Adding a New Product or Service

It’s been five years since George launched his franchise system, and he hasn’t changed a thing. George figures if it’s not broken, don’t mess with it.

Franchise sales have been terrific, and George invests heavily in his system’s growth through advertising and the use of broker systems to supplement his own sales department. Unfortunately, while the number of locations has been growing steadily and total system sales and royalty revenue are on the rise, same-store sales have been on the decline for some time.

George is under pressure from his franchisees to do something to improve system performance at the unit level. The solution he hears most often from his franchisees is to add new products and services to the retail offering—NOW. But, he has some concerns.

  • Are the franchisees’ suggestions for new products and services the right products for the system?
  • Is it essential to test them before taking them system-wide?
  • What if all the franchisees don’t support the necessary changes?
  • What happens if adding the new products and services doesn’t make things better?
  • What should he do to limit his risk?

It’s an interesting and disturbing observation: If you ask franchisors “How’s business?” or “How’s sales?” many will respond like George and talk about franchise sales, as in expanding the system. Ask the same question to a non-franchisor or to a franchisee and their response will focus on unit performance, same-store sales, average ticket price, and bottom-line results. George’s focus on franchise-system growth instead of franchise-unit performance makes him more typical than many in franchising would like to admit.

To sustain success, companies need to regularly refresh their brand by introducing new products and services. However, for many franchisors in George’s situation, new products and services are introduced reactively to franchisee demand, rather than pro-actively as part of a well-structured research and development program. When that occurs, new products are often rushed to market without the necessary market research: Pricing is wrong, distribution channels are not in place, advertising doesn’t resonate with the current customer base, and resulting sales don’t impact the bottom line quickly enough.

When new products and services are announced before they are tested, expect franchisee buy-in to be weak, since their input wasn’t sought until after the product was introduced. Another source of contention is when the franchisor does conduct market research, but then ignores any negative results and goes ahead and launches the product or service because it was their idea.

To ensure franchisee buy-in, any changes to products and services need to be planned and supported by research, and franchisees need to be included in developing and testing new products.

New product launches start with an assessment of:

  • the brand’s overall performance with its existing customer base;
  • who the target audience is, and who the decision maker will be for the new product;
  • the system’s core competencies, so it can leverage its strengths to a new audience or to a new product, service or idea;
  • the impact the new products or services will have on the current business; and,
  • what alternative distribution channels are available, if any.

Market research enables a franchisor to assess market demand before introducing a new product to the franchisees. It helps determine which features and benefits should be included, as well as the impact on the system in terms of additional costs of doing business, initial investment, and staffing and training issues. The most important consideration, of course, is whether the return on investment will be worth the financial and manpower commitment.

Once research is completed, it’s essential to test the new product before introducing it system-wide. At a minimum, testing should provide information on whether:

  • consumers will buy the product at the price needed to make margins and return on investment;
  • franchisees will be comfortable selling the product and have the skills and resources to do so successfully;
  • the new products have unintended consequences on current items being sold;
  • unit efficiency and staffing will be impacted;
  • the supply chain can support the new items initially and for the long term;
  • the marketing message works; and,
  • the new product will positively impact the brand, bringing in new customers and cementing the relationship with current ones.

Even after market research and testing have validated the new product, an assessment is required of what is often the weakest link—your supply chain. Some questions to ask are: Are production and sourcing on the same schedule as promotion? Will you have the necessary inventory to support and sustain the launch on time, with the quantities needed and at the pricing you require? Can your suppliers provide the necessary items in the quantity needed and in the packaging required for each location offering the new items? Will you have back-up capacity to deal with unanticipated success? And equally important, will you be able to curtail the launch if the results are not as anticipated?

You need to determine the requirements for staff training, and whether financing is available to the franchisee should they need to invest in capital improvements to execute the launch.

Finally, before new ideas can be sold to franchisees, you need to build the business case and present it to them. Some of the more basic questions to consider in building the business case include:

  • Which franchisees and markets will offer the items first?
  • What are the costs and capital investments involved, and how long will it be before a franchisee’s investment will likely to be recovered?
  • Is financing available?
  • Who needs to be trained, what will it cost, and will the current labor force be able to do the job, even with training?
  • And, finally, does the system have sufficient resources to market and support the launch successfully?

While George may not want to mess with a system in which nothing is “broken,” now is not the time to put the brakes on. The trust he builds with his franchisees by acting on their requests for innovation and involving them in the process will go a long way should any of the new products or services not work as well as expected - not to mention making it easier for them to sign their royalty checks each month.

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“I have known Michael for almost 20 years and he is as knowledgeable about franchising as anyone in the industry. His approach is pragmatic, creative and strategic. When I need guidance or advice in franchising, I go to Michael."

Peter Hoppenfeld, Principal
Peter Hoppenfeld, Attorney At Law
 

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Michael Seid (860) 523-4257 - mseid@msaworldwide.com

Kay Ainsley (770) 794-0746 - kainsley@msaworldwide.com