Part 4: Additional Perspectives on Marketing Channels. Franchise Marketing Channels. Franchise channels as a particular type of marketing channel Key Franchise Channel Concepts & Terms Scope and importance of franchise channels Rationale underlying franchise channels
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.
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)
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)
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.
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.
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.
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.
By 2005 the total output of franchise channels measured in dollars:
Franchising and franchise channels continue to grow both in the United States and internationally
Advantages for Franchisor to Franchise:
Advantages for Franchisee to Franchise:
Disadvantages for Franchisor to Franchise:
Disadvantages for Franchisee to Franchise:
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.
Channel Design & Franchise Channels
Selection of Franchise Channel Members
Motivation of Franchisees
Managing the Marketing Mix in Franchise Channels
Conventional Channel Factors to note:
In franchise channels, “degree of control” & “importance of channel members” are key
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?
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.
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.