An article about how to set the price of your franchise. We determine the amount of basic franchise payments and develop a franchise pricing policy.

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Franchise pricing

Determining the correct price for your franchise is always a challenge for a beginner franchisor. More specifically, the question is what size of the franchise fee, royalties, and other payments should be set for your franchise.

I would love to give you a short and simple formula that can be used to easily and simply calculate the optimal cost of a franchise, but unfortunately, there is no such solution. First of all, there is no such solution because the price of a franchise largely depends on the franchise development strategy, the audience, the market, and the environment in which your franchise develops.

Instead of a magic bullet, I suggest you answer a few questions yourself that will help you determine the optimal price for your franchise.

Ideally, you will answer these questions together with your team so that each question becomes a subject of discussion and brainstorming.
What problems does the franchise price solve?
The price of a franchise is a tool. It is a tool aimed at solving strategic tasks.

When determining the price of a franchise, you usually have to choose between two tasks:

1) To determine the maximum growth in the number of branches.

2) To maximize your profit from each franchise sold.

What costs do you incur?
This is the next important question you need to answer to determine the optimal price of your franchise.

You have costs:

1. At the stage of franchise development. It is logical to compensate them from the franchise fee.

2. When connecting a new franchisee. These costs should also be compensated from the franchise fee.

3. During the support of the franchisee, you will also have expenses. They should be compensated, most likely, in the form of royalties.

You should determine the costs for each item and determine how much you plan to recover the costs.

What pricing strategy will you follow?
Most likely, your franchise will not be the only one either on the market or in the industry. It will exist in a competitive environment, and the prices of your competitors will affect the price of your franchise. Therefore, you will have to choose one of the following pricing strategies:

1. High-price strategy allows you to "skim the cream" by setting the maximum price for your franchise. This strategy is possible if there are favorable conditions, namely, if you are for some reason far ahead of your competitors. This usually happens if there are no competitors at all, or if their emergence is very difficult.

2. Medium-price strategy allows you to maintain parity and keep prices without starting price wars, which will most likely lead to lower prices for all market participants.

3. Price breakthrough strategy should be followed if you are attacking and are interested in winning back your market share.

How do we react to the leader's prices?
It is good if you are a leader and have a significant share of franchise sales in your industry.

However, if you are not a leader, determine in advance how your price will relate to the price of the leading franchise in the industry.

How will you react to changes in the price of the leading franchise?

Collect crumbs after the leader
Why should you keep the leader's price in focus?

If you are not a leader, you will sometimes receive applications from partners who, for one reason or another, were not accepted into the leader's franchise, and they will be ready to buy a franchise from you. Why might this happen? For example, the leader has already sold an exclusive for the region and is not allowed to sell another franchise in this territory by contract. They are forced to refuse those who want to buy a franchise, which means they are forced to turn to other franchisors in the industry.

Alternatively, the cost of the leader's franchise may be too high, and potential buyers will look for a slightly cheaper franchise.

Keep this in mind, and you may want to reflect this in the price of your franchise.

Does the franchise price depend on the region?
Here is the next important question that you should prepare an answer for in advance: "Is the price of our franchise the same for all cities, or will the cost be different for smaller cities?" We will still touch on the regional franchise development strategy separately, but for now it is enough for us to understand whether the price differs from region to region or not.

To make it easier for you to answer this question, I offer you three categories of cities:

Moscow and Saint Petersburg.
Million-plus cities.
All other cities.
Look at each category and decide: "How does doing business in these regions differ? How do these differences affect the price?"

For example: "We have a lot of competitors in Novosibirsk and it is very important for us to enter this region, so the price will be lower there."

Or: "We receive the most applications from Sochi, so the price there should be higher than in other cities."
How does the price compare to the opening investment?
The franchise buyer analyzes and evaluates not only the amount of franchise payments: royalties, lump sum, etc. He evaluates the total investment in starting a business. Keep this in mind when planning your pricing.

Typically, franchise payments are significantly less than the investment in opening a retail outlet, but perhaps you impose special conditions on the franchisee, and the price of your franchise is equal to or higher than the opening investment.

In any case, take this factor into account when setting the price.
How will the price change depending on the number of points in the network?
The number of points in the network is a confirmation of the functionality of the business model. It is logical that as the number of outlets increases, the cost of the franchise will also increase. At the same time, the opposite situation is also possible, when you follow the strategy of maximum prices and “collecting the cream,” and price increases are simply impossible.

It is important for you to understand whether you will change prices as your network spreads and if you change, then in what direction.

For example, at first your network wants to demonstrate rapid growth to the market and is ready to sell franchises much lower than the market, and gradually increase prices as the network grows.

Or, on the contrary, you skim the cream off an extremely popular franchise and are not ready to give up a single ruble from the very start of sales, and as the network spreads, you will be ready to gradually reduce prices.

Franchise price increases
It must be admitted that a franchise is a product that is rarely bought quickly and impulsively. On the contrary, sometimes a franchise can be compared to a good wine that only gets better over the years. Some franchisees can negotiate for years without taking active steps to purchase or sign an agreement.

Planned price increases can help create excitement and push franchisees to take action. You warn the potential franchisee in advance that a general price increase is planned from a certain date, and if he wants to have time to buy a franchise at the old price, he needs to act quickly.

Determine at what point you will raise prices and how you will use this tool to boost franchise sales.
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Special conditions for purchasing a franchise

Are there groups of entrepreneurs to whom you are ready to sell a franchise on special terms? Will you announce this publicly or during negotiations? Who should I make a discount for? A discount is worth making for franchisees whose cooperation for some reason is less risky than working with others. For example, entrepreneurs with extensive experience, or, for example, premises owners may have special conditions for purchasing a franchise.

Special conditions may appear not only in the form of a discount. I will list just a few privileges that you can provide to buyers of your franchise:

A. Lump sum installment plan.
B. Royalty Holidays.
C. Exclusive right in the region.
D. Discounts.
E. Additional services.

Price as a filter
Obviously, in addition to the fact that the lump-sum fee is a source of profit and a way to compensate for investments in developing a franchise, the price is a filter for partners.

It is very difficult to determine what funds a potential franchise buyer actually has. By the size of the lump sum contribution, you can weed out applications from entrepreneurs with insufficient budget.

Conversely, if you want to sell your franchise to anyone, you can clearly communicate this to the market by setting a small and affordable lump sum fee.
Price Intervals
Personally, I divide all franchises into two groups based on price:

- franchises less than a million

- franchises worth more than a million

And in my opinion, the audience and methods of working with these two groups are significantly different.

Franchises aimed at mass franchisees are sold for less than a million. For an audience with little business experience.
Franchises worth more than a million are franchises for large entrepreneurs and experienced partners.