2011: Adapt or Die: Annual Franchise Development Report Shows Growing Improvement

By: Eddy Goldberg
Published: December 2nd, 2010

One of the most anticipated events at each year's Leadership & Development Conference is the presentation of results from the Annual Lead Generation Survey. This year's survey gathered data on sales and recruitment practices from 126 franchisor participants representing more than 42,000 units (38,563 franchised and 3,528 company-owned). Participants consist of franchisors who have registered for the conference and fill out the survey forms. The responses are sorted out and analyzed to provide an in-depth view into the recruitment and development practices, budgets, and strategies of a wide cross-section of franchisors--and provide the basis of our Annual Franchise Development Report (AFDR).

On the whole, says Franchise Update Media Group Publisher Steve Olson, who presented the findings at the conference, there have been some noticeable improvements in performance by franchisors compared with last year. "This is the first time in the 13 years we've conducted the surveys that we've seen a greater number of franchisors implementing best practices in development," he says. "We're seeing more positive change in development practices in this survey than we have since we started this."

This growing improvement, says Olson, is franchisors responding to the economic environment, working with franchisee buyers and existing franchisees to continue to make growth happen--whether through incentives for potential buyers, or with franchisees to provide improved support and services to strengthen their validation. "Failure is not failing," says Olson. "Failing is not making changes to respond, reinvent, and reengineer."

Among all respondents, growth plans for 2011 target a total of 3,100 franchisees and 3,850 new units. That represents a reduction from plans for 2010, when respondents from 116 franchisors forecasted they would add 3,400 franchisees and 5,360 units. (However, a majority of franchisors did not hit their sales targets, so perhaps expectations from this year's respondents have been tempered by the realities of the past two years.) Despite franchisors planning on more conservative growth after the recent body blows landed by the economy, Olson says development is "taking baby steps" and he sees "a very positive moving forward" in 2011. "It's getting better but in increments. Recovery to previous years' numbers still will take a couple of years."

What follows is a high-level summary of just some of the in-depth findings that will appear in the 2011 AFDR. (To order a copy of the complete report, click here)

• Recruitment budgets. For 2011, average recruitment budget plans were down slightly from the year before, dropping from $162,000 to $152,800, after climbing to an all-time high of $198,000 in 2009. Median recruitment budgets for 2011 dropped to $80,000, compared with $88,000 the year before, after coming in at $138,000 in both 2008 and 2009. "We can see it was leveling off," says Olson. "Recruitment budgets will go up as the market rebounds and credit becomes available, but slowly." In the coming years, he says, "We'll see more franchisors pumping money into their development budgets."
• Where the money goes. Projected development spending by category has remained fairly steady over the 5 years from 2007 to 2011. The Internet still accounts for about half of all recruitment dollars, followed by print (18 percent), trade shows (13 percent), public relations (10 percent), and "other" (12 percent), which has risen slowly and steadily over the past 5 years, most probably from increased spending on social media.
• Internet spending. Discernible shifts appeared this year in how franchisors plan to allocate their Internet spend. Most dollars are still being spent on online ad portals and an increasing amount on search engine optimization (SEO). The percentage of SEO spending rose from 18 percent to 24 percent, while pay-per-click remained steady, dropping 1 percentage point to 14 percent. Social networking spending rose from 6 percent to 10 percent, and is expected to continue rising as franchisors continue to try new ways to use social media platforms for franchise recruitment in the coming years.
•  Top sales producers. The Internet is still the top sales producer, although other lead sources are gaining ground. Its role for generating buyers had been steadily rising until 2005 (46 percent), after which it declined for 4 years before increasing slightly in 2010. Referrals accounted for one in four sales in 2010, brokers remained steady at 17 percent, print dropped from 8 percent to 5 percent, and "other" (think social media) rose from 13 percent to 17 percent from the previous year.
• Top Internet sales producers. Online ad portals continued as the top online sales producer, although its numbers declined this year. While SEO rose only from 26 percent last year to 28 percent this year, the general sense at this year's conference was that ad portals still play a valuable role in franchise sales, but there is an ever-increasing interest in SEO and better-designed franchisor websites (with separate sites for consumers and potential franchisees).

Pay-per-click (PPC) accounted for 11 percent of sales in this year's survey, up from 8 percent from 2009. Nevertheless, for both 2009 and 2010, PPC was judged by respondents to have the lowest return per budget expenditure. Interestingly, those who said they "Don't know" what their top Internet sales producers are rose to nearly one in four (24 percent), up from 16 percent last year.

The big buzz this year, says Olson, was around SEO and franchisors optimizing their own recruitment websites. "The increase in sales attributed to SEO shows more Internet dollars are going toward site optimization as a top generator of prospects in the online space," he says. "This really should be the case."

