Making Sense of Advertising Fees
Brand identity. How do you achieve it? Advertising! Every
business owner knows that brand identity drives customers and
revenues, but how many small business owners can afford to saturate
a marketplace to develop brand identity. Not many, unless they're
part of a franchise network.
And yet we often hear from franchise prospects that franchising
is too expensive and that part of the reason it is too expensive is
the advertising or marketing fund fee assessed by the franchisor.
If brand identity is critical to the success of a business, then
how do you make sense of the fees franchisees pay to advertise?
Who owns the Ad Fund Money?
First, it's important to know that franchisors may require
franchisees to pay a monthly flat fee for advertising, or (more
commonly) a royalty.
Typically, the advertising royalty runs between 2% and 3% of the
franchise unit's gross sales, collected monthly. It's also
important to know that advertising royalties always belong to the
franchisees and never to the franchisor. A franchisor that violates
this principle will not only lose credibility and trust, but is
likely to face serious consequences in a courtroom battle. Even
though the franchisor may collect the ad royalties, these funds
must be held separate from the franchisor's operating royalties and
accounted for separately.
Two to three cents of every dollar collected by a franchise unit
doesn't sound like a lot of money, but it adds up quickly. The ad
funds of the top franchise networks in America each amount to
millions (some are in the billions) of dollars annually - money
that can be wisely invested in all types of media, as well as
events and promotions, to build brand identity. How would a single
business owner - selling pizza, plumbing, haircuts, coffee, etc. -
afford to advertise on billboards, TV, radio, and online? You know
the answer: The mom and pop business owners cannot do it. They
cannot afford to build brand identity, and consequently they cannot
compete with franchised units.
Deciding how to spend the money
In a franchise network, franchisees not only can afford a
variety of effective advertising and marketing campaigns, but they
also get the opportunity to voice their opinions about how their
money should be spent. Franchisors generally organize a committee
that includes members of the franchisor management team and
franchisees to distribute the funds. The franchisees may be
appointed by the franchisor, or elected by their peers.
However, most franchisors and franchisees admit that they're not
knowledgeable about advertising, and even if they are, they're not
prepared to develop and execute marketing plans, which includes
expertly buying media (How much TV exposure is too much? How many
billboards are necessary to make an impact?) and negotiating
advertising fees. That's why franchise networks select media
agencies to do the work for them.
Franchising isn't an inexpensive proposition - but is any
business? Franchising comes with fees and some people conclude that
the fees make franchising too expensive. Others, however, including
franchisors and franchisees who have profited from franchising,
will say that the fees are reasonable and necessary to build
successful businesses. Ultimately, you'll have to decide if the
franchise fees make sense for you.