Creating Profit Through Alliances - business models for collaboration E-book | Page 73
To determine how attractive a franchising formula is
for the franchisees, three cost components are
important:
the size of initial investments to set up a shop
or sales office;
the size of the monthly payment in return for
using the formula;
the margin obtainable through sales, based on
purchasing costs and freedom to set prices.
Where it concerns an established franchise formula,
the costs for a franchisor usually concern the
consultations and part of the shop furnishing. The
major investments have been made before, and the
most important risks have been taken. At bottom, he
is the party that stands to gain most from the
negotiations.
Aligning propositions and referral
Pioneering franchisors will need to keep the
franchisee's initial investments low and possibly
refrain from asking a one-off compensation. This
reduces the starting-up risks for the franchisee. This
risk will also seem less if the franchisor agrees to
share in the investment; this will have a positive
impact on the formula's growth rate.
Where two companies align their propositions and
refer to each other, this will generally not see much
in the way of cost settlement. In most cases both
parties bear their own costs for the alignment and
possible product or service modifications. Aside from
that, the expenses of joint marketing campaigns may
be shared; see also the paragraph about co-branding.
Research has shown that the size of the monthly
payment does not seem to influence the growth rate.
However, this payment should be such that it
combines with the profit margin of the turnover to
produce a profitable franchise. As the formula ages,
the pressure will increase to reduce the monthly
payment: franchisees become more experienced and
less dependent on the formula, for example because
they know their customers and their needs better,
and mutual competition increases 31.
In the services sector it is still common to work with a
lead fee. Simply contributing a potential client or
arranging an assignment can be reason for the
contracting party to remunerate the contributor. For a
single lead this may be a few percent, but for an
entire sales trajectory percentages of 10 to 30% are
customary.
In many cases, the franchisee will need to finance the
launch of his or her company. The furnishing of a
location, hiring and training personnel, a sub-optimal
staffing at first and building and maintaining stocks
all cost money. These financing costs also need to be
incorporated in the business case.
Also referring Internet users through links or banners
on another website, known as affiliate marketing,
can be regarded as partnering; the more so if
payment is offered for each completed sales
transaction, rather than for each „click‟ as Google
does with Adwords.
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