Part 4: Additional Perspectives on Marketing

Channels

16
CHAPTER

Franchise
Marketing
Channels

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 ① Franchise channels as a particular type of
marketing channel
Learning Objectives

② Key Franchise Channel Concepts & Terms

③ Scope and importance of franchise channels
④ Rationale underlying franchise channels
⑤ Disadvantages associated with franchise
channels
⑥ Franchisor and franchisee perspectives
⑦ Channel management implications of franchise
channels

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
Objective
Franchise channels as a particular
1 type of marketing channel
• Important and growing channel type
• Franchise channels within the larger field of
marketing channels
• Franchise channels have huge and growing
role in making products and services
available to tens of millions of consumers.
• Nature of the relationship among channel
members is unique – franchisees are captive

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
Objective
Key Franchise Channel Concepts &
2 Terms

Franchise: A legal agreement

between two independent parties
whereby one of those parties grants a
license to the other party to sell a
trademarked product or service.

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Key Franchise Channel Concepts &
Terms

Product Distribution Franchise: The

franchisor licenses its trademarked
product (or service) to franchisees who
then have the right to sell the franchisor’s
products or services. (e.g., GM and Ford)

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Key Franchise Channel Concepts &
Terms

Business Format Franchise: The

franchisor licenses the franchisee to sell the
franchisor’s trademarked product or
service, but the franchisor also provides
the complete system or format for
operating the business. (e.g., McDonalds)

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Key Franchise Channel Concepts &
Terms

Single-Unit-Franchise: In this type

of structure, the franchisor grants the
franchisee the right to own and operate
one unit. This is the most common and
simplest form of franchise channel
structure.

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Key Franchise Channel Concepts &
Terms

Multi-Unit-Franchise: Under this

structure, the franchisor grants the
franchisee the right to own and operate
more than one unit at the outset of the
relationship.

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Key Franchise Channel Concepts &
Terms

Franchise Fee: A franchise fee is

typically a one-time flat fee paid by the
franchisee to the franchisor usually
when the franchisee signs the franchise
contract.

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Key Franchise Channel Concepts &
Terms

Royalty Fee: Royalty fees are

required payments by franchisees to
franchisors in the form of regular and
continuous royalty fees for as long as
they hold the franchise.

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
Objective
Scope and Importance of Franchise
3 Channels
By 2005 the total output of franchise channels
measured in dollars:
• Was almost $881 billion per year
• Accounting for 4.4 percent of the private-sector output
of the United States
• Composed of over 909,000 franchise business
establishments.
• 11,029,000 jobs provided by franchised businesses
compared to 8,995,000 jobs from durable goods
manufacturing
Franchising and franchise channels continue to grow
both in the United States and internationally
11

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
Objective
Rationale Underlying Franchise
4 Channels
Advantages for Franchisor to Franchise:
1. Capital advantages
2. Potential to reduce distribution costs
3. Possible high level of managerial motivation
fostered by franchising.

12

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Rationale Underlying Franchise
Channels
Advantages for Franchisee to Franchise:
1. Uncertainty of success is reduced
2. Franchisors often offer well-known
trademarked products or services
3. Many franchisors offer initial and continuing
assistance to their franchisees
4. Relatively inexpensive way to enter a
business
5. Prospects for adequate returns often higher
than is the case for independent businesses
13

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
Objective Disadvantages Associated with
5 Franchise Channels

Disadvantages for Franchisor to Franchise:

1. Limited flexibility of the franchisor
2. Overly high franchisee expectations,
3. Increased governmental scrutiny by state
and federal regulators.

14

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Disadvantages Associated with
Franchise Channels

Disadvantages for Franchisee to Franchise:

1. Limited independence of the franchisee
2. Royalty fees
3. The negative halo effect.

15

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
Objective Channel Management Implications
6 of Franchise Channels

The strategic and tactical direction of

franchisees by the franchisor can affect
the relationship between participants in
franchise channels in ways that are
different from conventional channels.

