Part III: Taking the Fear Out of Franchising

September 6, 2016 1:39 pm Published by Leave your thoughts

Taking the Fear Out of FranchisingA franchisor says to a prospective franchisee, “In return for your upfront franchise fee, your commitment to follow our business systems, and agreement to pay a monthly royalty fee as well as contribute to our national advertising fund, we’ll teach you how to operate and implement our systems, and provide support along the way so that you can build a profitable and satisfying business.”

And then the franchisor adds one final note:

“We’re always in control”

“As the franchisor, we’re always in control. You do not own our business, our logo, our business systems, or any of our intellectual property. Furthermore, you don’t own your business phone number, or your list of customers. We own it all. . . . Agreed?”

So now you must be asking, “Under those circumstances, why would anyone buy a franchise?”

And lest you think I made up those circumstances, and that franchisors don’t really talk like that, you’re right, at least in part. Dishonest franchisors don’t talk like that. But everything I wrote is franchise gospel, and honest franchisors will tell you so.

Is it any wonder that people fear franchising?

You might borrow money, or drain your savings, to invest in a franchise, and legally commit yourself to an agreement whereby even if you must close your business you’re still obligated to pay the franchisor, the landlord, the bank, and others for the commitments you made.

Oh! And if you do close the business — all the manuals, instructional guides, and videos that the franchisor “loaned” to you? . . . You’ve got to send those back, along with a printout of your customers!

Franchisor already has your number

Don’t worry about transferring the phone number into the franchisor’s name because you already signed that authorization when you signed the franchise agreement.

Given this scenario, it’s particularly astounding in the land of the free and the brave, where independence seems to be everyone’s passion, that anyone buys a franchise.

But, of course, thousands of people do every year in the USA alone.

And with good reason.

You might still be scratching your head and wondering: “Why?”

Allow me to give you one good example that explains why.

I am sure there are countless stories just like this one, but this one I know personally.

Why people buy franchises

Years ago in my home state of Ohio, my cousin, Mary Jo, and her husband, Tony, decided to open a pizza shop. They were young, energetic, and entrepreneurial, and they had a small sum of money to invest in a business. Tony was already part owner of a successful business with his brothers, but he and Mary Jo wanted something to build for themselves.

For years people had been telling them that they made the best pizza ever, and no wonder because they both grew up in the kitchens of Italian mothers. “You should get into business and sell these pizzas. It’s the best pizza ever!” friends told them over and over.

So when it came time to start something of their own, my cousins decided to get into the pizza business. They had plenty of money to buy any one of the famous pizza franchises, but they knew that if they joined a franchise they’d be forced to use the brand’s pizza recipe and they would not be able to use their own recipe which produced “the best pizza ever.”

Selling the best pizza ever

And since the purpose of getting into business was to sell “the best pizza ever” – or so it was for them — they didn’t consider buying a franchise.

As they went to work on their own, they found a shop, they sourced the equipment, they bought a sign, they acquired supplies and materials, and they began making pizzas.

And for a while, they were busy because all of their friends came for pizza, and friends told friends about Mary Jo and Tony’s new pizza shop with “the best pizza ever!”

But then, as always happens with a new business, the customer flow slowed down, and my cousins were faced with some decisions. They didn’t deliver pizza, and the place didn’t include many tables, so they relied mostly on customers calling them to order a pizza and then coming to pick it up. By this time, however, all the pizza franchises delivered pizza, and customers preferred home delivery, if only for the convenience.

“We can’t afford to deliver pizzas,” Tony explained to me one day. “The insurance alone is sky high. Plus, figuring out the delivery routes is complex.” So they decided not to introduce delivery. If customers wanted “the best pizza ever” they’d have to come and get it.

Strike One: No delivery

That was Strike One.

  • A good pizza franchisor would never have allowed them to get into the pizza business without delivery.

While my cousins had a large circle of friends, and their friends influenced their friends, a business isn’t going to survive on friends alone.

“We hadn’t done any advertising when we opened the place,” said Tony, “but now we knew we needed to get the word out.”

He looked at a variety of options – the Internet and social media had not yet been introduced – and for whatever reason, he decided newspaper advertising was the way to go. But it was expensive!

And it was ineffective for selling pizzas.

Strike Two: Wrong advertising

That was Strike Two.

  • A good pizza franchisor would never have encouraged Tony to advertise his store in a newspaper. Pizza franchisors know that newspaper advertising – even years ago when newspapers were more popular – isn’t effective for selling pizzas.

Logically, in a town with only one newspaper, but a newspaper that was popular and widely read, what better vehicle was there than the daily newspaper for promoting “the best pizza ever”?

Sometimes, as franchisors will tell you, logic makes no sense in business. In fact, look at any of the successful pizza franchises – and there are many, with new brands introduced almost every year – and you won’t find even one that uses newspaper advertising as its primary means of marketing and promotion.

Instead, the folks who cracked the secrets to selling pizza figured out that pizza customers don’t stray far from home, especially if they’ve got to drive to the pizza shop to eat or take away the pizza.

Chances are pretty good that most of a pizza shop’s sales comes from within a two to five mile radius, depending on the density of population. The radius will be larger, but not much larger, for a shop that delivers pizza.

Do people who read newspapers buy pizzas? Certainly.

But is newspaper advertising the most cost-effective means for a pizza shop to attract customers? Certainly not.

What works?

Door hangers!

Instead of paying huge sums of money for newspaper ads, Tony and Mary Jo should have printed thousands of flyers and arranged for a company, or a team of part-timers, to deliver to every house within three miles of their shop a flyer with a coupon. That’s what a pizza franchisor would have advised at the time.