• Online alternative resources. Selling franchises through social media platforms still has a long way to go, according to this year's survey participants, who reported five sales made through this channel; this compares with seven sales reported in 2009 and seven sales in 2008. The percentage of franchisors using social media as a sales tool actually dropped in this year's sample: 58 of 126 (46 percent) placed online ads, videos, or press releases on social or business networks, blogs, YouTube, Craigslist, etc. compared with 62 of 116 (53 percent) last year.

"This is still not a direct sales source, but it strengthens your brand awareness. We're not there yet, but we have to watch it closely as a recruitment tool," says Olson. "Most of the success we've seen is definitely on the retail side. Social media can contribute, but it's still not a direct recruiting vehicle yet, with the exception of a few concepts." The main point for franchisors, he says, is to continue to experiment with social media as a recruiting tool, but, he advises, "Don't throw a lot of money at it."

• Overall closing ratios this year were about the same as in 2009: leads to sales for both years came in at 1 percent; applications to sales fell slightly from 10 percent in 2009 to 8 percent in 2010; and discovery days to sales remained at 65 percent. "We continue to see a slight dip in the application-to-sales ratios," says Olson. "During the boom years, we were seeing that number at around 20 percent." He attributes the decline to the ongoing tight credit situation. Also, he says there are fewer potential buyers today, and they are more cautious about investing in any type of business. His message to franchisors: "You have to expand your recruiting pool to make up the difference."
•  Brokers. The use of brokers by this year's participants inched up slightly from last year, rising from 52 to 57 percent, but the percentage of those closing deals through brokers dropped from 78 percent last year to 67 percent in 2010. The "sweet spot" for broker deals is still in the up-to-$150,000 range, and looks to remain there for now. The predominant users are service businesses and lower-cost retail or food concepts. Median commissions paid to brokers in 2010 rose to $15,000 per deal, an increase of $4,000 from the year before (median broker commissions last year had fallen $2,000 from the year before, from $13,000 in 2008 to $11,000 in 2009). "Franchisors are spending a little more money with brokers again, because of the tighter ad budgets and the advantages of no money invested up front with brokers," says Olson.
• Franchise sales performance. Since the bottom fell out of the economy in mid- to late 2008, setting sales goals has become a tricky proposition. Yet set we must, whether those goals are more conservative or not. For 2010, 19 percent of franchisors reported they are exceeding their goals, 21 percent said they are meeting them, and 59 percent reported they expect to end the year below their sales goals. In 2009, 9 percent exceeded their goals, 33 percent met them, and 59 percent were below. Despite lowered expectations to account for the recession, a pool of cautious prospects, and consumer uncertainty, for six in 10 franchisors the market continues to prove challenging. One positive note is that the number of franchisors exceeding their goals in 2010 doubled from last year.
• Franchisors exceeding goals. The distribution of franchisors exceeding their goals was largely unchanged from 2009 to 2010 for the service category (47 percent in 2010, 50 percent in 2009) and the retail non-food category (21 percent in 2010, 20 percent in 2009). In the retail food category, franchisors exceeding their sales goals dropped from 20 percent in 2009 to 11 percent this year. The food category, however, rose from 10 percent in 2009 to 21 percent this year. "Lower-cost and service businesses did fairly well, but we saw drops in retail food, which includes juice, coffee, pretzels, and other food concepts that involve minimal preparation," says Olson.
•  Measuring costs. Among this year's respondents, 69 percent track their cost per lead, compared with 67 percent in 2009. Slight improvement yes, but read another way, nearly one third (31 percent) still do not track cost per lead. This year, 65 percent tracked cost per sale, compared with 57 percent in 2009, a more important consideration; but again, more than one in three (35 percent) did not. The acquisition cost of both leads and sales rose over the previous year: median cost per lead was up from $43 in 2009 to $54 this year (in 2009, median cost per lead fell $7 from the previous year); and median cost per sale rose from $7,000 in 2009 to $10,000 this year.

In analyzing these numbers, Olson says, measuring cost per lead is least important. "The key number is acquisition costs: How can you establish a development budget if you don't know what selling a franchise will cost you? Say you want 40 franchises this year and I give you $80,000 to do that. If your cost per deal is $5,000, you'll need $200,000--the $80,000 budget won't even keep your sales on life support!" The point, he says, is that franchisors must determine their cost per sale and budget accordingly.

Also, he notes, with sales/recruitment budgets going down and franchisors spending a median of $3,000 more per sale, there could be problems down the road for franchise recruitment efforts.

One way franchisors continue trying to boost sales, he says, is by reducing expenses on franchisee startup costs. "Everyone is talking about lifetime royalty stream to justify the lower up-front costs."

