By Shawn Saraga
Franchises often flourish because they offer great prices on products and services compared to competitors. They also put on frequent sales and offer discounts that further draw in customers. Whether it’s an annual two-for-one deal, or discount cards for seniors and students, franchises know the public loves to save money.
While it’s important to attract clients with amazing deals, you have to wonder how much this discounting is going to cut into your bottom line as a franchisee. Here are five questions to ask your franchisor about sales, deals and discounts, and how they’ll impact your business.
1. How will sales and other consumer discounts affect my profitability?
Discount programs promoted by franchisors to the general consumer can have positive or negative impacts on individual franchisees. Solid franchise systems will have negotiated with suppliers in advance to get preferred pricing on specific products. This means they will have a strategy planned around the sale item. They will also likely present the strategy to franchisees and ask them for buy-in and commitment to follow through on the program. This type of approach can help forge a great relationship between you and your franchisor.
2. Do I have to pay a royalty on the pre-sale or sale price?
This question needs to be asked before you enter into a franchise agreement. Most franchisors will ask you to pay the royalty on gross revenue; this means discounted prices will warrant a discounted royalty. This is common practice among franchisors charging percentage-based royalties and advertising fees. Franchisors that follow this practice should be able to show you a theoretical breakdown in costing.
While some franchisors offer royalty breaks on discount programs, these are rare and usually offered because a supplier may make up the difference to the franchisor (e.g. a rebate paid to the franchisor for running the promotion). If a franchisor is offering a royalty break, it can also be to help ease the pain of a deep discount to help promote the brand.
Some less compassionate franchisors will ask for royalties to be paid on the pre-discount price. This is a bad practice that can have a negative impact on your profit. When investigating a franchise, be sure to ask about the policy on discount programs and make sure it is in writing. If a franchisor chooses to charge you the full amount on discount programs, consider it a bad sign.
3. What if I want to run my own sale?
One of the reasons people invest in a franchise system is for the uniformity the brand offers. When one or two franchisees start offering promotions and programs independent of everyone else, it jeopardizes the franchise’s ability to function as a whole unit.
Check your franchise agreement and talk to your prospective franchisor to be sure you understand what you can and cannot do when it comes to running your own promotions. Some franchisors will give you a certain amount of autonomy to do this; however, it will likely retain approval rights for any promotion you suggest. The franchisor may have tried the promotion before and can advise on how to best approach it again. In other cases, you may be asked to hold off, as your sale is too similar to an upcoming company-wide promotion.
4. What if a supplier approaches me about running a one-off promotion?
Exuberant sales reps have been known to approach franchisees with the idea of a one-off special promotion. When this happens, it is best to ask the supplier if they have approached the franchisor about this idea (most franchisors, as previously mentioned, will retain final approval on all promotions). If the answer is no, you should advise them you do need your franchisor’s approval before running the promotion.
Great franchisors have negotiated key terms with suppliers; running your own one-off specials can negatively impact this arrangement. If the franchisor isn’t aware of sales and discounts at the store level, the rest of the chain runs the risk of providing an inconsistent customer experience.
5. What if I don’t want to run a promotion?
Well-run franchises do not allow franchisees to opt in or out of promotions. In most franchise agreements, there is strict wording regarding your involvement in promotional programs.
The only instance where this wouldn’t be true is when the franchisor offers a promotional program that cannot be profitable. If you are proven to suffer a loss from running a promotion, you are well within your rights to stop running that promotion. While good franchisors only offer well thought out programs that meet your profitability needs, a poorly run franchise may run promotions arbitrarily. These franchisors must be taken to task.
The best way to verify whether this happens in a particular franchise system is to speak with current franchisees. Here are three questions for you to ask them that can help you determine if the franchisor is on side or not:
- What’s it like to work with head office on promotional programs?
- How profitable was the last promotional program you ran?
- Were you asked for feedback on promotional programs?
By checking with existing franchisees, reading the franchise agreement and understanding the rules and obligations surrounding promotions you’ll be bound by as a franchisee, you will be better equipped to determine the best franchise system for you.
Shawn Saraga is the Founder and President of the Franchise Academy. To learn more or book a meeting time please visit www.shawnsaraga.com