16

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Channel Management Implications
of Franchise Channels

Channel Design & Franchise Channels

• Franchise channels offer high degree of
control
• Permits independent highly motivated
channel members
• Feasibility contingent on industry and/or
products & services being offered

17

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Channel Management Implications
of Franchise Channels

Selection of Franchise Channel Members

• Objective selection criteria such as
financial strength and experience
• Franchisor paradox: Need franchisees
who are independent and creative on one
hand and have the capacity to take
direction on the other

18

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Channel Management Implications
of Franchise Channels

Motivation of Franchisees
• Differs from motivation of channel members
in conventional channels
• Need to convince franchisees to adhere to
the franchise plan
• Franchisor should make effort to understand
franchisee needs and problems

19

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Channel Management Implications
of Franchise Channels

Managing the Marketing Mix in Franchise

Channels
• Pre-packaged nature of franchise model
predefines much of marketing mix
• Marketing mix less fluid than in conventional
channels

20

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Channel Management Implications
of Franchise Channels

Conventional Channel Factors to note:

• Degree of control
• Importance of channel members
• Nature of the product
• Number of channel members
In franchise channels, “degree of control” &
“importance of channel members” are key
21

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Discussion Question #1
Snap-on Tools is the franchisor for a unique business format
franchise that uses franchisees in mobile vans to sell high quality tools
and equipment to professional mechanics. The franchisees bring the
tools and equipment to the mechanics at their worksites so that the
mechanics do not lose time shopping for tools. One of the features of
the business format is Snap-on prescribing the level and variety of
inventory to be carried by the franchisees. Snap-on argues that it has the
knowledge and experience needed to assure that each franchisee has
the optimum inventory mix. Many of the franchisees, however, claim
that the territories they serve are diverse and have different customer
needs. So they can become loaded down with inventory that they cannot
sell if they rely on Snap-on to specify their inventories. This dispute over
the control of franchisee inventory has created a conflict that resulted in
some franchisees launching lawsuits against the franchisor.

Discuss the issue of inventory determination from the franchisor’s

and the franchisee’s points of view. Do you think that specifying the
franchisees’ inventory mix is a crucial component of the business
format?
©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Discussion Question #2
7-Eleven, Inc. operates the world’s largest convenience store
retailer franchise. In business for over eight decades, 7-Eleven has
thousands of stores all over the world and boasts that it has an instantly
recognizable, world-famous trademark. Yet 7-Eleven says that it can
provide prospective franchisees with the opportunity to own a true
neighborhood business. 7-Eleven believes that its ordering system, POS
scanning system, and other technologies enable franchisees to have
customized product assortments that reflect the localized needs and
preferences of customers. Thus, franchisees can always have the
products customers want whenever they step into a local store. 7-
Eleven also promises to prepare its franchisees for success by providing
initial and ongoing training, financial assistance, payroll services, twice-
a-week consulting services and other support.

Does 7-Eleven’s model live up to the statement often heard in

franchising circles that: “Franchising lets you go into business for
yourself but not by yourself?” Discuss.

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.
 Discussion Question #5
H&R Block is by far the largest franchisor of tax preparation
services with over 4,500 franchisees. Startup costs range from
about $35,000 to $100,000 and there is no franchise fee. But the
royalty rate on all revenues generated by the franchisees is 30
percent—one of the highest rates in franchising for any type of
franchise business. H&R Block franchisees are not permitted to
operate from home or even in kiosks in stores and malls. Instead,
they must operate from a store or office format. Franchisees
receive substantial training from H&R Block based on the
expertise and systems developed by H&R Block over half a
century.

Is H&R Block’s royalty rate too high? Why or why not? Discuss
in terms of what support the franchisor offers to the franchisee,
the nature of the service provided by the franchisee, and the
franchisee’s obligations to the franchisor.

©2013
©2013Cengage
Cengage Learning. All Rights
Learning. All Rights Reserved.
Reserved.May
Maynot
notbebe scanned,
scanned, copied
copied or duplicated,
or duplicated, or posted
or posted to a publicly
to a publicly accessibleaccessible
website, inwebsite,
whole orininwhole
part. or in part.