Finally, he says, in a time of tight budgets and a declining, more cautious pool of applicants, it is more critical than ever to measure your marketing ROI. "You will save thousands of dollars per year by determining where your best sales sources are. Too many companies unfortunately continue to base their advertising buys on cost per lead."

• Referrals. For more than half of respondents (54 percent), referrals have the highest close ratios (compared with 50 percent last year). Almost two thirds (62 percent) provide incentives to franchisees (65 percent last year). This follows a huge leap from 2008, indicating that the number of franchisors providing incentives has leveled off. Median referral fees of $3,500 remained steady year over year. Referrals continue to have, by far, the highest close ratios of all lead generation sources, but there's more to success in this endeavor than providing incentives to franchisees.

"Success isn't based on providing a fee, but in creating a referral program--and a system to let franchisees know about it," says Olson. Components of such a program could include a newsletter, noting how many franchisees have come aboard, recognition at the company's conference for franchisees or employees who have provided referrals, and putting together a year-round awareness campaign to boost greater activity. While franchisors often get a flurry of early leads when a referral program is introduced, the most important component of success is to promote it on an ongoing basis, he says.

• Qualifiers. The use of qualifiers or lead screeners in the sales process was a hot topic this year. Nearly four in 10 (38 percent) participants in this survey employ qualifiers. Of those, nearly six in 10 provided their qualifiers with a commission in addition to their base salary. Shelly Sun, CEO of BrightStar Healthcare, this year's STAR Award winner for Best Telephone Prospect Follow-Up, says qualifiers have "the highest ROI in the entire sales cycle to move an initial prospect to a lead and a lead into a closed sale." (For more on her company's use of qualifiers see page 26.)
• Web analytics. The number of franchisors using web analytics to evaluate the results of their online recruitment spending rose to 79 percent this year, up from last year's 68 percent. "More franchisors are starting to use metrics to improve their websites--or at least have installed analytics," says Olson. "Consequently, there's been an improvement in the websites that have been analyzed." The average franchise conversion rate of visitors to leads through franchisor websites rose slightly this year to 1.9 percent, up from last year's 1.7 percent. In today's marketplace, that could be more of an achievement than the statistics would indicate. "The better we get at reducing site abandonment the better off we are," says Olson.
• Website navigation. The importance of building a clear navigation path into your website to guide visitors through a process--much as your franchise has developed recruiting steps for the sales team to use with prospects--also was a big topic of discussion this year. Olson says this is due to what he called "breakthrough research intelligence provided to us" in the past year, and says this was responsible for the biggest success franchisors are having in improving the effectiveness of their websites.

"The majority of people don't know how to buy a franchise. We have to give them start points they're going to follow on our websites to draw them through the sales process," says Olson. Up until 2009, he says, franchisors just didn't do that. "Now that there's a systematic process leading them through the website, it works for both sides; they're engaged in a logical process." The use of a navigational starting point on franchisor websites was up to 28 percent this year, compared with just 6 percent in 2009. If you create a path and provide an order for navigation from lead to finish to draw prospects through that, says Olson, sales are bound to improve.

ORDER YOUR REPORT TODAY!

The 2011 Annual Franchise Development Report (AFDR) delivers data from 126 franchisors with more than 42,000 units organized by industry, unit investment, system-wide sales, and more. Each year, the AFDR provides franchisors with the perfect tool for digging deeper into their own development practices, for benchmarking their sales and recruitment budgets against their own industry categories, and for setting goals and budgets for the coming year. The report also includes research into online recruitment practices.

The AFDR, the only sales and lead generation benchmark report available in franchising, identifies industry sales trends and top lead generation sources for meeting your sales goals.

For example:

• Are your closing ratios in line with your industry and investment level?
• Is your online spending paying off? How do you know?
• Are your brokers delivering--and is their price per deal too high?
• What conversion rates should you expect from your website?
• Some franchisors are exceeding their sales goals. What are they doing differently than those falling below their goals?
• How does your sales budget compare with those of other concepts in your market?
• Social media: how are franchisors using it to recruit candidates?

The 2011 AFDR is packed with timely information and benchmarking data that can help your franchise system grow faster and close more deals--while saving thousands in cost per sale. Based on in-depth interviews with 126 franchise organizations actively expanding their franchise systems, this thoroughly researched report reveals the franchise success drivers that are sure to boost the output of your sales department.

Packed with the most comprehensive sales and lead generation data in franchising, the 2011 AFDR is a must-buy selling tool for franchisors, development consultants, and advertising and marketing suppliers. The AFDR is ideal for benchmarking and building budgets and media plans. The complete report, with analysis and benchmarks, is available now for $399. For ordering information, call Sharon Wilkinson at 800-289-4232 x202 or sales@franchiseupdatemedia.com, or go to www.franchise-update.com/magazine/franchisedevelopmentreport/.

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