The Impact of Franchise Fees on Revenue and Growth

Gerson Advisory Services

Franchise fee structures play a critical role in a brand’s performance and growth potential, according to a comprehensive two-year study analyzing over 2,400 Franchise Disclosure Documents.

The Initial Franchise Fee and Higher Revenue Potential

The study revealed a notable correlation between the initial franchise fee (IFF) amount and a brand’s revenue per location. Franchisors charging IFFs around $40,000 or higher enjoyed an average revenue of?

$1.5 million per franchise – a whopping 2.5 times greater than brands with fees of $25,000 or less (averaging $583,000 per location).

This suggests franchisees may have a willingness to invest more upfront for the chance at higher revenue potential. Franchisors should consider raising initial fees to strengthen brand value and fuel growth.

Royalty Fees Equate to Stronger Support

Almost every franchise (94%) charges an ongoing royalty fee, primarily as a percentage of monthly revenues averaging 6%. The data shows consistency, with 80% of brands charging royalties within 2% of the median.

This recurring fee funds the franchisor’s operational support critical to franchisee success. The small percentage not charging royalties are typically “product distribution” models where franchisees pay more for proprietary products instead.

Balanced National and Local Marketing

Successful franchises balance national advertising funded by fees (levied by 72% of brands, predominantly as a percentage of revenues) with required local marketing spending (mandated by 55% of franchisors, averaging 2% of revenues).

This balanced investment in marketing at both levels is vital for a franchise to remain competitive and drive franchisee sales.

Technology Fees Drive Competitive Advantage

In today’s environment, strategic technology investments are critical for franchisors to maintain a competitive edge and operational efficiency across the system. A majority (61.9%) now charge technology fees, mostly flat monthly rates.

Notably, franchisors charging tech fees were found to grow 36% faster over two years compared to those not charging them. Half of franchisees also acknowledge the significant value derived from franchisor-provided technology.

Future-Proof Your Franchise with a Technology Fee

In today’s rapidly evolving business landscape, technology is no longer a luxury – it’s a necessity for survival. Companies across all industries are investing heavily in digital tools and systems to drive operational efficiency, enhance marketing impact, streamline sales management, and deliver exceptional customer experiences.

The franchising world is no exception. To maintain a competitive edge and provide sustainable businesses, modern franchise brands must have the ability to adapt their technology stack as market needs change. One powerful way franchisors can position themselves for long-term success is by implementing a technology fee.

The Advantages of a Dedicated Technology Fee

A technology fee provides numerous benefits that can future-proof a franchise system and facilitate continual innovation. Here are some key advantages:

• Differentiate Your Franchise Offering: The technology platforms and digital capabilities you’re able to provide franchisees can be a huge differentiator. A steady revenue stream from a technology fee enables you to invest in best-in-class tools that increase effectiveness and efficiency across operations, marketing, sales, customer communications, and more.
• Spread Costs Equitably Across the System: Often, franchisors bear the lion’s share of expenses when implementing new technologies across all locations. A technology fee helps spread these costs fairly among all participating entities so the investment burden doesn’t fall disproportionately on the franchisor. Everyone contributes and everyone benefits from the innovations.
• Adapt Nimbly to Changes: By drafting the technology fee broadly in your franchise disclosure document (FDD), you gain flexibility to adapt as needs evolve without modifying agreements. If you didn’t originally plan for a new system like a royalty management application, the technology fee funds can support rolling it out across the brand.? No cumbersome contract updates required.
• Drive Continual Innovation: Perhaps most importantly, having a dedicated technology fee revenue stream allows you to continually invest in keeping your system on the cutting edge. As new tools and capabilities emerge, you can rapidly embrace what will deliver competitive advantages. This commitment to innovation helps protect the long-term viability and health of your franchise.

For franchisors looking to implement a technology fee or make adjustments to an existing fee, it’s wise to consult experts who can share prevailing practices around structuring, franchisee communication strategies, and optimizing the revenue to drive high-impact investments. With a forward-thinking approach in this area, you can position your franchise as an industry leader.

The franchising landscape will keep evolving at a furious pace. By implementing a technology fee, you equip your system to evolve along with it – continuously refreshing capabilities, delighting customers, and delivering exceptional franchisee experiences that will keep your brand thriving for years to come.

Charging technology or system fees is important for franchisors for a few key reasons:

• Revenue stream – These ongoing fees provide a steady revenue stream for the franchisor beyond just the upfront franchise fees. This income helps fund system-wide technology investments, marketing, operational support, and other expenses for maintaining the brand standards.
• Technology advantage – The fees collected can allow the franchisor to invest in robust technology platforms, data systems, mobile apps, digital marketing capabilities etc. that may give their franchisees a competitive advantage through modern solutions.
• Brand consistency – When franchisees utilize the same mandated technology and systems funded by these fees, it promotes brand standardization and consistent customer experiences across all franchise locations.
• Economics of scale – By requiring all franchisees to contribute fees, the franchisor can leverage the scale of the entire system to negotiate better pricing on technology, marketing, and other services.

So in summary, technology and similar fees paid by franchisees to franchisors enable investment in solutions that enhance brand value while providing revenue diversification for the franchisor’s business model long-term. This can foster faster system growth beneficial to both parties.

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