After preparing your business for franchising, price your franchise according to the value you give to would-be franchisees.
Q: Is there a way to figure out how much in franchise fees I should charge? I’m planning to franchise my growing perfume business, but I want to charge just enough to get potential franchisees interested and still guarantee a profit.
A: Before pricing your franchise, make sure you have taken the necessary steps to prepare your business for franchising. Have you figured out how you want to run your business when it is franchised? How will you make money and how much will you sell your products to your franchisees?
When you organize the business for franchise, you may have to restructure some parts of your operations, such as increasing production capacity, computerizing the accounting system, promoting branding activities, and even hiring additional people. Preparing to franchise the business alone will entail some costs, not to mention other expenses such as fees you may need to pay for franchise consultants, or for lawyers who will help you draft contracts.
These costs shall become your one-time investment, which you need to recover by selling franchises, and your challenge is to recover costs as soon as possible. This shall depend on the size of your investment, the number of franchisees you will get, and the final pricing of your franchise fee. To some, the payback period may take only a few months; for others, it may take years. The demand for your franchise will depend on how you will package your business based on the appeal of your brand, pricing, the estimated payback period, and return on investment of the franchisee.
If you package your franchise as a high-end brand, you can charge a premium on your franchise fee. You may be able to recover your investment costs in a short time because of the higher prices, but you need to support your premium pricing with the quality of your products and higher selling prices, too.
On the other hand, you can lower your price to attract prospective franchisees to join your company immediately. You can offer an introductory price that is artificially lower than your competitors’ to enable you to get enough franchisees to start with. Other factors aside from pricing affect the buying decision of the prospective franchisee, such as your company’s stability, its strong brand recall, and market presence. If you lower your franchise fee and the response turns out to be slow, resulting in few takers, your franchise may be perceived as an inferior brand and may seriously affect your ability to compete in the future.
With so many franchises available in the market today, you need to offer something that your market will not easily find in other franchisors. You can price your fee based on value; the focus of this approach is not on products, features or benefits of your franchise, but the value you will deliver. Identify what franchisees will get from you that they won’t get from your competitors, and quantify it as part of your pricing.