There is a lot of content about franchising everywhere. I intend to show in this post what are the main principles to be taken into account when designing a franchising system for a company that decides to add this channel to its established distribution channels.
There is a concept in business strategy, a key term, almost biblical, the "value creation along the channel". And in a franchise process, this concept is magnified because it becomes very complex due to that it involves many players.
Every company creates value for the next point of the channel to justify a premium price o a purchase preference at the same price, basically through two mechanisms:
pulling down the cost to the purchaser, or
increasing the benefits to the buyer
All buyers in the world, as a standard behavior, slow to realize what are them being offered, and they will not pay for not perceived value, no matter how extraordinary this value in fact is. A company that develops little relative value but can communicate it more effectively, can handle a higher price than another company that has developed higher value but do not communicate it properly, for not having thoroughly investigated the channel secrets.
In this sense, it is very important to know, through research, who the real buyer is, since often, the one who decides the purchase is not the one who pays the bills. The purchasing behavior of a customer breaks down and is influenced by two main features:
Use criteria (functionality). For example, product quality, physical characteristics of the product, delivery time, technical support.
Value signals (influence to "increase" the use criteria). For example, a company's reputation, its image, advertising, packaging, the consumer shopping experience, the management staff.
Below is a diagram that summarizes the basic concepts that value each buyer in the various links of a typical franchise network, basically four:
- the final consumer,
- the franchisee,
- the franchisor and
- the potential buyer of the chain.
This hypothetical example is done for a women's clothing boutique network.
Anyway, the great "star" of the whole system is and should be the franchisor, as he/she is the "pitcher" of the business. On his/her backs remains the ultimate responsibility for sending effective value signals.
PLAYERS AND CONFLICT HYPOTHESIS IN A WOMEN’S CLOTHING BOUTIQUE NETWORK
1) CONSUMER
What does he/she use: the final product
From whom receives value signals: from the franchisee and from the franchisor
Use criteria: Sales employees speed and quality, price, store layout and presentation, availability of sizes, fabric quality, in-store marketing, brand name
Value signals: Advertising, combined promotions with other brands, discounts and payment methods, ubiquity, use of recyclable materials for packaging, attractive setting
2) FRANCHISEE
What does he/she use: the franchise business format
From whom receives value signals: from the franchisor
Use criteria: franchise format profit margin, franchise format business model, marketing support from the franchisor, franchisor speed of response, quality of franchisor training programs, flexibility to adapt some franchise format items, availability of adequate personnel in the market
Value signals: Financial provisions, proven business format and years of experience, absence of litigation with other franchisees, amount of operative franchises, amount of closed or not renewed franchises, network’s geographical extension, brand market share
3) FRANCHISOR
What does he/she use: the brand name and company reputation
From whom receives value signals: from his/her internal structure, from franchisees, and from the market (consumers and competition)
Use criteria: franchise requests by potential franchisees, ability for systematize the business, internal structure to train franchisees, management's ability to manage a business network, peaceful conviviality with other (than franchise) existing channels, brand ownership with no litigation
Value signals: Powerful brand, financial health, market proven products and business format, quality products and easily obtainable supplies, marketing strength, brand awareness, superior management team, outstanding suppliers and sponsors
4) FRANCHISE NETWORK’S POTENTIAL BUYER
What does he/she use: a consolidated franchise network
From whom receives value signals: from the market (consumers and competition), from franchisees and from franchisor
Use criteria: revenues, profitability, portfolio synergy with other owned businesses, consumer profile, stage of life cycle, possibility of joint other businesses with the brand, quality of suppliers and sponsors
Value signals: financial health of the franchisor, simple structure and simple franchise contracts, network’s geographical extension, brand market share, lack of litigation
As noted, the design criteria are different for the four analyzed levels.
Based on these criteria, the designer of the franchise system must understand the different players power projects, and work better than the competition in all aspects, so that each link "can buy" the next link in more advantageous conditions.
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