a chain of other business owners, you may have to accept that majority rules when it comes to decisions where franchises do have a say.
3 Ways You Can Innovate And Improve As A Franchisee
Although your role as a franchisee isn’t really to innovate, there’s room for creativity if you go about it the right way.
When you signed on the dotted line after reading and agreeing with the franchise agreement, you knew that you were buying into a proven system where everything has already been thought out for you, and all you have to do is follow the formula for success.
But you’re a franchisee longing to put your own imprint on your business, and it may be frustrating to feel boxed in by a formula, while you’re bursting with new ideas.
“Franchising, by its nature, discourages innovation on the part of franchisees, who are required by their franchisors to follow very specific policies and procedures on exactly what they will sell, how they will make or deliver it,” notes Randy Myers, contributing editor for CFO and Corporate Board Member magazines.
This doesn’t mean your ideas will never see the light of day though. But before you approach your franchisor with your brilliant insight, consider the following steps that may well lead you down an innovative path:
1. Get the basics right first
Franchisors know that customers like consistency as it makes them comfortable and trust every location of their franchise they choose to visit. But, even the strictest franchisors get hungry for new ideas. It’s the timing that’s vital for your idea to even be considered.
“Most good systems don’t want new franchisees to even think about innovations until they learn the existing system inside out and prove that they can execute it like a star,” said Jeff Elgin, CEO of FranChoice, a network of franchise referral consultants. “At that point, they have become successful, their base is secure, and they have earned the right to consider innovations.”
It’s wise to ensure you’ve learned your franchisor’s existing business model before you suggest any improvements.
2. Do your homework
So, you’re doing well and you’re sure your idea will be welcomed as a crucial innovation to the franchise system – but research your proposal, suggests Kim Stevens, VP of Regional Development and Director of Franchise Awarding at Woodhouse Day Spas. “Especially if you’re suggesting something that would impact all franchisees, create a business plan before approaching your franchisor,’ she says.
It’s also good to have another look at the franchisor’s policy for accepting new ideas to ensure you’re prepared for tough questions before you propose your idea.
3. Speak to the right people
Elgin recommends you first identify the person at the franchisor’s head office who’s responsible for receiving new ideas. “Many of the ideas a franchisee comes up with will already have been proposed by another franchisee,” notes Elgin.
To avoid wasting your time, no matter how great you think the idea is, present it as early as possible before spending anything developing the idea.
3 Pricing Tactics To Recession-Proof Your Franchise
As consumers tighten their belts, how can you ensure your franchise is their first choice in the midst of strict budgeting and curbing of spending?
Whether or not there is a dip in the economy, you have stock on shelf you need to sell. But, if consumers are cash-strapped, you have to make every effort to ensure that your franchisees aren’t running at a loss.
“There’s no doubt that shoppers are more discerning about what they need and how they shop. However, quality remains significant and brands that continue to delight their customers will reap the benefit of being chosen,” says Ailsa Wingfield, executive director marketing and communications: Africa, at Nielsen.
Why not give customers the best of both – value for money at a competitive price – by applying one or more of the following pricing tactics in tough economic times:
1. Consider a greater focus on your house brand
“The days of in-house retail brands being treated with a fair amount of disdain by South African consumers have come to an end,” says Wingfield.
The global performance management company’s research has found that R38.4 billion of the amount consumers spend at hypermarket and supermarket tills – or R10 out of every R50 – is spent on private label products. South African consumers are beginning to feel that the quality of these house brand products is as good as that of established name brands.
Since research indicates consumers are further likely to shift between branded products and retailer private label offerings, it would be of benefit to your franchise if your in-house products are perceived as viable value alternatives of similar or better quality.
2. Sell products in bundles
This the method combining various products and selling them together as one bundle for a lot less than if they were being sold separately. This method is great for moving items that might be selling slower but also great for achieving a higher value perception in the minds of consumers.
CEO of GuruShots, Gilon Miller, says there are several bundling techniques you could apply, including:
- Pure bundling, where you offer a group of products that are only available as a bundle and aren’t sold separately.
- Mixed bundling, where you offer products that are sold both as bundles and as individual units.
- New- or lesser-product bundle, where you bundle a successful product with a newer or less successful product – the stronger product will help the other product find its way into a new market.
Bundling results in cost efficiency, more competitive pricing and might also encourage customers to regard a single store as a source for several solutions.
Related: How To Recession-Proof Your Business
3. Add even more value
When you price your product in alignment with the value your customer sees in it, you’re preventing both you and your customer from the possibility of losing out on value.
Calculating your optimum price, involves asking yourself these questions:
- Will your customers save money or time by using your product or service?
- Is your product or service is unique?
- Will your product or service help customers gain a competitive advantage?
- What does the competition charges?
“Value-based pricing ensures that your customers feel happy paying your price for the value they’re getting,” says Patrick Campbell, co-founder and CEO of Price Intelligently. “Pricing according to the value your customer sees in your product prevents you from short-changing yourself while creating an experience for customers that’s most aligned.”
The more value your customers see in your product, the more they will be willing to pay for it, ultimately improving your bottom line. When your pricing is reasonable, they won’t need much convincing to make the purchase at your franchise instead of your competitor’s.
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