Using Applied Technology To Improve Franchise Development
"The more things change the more they remain the same."
During my 35 years in the franchise business, I've observed that the process of growing a franchise system has remained virtually unchanged. If one were to Google "franchise sales process" they would find numerous responses, some several years old. Yet each response shares a common thread: obtain good leads, qualify candidates, and follow a series of steps that will lead to closing the franchise transaction.
There have been limited changes to the franchise sales process over the years. Two primary drivers of change are stronger franchise disclosure requirements and the increased availability of free franchise information online. Lesser changes include the use of franchisee satisfaction surveys, the generation and delivery of leads through social media, communicating with candidates through email, and the electronic delivery of franchise response packets and FDDs. However, the marketing and sales of new franchises remains focused on combining quality lead generation and effective sales people.
Too few franchisors use data to market and support their franchise development programs
"Of the 168,565 franchised outlets opened within a 5-year period, the bottom 25% of franchise systems with negative growth accounted for 25% of all new outlets opened. But they also represent 61% of the 138,825 outlets closed." (A Few Bad Apples?, Franchisegrade.com)
To support their sales process, many franchisors use anecdotes and self-promoting information that lacks objective performance data. Prospective franchisees are lured by articles with enticing titles like "The Hottest Franchises" or "Up-and-Coming Franchise Concepts." Franchise ranking websites and other broad measures of so-called successful franchises are used to enhance the credentials of a franchisor, with most ranking criteria based on system size and growth. Although these are important criteria for measuring system performance they aren't the only ones.
When franchise development is focused primarily on lead generation and aggressive selling techniques, poorly performing franchise systems can outgrow better-performing franchise systems. However, if franchise performance statistics and competitive benchmarking were applied to the franchise sales process, poorly performing franchises would find it difficult to compete.
This raises a key question for franchise development executives and sales teams: Would a franchise candidate be more aggressive in pursuing a franchise opportunity if they recognized that franchise as a top performer based on objective, data-based information?
Is "marketing myopia" the cause?
Marketing myopia is a term introduced by the late great Harvard Business School marketing professor Theodore Levitt. In a 1960 Harvard Business Review classic entitled "Marketing Myopia," Levitt wrote that companies become so focused on producing goods or services that they don't spend enough time learning what their customers really want. In our case, the customers are franchisee candidates. We can compare this mindset to franchisors so focused on new franchise growth that they neglect those areas that make franchisees more successful.
The myopia that Levitt describes is a lack of insight into what a business is doing for its customers (think franchisees). Organizations invest so much time, energy, and money into what they currently do that they're often blind to the future. One of the best and often-quoted examples of marketing myopia is the railroad industry believing it was in the train business, rather than the transportation business.
Curing marketing myopia in franchise development
Franchisors suffer marketing myopia if they view their primary role as selling franchises, rather than marketing investment opportunities. For example, some franchisors devote more time and resources to marketing and selling franchises than to measuring and maximizing the return on investment (ROI) of their franchisees and finding ways to improve system performance. This can be solved by introducing technology to the franchise sales process using objective franchise and franchise industry performance data.
Quite often, poor franchise system growth is attributed to low-quality or insufficient leads, or weak franchise sales people. Yet, how many franchisors know whether their franchisees are earning an acceptable ROI? And if so, how much? How many franchisors ask the question? Franchisors should stop selling franchises by emphasizing emotional triggers. Instead, they should use statistics and comparative data to demonstrate why their franchise represents a quality investment with a great ROI opportunity.
Where the real franchise growth is coming from
The problem is not a lack of qualified candidates, but rather a lack of more qualified franchise opportunities.
From 2010 to 2016, franchise systems with between 101 and 500 outlets generated $66.4 billion in initial investments, which is 2.5 times more than systems with 501 to 1,000 outlets. This may reveal that emerging brands gain traction and growth occurs more rapidly. Once a franchise system reaches a certain size its growth slows.
In addition, most franchise systems are relatively small: 7 of 10 franchise systems have 100 locations or fewer. These franchise systems face competition from larger, more established franchises and multiple smaller systems that fight for exposure and growth. (Kings and Paupers, Franchisegrade.com)
The more a franchise system can point to reliable franchise performance data, the more attractive and less risky the franchise investment will appear to a prospective franchisee. Our research indicates that from 2010 to 2016, about four-fifths (82%) of the money invested into franchises went into the top 28% of franchise systems--which accounted for 86% of new franchise outlets during the same period. Conversely, 82% of franchise systems accounted for only 14% of new franchise growth over the same period.
Applied technology can improve franchise system performance and increase system growth
The benefit of statistics is that you can use them to support your franchise development marketing.
What's missing from franchise development is a lack of technology to establish predictive analysis for franchise system investments. This includes objective performance data and benchmarking against other competitive franchise opportunities. If franchisee candidates had access to objective franchise performance data, it would minimize their investment risk. This information would enable franchisors to learn how they compare with other franchise investment opportunities and where improvement is needed.
A paradigm shift has occurred, and data is needed more than ever to support franchise growth.
An analysis of Item 19 disclosures indicates the benefits of applied technology
68.8% of the top 25% of franchisors have an Item 19 FPR in their FDD
In our study of Item 19 disclosure over a 6-year period, we found that franchisors that provided expense data on their franchised locations grew by an amazing 18.4%. Since 2010, the 383 franchise systems that provided expense data in their Item 19 grew by 24,084 locations, from 131,111 to 155,195. Franchise systems that failed to provide financial transparency had negative growth over that same 6-year period. On average, franchise systems that provided expense data had the highest growth rates.
10 ways applied technology will enhance franchise system quality and franchise development
- More objective and reliable franchise performance data will identify healthier franchises; objective performance analysis will highlight top performers.
- It will provide the ability to compare individual franchise system performance to sector and category.
- Franchisors that market objective performance data will have a competitive advantage. Look to the increase in Item 19 disclosures over the past several years to see how franchising can evolve.
- Poor-performing franchisors will find it more difficult to recruit qualified leads. They will have to improve system performance or fail.
- Utilizing the right data to qualify a business before it's franchised could reduce poor start-up performers and boost the growth of better start-up systems.
- Start-up and emerging franchisors will know key performance standards to meet and how they compare.
- Data will identify areas that franchisors need to improve, e.g., Item 19, territory rights, litigation, or system growth.
- Data can be used to identify the best markets available for franchise development, rather than granting a franchise based on the choice of the candidate.
- More data would elevate the overall level of franchise system pro formas.
- Last, more data would provide prospective franchisees with more qualified information regarding their franchise investment.
- All stakeholders in franchising need to recognize and accept the fact that the path to successful franchise system growth runs through quality franchise systems.
- The franchise sales process needs to utilize applied technology and be brought up to current times.
- Applied data can identify top-performing franchise systems and help poor-performing systems become more successful. Using objective data to recognize the strongest systems and improve the weaker ones can elevate the performance level of the entire franchise industry.
- Integrating newly acquired performance data into the franchise sales process will lead to more use in both franchise operations and franchise sales. The increase in Item 19 FPRs is the result of franchisors using this information to gain a competitive edge. Currently it's the best example of how data can enhance the franchise sales process.
Ten years ago, a paradigm shift occurred as fuller Item 19 disclosures became more prevalent. Now franchising's next major shift has begun as applied technology will become the norm in franchise sales and development.
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