It’s the Unit Economics, Stupid!

I had a good conversation with David Leoncavallo of Sopra Capital today. Sopra and Foundry operate in a similar space so it is always interesting to spend some time talking about trends we see in franchising. One of the things we have both run into recently is that too often for emerging brands, unit economics takes a back seat to everything else when it should be the focus.

When we talk about unit economics in franchising, we are referring to the individual franchisee’s ability to make money by following the franchise system. If you are evaluating a system, you can generally find information about how well existing franchisees are doing by taking a look at Item 19 of the Franchise Disclosure Document. Many emerging franchisors leave Item 19 blank, which means you need to talk to existing franchisees about how well they are performing. Remember that franchisors can only talk about financial performance that is disclosed in Item 19.

If you are a franchisor struggling with unit economics, here are three tips to consider:

1. Focus on expense reduction strategies. 

The best place to start when it comes to improving unit economics is expense reduction. This is because every dollar saved is a dollar in your franchisee’s pocket, while revenue always comes with additional expenses (the cost of delivering the service or product). Look at ways that you can use the scale of your franchise system to negotiate volume price discounts for everyone in the system. This could be through the use of centralized printing solutions, like Divvy, or through negotiating better food distribution contracts with your network.

2. Don’t forget the revenue. 

Even though expenses are the place to start, a strong system also includes strong revenues. Once you have franchisee expenses under control, the increased revenues will be more profitable to the franchisees. Marketing has changed dramatically in recent years and that means that there are a number of cost effective ways to drive your business. Develop and execute a digital marketing campaign to support your franchisees, but also remember that the best marketing is free and it comes from your customers. Solutions like Listen360 help you and your franchisees understand the quality of the customer experience at individual franchisee locations. You want your customers to become your brand’s best promoters.

3. Track and measure your efforts. 

Most franchisors only collect revenue information from their franchisees. It’s difficult to have a complete understanding of your system’s financial performance if you don’t also have a firm grasp on the expense side. We recommend ProfitKeeper‘s tools to help franchisees and franchisors track profit and loss at the unit level. Identify a baseline of performance prior to implementing any expense reduction or revenue generation strategies so you can see the impact of your efforts. It is easier to get franchisee compliance with new programs if you can demonstrate measurable success.

If your unit economics are strong, it makes marketing and selling the franchise system much easier. Good unit economics leads to happier franchisees. Happy franchisees will provide strong validation of the system to candidates interested in your system. On the other hand, weak unit economics can make awarding franchises extremely difficult and no amount of marketing or PR will completely solve your problem.

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