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Advertising Fees and Strategies for Franchisors

financing a franchise

By Michael Seid, Managing Director, MSA Worldwide

Just like any other fee imposed in a franchise agreement, advertising and marketing fees must be structured in a way that balances the franchise system’s need for the funds with the franchisee’s practical bottom line return on investment.

The amount and types of marketing expenses made by the franchisee should be designed to effectively build brand recognition for the franchise system and also sustain a customer base. To have a sustainable marketing effort, it needs to be affordable and productive. Franchisors that set fees at unrealistically low rates, in a desire to seem competitive to other franchisors, will soon find that the lack of effective advertising programs will be viewed by the franchisees as a failure of the franchise system. Likewise, setting the fees at too high a rate will be unaffordable by the franchisee and will therefore create other problems.

Just as we have discussed in other articles concerning continuing fees, all franchisees and all markets are not equal. Multiple factors, including unit sales, established critical mass, experience of the franchisee, brand recognition, population densities, existing sales at the location, and local media costs will generally lead to differing marketing and media strategies. Franchise systems that have a national or regional presence will also have different marketing objectives than more localized systems.

Before you establish the advertising and marketing fees for your franchise system and the structure of how you want those fees allocated, franchisors need to be aware of their basic retail and marketing positioning and should take into account:

  1. What are the effective retail advertising and marketing strategies available to them?
  2. What are the market introduction and grand opening programs that will be effective, given the brand and the intended customer?
  3. What strategies are effective, affordable, and have the highest chance for a return on the investment for the system and for the markets?
  4. With responsible growth expectations, what will be the effective and affordable marketing strategies going forward?
  5. How do you structure the advertising fees to ensure that the franchisor has the flexibility to meet future requirements?
  6. Where do social media and other Internet-based marketing and promotions fit in the overall composition of the marketing approach?

Typical Retail Marketing Expenditures

Market Introduction and Grand Opening Expenses: The amounts the franchisee will be required to invest in Market Introduction and Grand Opening promotions are usually stated in the franchise agreement; details of how the money is to be spent would be contained in the system’s operations or marketing manuals.

Franchisors vary widely in the scope and detail of the methods they prescribe for implementing the market introduction and grand opening programs. In some instances the franchisor fully plans and implements the plan as part of their pre-opening obligations, but most franchisors provide general guidelines to franchisees for them to design the program they will implement. Working with the franchisor’s marketing team or field consultant, the franchisee crafts an approved plan with detailed budget, execution steps, and measures before executing any strategy.

In developing the plan, the general range of costs for the opening program will be developed. In the FDD the franchisor estimates a range of market introduction and grand opening expenses. Often the franchisee will choose to expend more than was estimated by the franchisor, and that is generally fine. However, just because the FDD discloses a range of opening marketing costs does not mean that franchisees may spend less. There is little reason to waste advertising dollars if, in the opinion of the franchisor in consultation with the franchisee, this additional spend is not required.

Local Marketing: Most franchise agreements have a requirement for franchisees to market their business at the local level. This is common for both mature and immature franchise systems, in both developed and undeveloped markets. The franchisor may require a certain dollar amount being spent locally, or a certain number of ads appearing in local media per month, or in other ways.

The advertising budget can be set as a fixed dollar amount, a minimum dollar expenditure, or, as more typically found, a percentage of gross sales. Sometimes the ad rate may be adjusted periodically as market dynamics change.

As with the market introduction and grand opening programs, the local advertising spend is determined based on a plan developed in conjunction with the franchisor and franchisee. And, as with the opening marketing programs, sometimes the franchisee will decide to spend more than the minimum amount requirement and franchisors should also allow franchisees to spend less, when the market or conditions allow.

Too often local advertising expenditures are required on a monthly basis in the franchise agreement. But most businesses have some cyclical flow to them. It is better to tie the overall local advertising investment to the times of year it most benefits and not to some blended formula of a comparable spend each month. Also, local advertising should always tie into national or regional campaigns, at the election of the franchisor’s marketing professionals.

Local and Regional Cooperative Programs: Many franchisors establish local and regional advertising cooperatives: franchisees, generally at the election of the franchisor, combine part of their local advertising budgets into a single advertising cooperative to use their combined spending power and obtain marketing consistency. The amount of the franchisee’s contribution to the cooperative is usually stated as a percentage of gross sales or as a fixed dollar amount, typically with an annual CPI adjustment.

Depending on the franchise agreement, the cooperative dollars may be additional advertising spend by the franchisee, or may be an allocated portion of either their local or national requirements.

System Brand Funds: Most franchisors today have a system or national brand fund or have reserved the right to establish one down the road. In some franchise systems, these funds are also referred to as an advertising fund. The principal purpose of a brand fund is to enhance and support the system’s brand and generally is used to pay for creative work, media placement, marketing salaries and costs, market research, etc. The use of the fund is generally found in the franchisor’s franchise agreement or in the manual library.

As with other marketing expenditures, brand funds are usually set as a percentage of franchisee sales but may be a fixed dollar amount, with annual CPI adjustments.

Marketing can be the lifeblood of any business, and franchising is no different. As the funds contributed into the brand fund are not income to the franchisor, the money generally is not used for marketing for new franchisees. Also, one of the main tasks of most Franchisee Advisory Councils is to establish a committee to review with the franchisor how the brand fund budget is being expended.