“Tonight, try the best pizza ever!” Location and phone number. Include a small map, too. Total cost would have been far less than newspaper advertising, and the sales impact would have been immediate.

If Tony could have told the newspaper to insert his advertisement only in newspapers that were delivered to the houses within a three or four mile radius of his shop, the advertising might have paid off.

But that’s not what the newspaper offered.

Tony’s ad for “the best pizza ever” would be seen by people who lived just down the street from the pizza shop, but also by people – in fact, the majority of people — who lived 20, 30 even 60 minutes across town.

And they weren’t going to fight traffic for a pizza. Not when there were a dozen pizza shops between them and Tony’s location, and not when they could get a pizza delivered to their home in 30 minutes or less!

But it wouldn’t be “the best pizza ever.”

Strike Three: Wrong pizza

And there was Strike Three.

  • A good pizza franchisor would never have encouraged Tony and Mary Jo to produce “the best pizza ever” because it wasn’t necessary. The pizza franchisor, with dozens of successful franchisees, had already proven that a better recipe doesn’t make a difference.
What franchisors know that you may not

Long, long ago, Americans made it clear that they do not require or demand or even buy the “best pizza”. It’s not that they don’t want it, or crave it, but they’re not willing to pay for it, or be inconvenienced to get it. Same for hamburgers, cookies, frozen yogurt, ice cream, pancakes, and other food products.

“The best pizza ever” wasn’t only inconvenient for most people to buy, it also cost a little more than other more famous pizzas because of the ingredients.

It might also have been due, at least a little bit, to ignorance.

“How many slices of pepperoni can you put on a large pizza and still sell it for a profit?”

Hmmm. No one had thought about that. Well, franchisors have.

And Mary Jo and Tony, solo operators, had to pay premium prices for all of their ingredients and materials because they were buying for just one shop.

No economy of scale

Meanwhile, their competitors, franchisees of famous and not-so-famous brands, paid considerably less when they purchased flour, cheese, and pepperoni, because the economy of scale was on their side. A supplier is willing to lower his unit prices to provide products for a 500-chain brand, or a 1,000-chain brand, but no supplier gives a discount to solo operators.

It took some time for Strike Three to deliver its fatal blow, but not before Mary Jo and Tony had depleted their savings. In spite of “the best pizza ever” – and it truly was – their business was a failure.

What’s even sadder is that the failure could have been predicted and prevented.

They could have bought a pizza franchise, and if they had, their children might be selling pizzas yet today.

No, they wouldn’t be selling “the best pizza ever,” but then that begs the question: Is the purpose of a business to sell the best of something?

Or to accomplish something else?

Why own a business?

For example: The purpose of a business is to satisfy, if not exceed, customer expectations so that the business thrives financially.

If you can accomplish financial success and sell the best of something then you’ve struck a goldmine. But in societies where people are comfortable saying, “it’s good enough,” or, “it’s convenient,” business often isn’t about selling the best of something.

If people won’t pay for “the best pizza ever,” or won’t even consider buying it because it’s inconvenient, why would you start a business around that recipe?

A good pizza franchisor would know better.

Successful pizza franchisors – and the same is true of all successful franchisors regardless of the industry — don’t get hung up on selling a product because of its personal history, or even because people say it’s “the best ever.”

Even the best of friends, offering the most objective of opinions, don’t necessarily understand the dynamics of starting, building and maintaining a successful business. They may know good pizza when they taste it, but they don’t necessarily know business.

Franchisors know business

But successful franchisors do. Some of them have had to learn the hard way themselves. Some of them have invested millions of dollars to test ideas, to develop business systems only to fail, and then revamp the systems and start over again. And again.

Successful franchisors rarely begin a business knowing how to market, advertise and promote their products, but through trial and error – and buckets of money — they figure it out.

They discover how to find customers, how to treat customers, and they become proficient at serving customers, knowing their limits, knowing what they will buy, and understanding their behaviors. They know, better than most operators, why customers buy what they buy!

And then the best franchisors document everything. That’s how they create systems, and training and support programs. Through their experiences they know what’s required to replicate their business. If they’re really good – and many are not – they also know the type of person who will succeed as a franchisee.

And that’s why people buy franchises

They’re paying for systems, training and support, but they’re also buying knowledge and experience. And controls.

I can only wish that Mary Jo and Tony had ignored their friends, and if selling pizza was really what they wanted to do – and clearly it was not – then I wish they had bought a franchise, controls and all. Because it not only would have saved their investment, and saved their business, it might also have saved their marriage, and her life.

Before it was all over, Mary Jo and Tony’s fairytale romance ended bitterly. No one could even fathom how two people, so in love and seemingly so right for each other, were suddenly at each other’s throats, but a failed business will do that to the best of couples.

And then, worst of all, closing out the nightmare, Mary Jo was diagnosed with breast cancer and didn’t survive after several years of agony.

I have no proof that a franchise would have made the difference, or kept them together and kept her alive, but it doesn’t take a scientist to know that the boiler cooker they were in, the loss of funds, the embarrassment of business failure, and the stress of it all took its toll.

As it turns out, when it came to franchising, they had nothing to fear so long as they understood the principles of franchising, so long as they vetted franchisors to find a good fit, and so long as they were willing to accept a franchisor’s seemingly onerous controls.

Control at what price?

So it comes down to this. Control versus freedom. Do it the franchisor’s way, even if the end result isn’t the “best” of something, or do it your way.

But know this: If you do it your way, you’re probably going to fail.

Now you really want to know what you should fear?

It’s not franchising.

I’ll tell you about it in Part IV of Taking the Fear out of Franchising.


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This post was written by Dr. John Hayes

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