How franchisors can build franchise system enterprise value by supporting and boosting local franchise marketing and customer acquisition.
When it comes to launching a new franchise, emerging franchisors should know that the value of a franchise system rests on the success of its franchisees.
Because long-term enterprise values are a function of a franchisor’s royalty earnings before interest, taxes, depreciation and amortization (EBITA) – a factor determined by franchisees’ sales and profitability – it’s important to understand how to supercharge local marketing and build up strong unit-level economics and sales across the entire network to achieve sustained growth and success over time.
“When we speak to startup franchisors, everything – their whole future – is based on franchisee validation, franchisee unit-level economics. And I feel like startup franchisors could use a boost or support, or at least focus and a game plan, for local marketing [and] a brand development fund,” says Charles N. Internicola, a seasoned franchise attorney and the founder of the Internicola Law Firm, a law firm that specializes in franchise law and development.
So how can franchisors develop a game plan that not only attracts the right customers but sustains those relationships and builds unit-level economics over the long term? As it turns out, the answer lies in identifying ways to meet customers’ needs effectively.
Begin at the end
For new and emerging franchisors, making sure a brand’s values are marketed effectively and products and services are aligned with customers’ actual needs are critical – no matter how hard it might be for business owners to make those connections.
“I think it's very hard for a business leadership team, or founder, to see their blind spots. And so everyone has a difficult time assessing and evaluating their own business. So 99% of the time, we all think the messaging and the values we’re focused on is being received by the customer,” Internicola says, explaining that confirmation bias can lead to misdiagnosis when it comes to recognizing what customers actually need.
According to industry experts like Jay Gordman, co-founder and chief marketing officer (CMO) of yorCMO, a fractional marketing system that doubles as a franchisor offering cost-effective marketing solutions to businesses and entrepreneurs, one of the best ways to identify and overcome those blind spots is to start with the end in mind – a tactic that can enable new and emerging franchisors to identify gaps in their marketing strategies early on.
“It may sound odd, but we start with the end customer in mind. We want to know what's going to drive that customer into a franchise business,” Gordman says. “We've worked with franchisors where we've done surveys of their customers and found that the way they explain their business and what they offer is counter to what their best customers truly want. If you can make sure that the offering at the franchise level – and how they communicate that to the customer – is in line with the customer's needs, that's the absolute most critical first step.”
To make sure a franchise system’s products and services are working for customers – and are communicated effectively through local marketing channels – Gordman advises business owners to utilize customer surveys and behavior analyses.
“The first tool we use is direct buyer interviews. We ask what triggered the need for this product, this offering? And so we understand what the needs are and how those are formulated,” Gordman says.
Once the team at yorCMO understands how customers decide what they need from a brand before making a purchase, they ask about the methods customers used to find those products or services. By determining how consumers make buying decisions – and where they turn to find the information necessary to make those choices – business owners can tailor their marketing strategies to be more effective.
“We've learned in many cases, franchisors and even franchisees thought that certain things were most important to their customer, and the reality is that other things were more important. And so you're able to, in most cases, make simple adjustments to messaging, offering and things like that, and make a difference,” Gordman says.
Put customer data to use in ways that make sense
Although understanding customer needs and behaviors is an important part of the process of building good unit-level economics, making sure that information is applied appropriately in the real world is also critical.
While some franchisors and franchisees might place a high priority on increasing social media engagement, it’s important to make sure marketing efforts are tailored to real-world data rather than perceptions or hype. Gordman explains that if the majority of a franchise’s customers are actually acquired through search engines, rather than social media, franchisors should shift their marketing focus to search engine optimization (SEO) – regardless of their personal preferences.
“Put whatever you want on social media at this point, that's fine. But let's make sure we absolutely own AdWords in your market. Let's make sure SEO [is strong]. … We show [business owners] the data – that's where people find them. That's critical,” Gordman says.
Beyond social media and SEO, Gordman advises franchisors to consider options like hosting events and partnering with local influencers to expand their customer base.
“Those key influencers will bring their people and their customers. And it's a real collaboration because everyone wins. And in their case, the more [franchisees] can have events and just create a lot of fun at their location, both the customers and your referral network of professionals just get to know you better, and you have a better relationship with them,” Gordman says.
Know when to start marketing – and when to cut back
Beyond gathering data about customer acquisition and consumer buying habits, knowing when to market the grand opening of a new franchise is critical.
“If you just open your business, open the door and say, ‘We're here,’ and you know, there's crickets, that's not good for profitability,” Gordman says, adding that early marketing efforts can help franchisees achieve profitability as quickly as possible.
Internicola agrees, noting the importance of finding not only the right timing for marketing campaigns but also the right messaging to reach potential customers.
“One of the frustrations I see for emerging brands, in my experience, is that so many of them don't have the right brand positioning – so, the brand positioning, messaging. And then you're deploying dollars into lead generation. And then you're misdiagnosing the problems. … Maybe the marketing channel is [misdiagnosed as] not effective, but it's the messaging. And then I think a lot of generic agencies that just want to feed an emerging brand just enough, based on a dollar value, leads to this cycle where they don't gain traction,” Internicola says.
To avoid wasting time and money on ineffective and poorly-timed campaigns, Internicola encourages franchisors to prioritize local marketing when preparing the Franchise Disclosure Document (FDD) early in the franchising process.
“One of the things that I see often when we're working with our clients is, say, Item 7, ‘Estimated Initial Investment.’ A lot of franchisors will have an initial marketing plan or grand opening marketing, and it almost feels like an afterthought. Sometimes they'll … focus on the lower numbers, and so that gets your estimate lower. But I think [they’re] missing the bigger opportunity, which is, hey, what about a six-month block of marketing that starts two months, at least, prior to opening, and we have a good runway,” Internicola says.
In addition to launching marketing campaigns early, Internicola advises business owners to know when to cut back on marketing efforts – something he learned years ago when speaking to a multi-unit franchisee.
“[That] multi-unit franchisee of other systems was like, ‘Hey, I hit flow at certain sales, I want to reduce my marketing because there's only so much I can do for incremental gain.’ So I think that's an important point,” Internicola says.
Understand buying habits and lifetime value
For emerging franchisors looking to find better ways to determine their estimated initial investment during the FDD development process, looking at marketing costs and modeling out benchmarks and milestones for breaking even can be helpful.
“I think [franchisors] need to communicate that marketing needs to be a certain percentage of sales for a certain period of time until they get to break even. And yes, the closer you get to breakeven, the lower it can go as a percentage of sales,” Gordman says.
In addition to working out those percentages, Gordman says he’s seen franchisors start generating cash flow even before formally opening a business through various marketing tactics like pre-orders and pre-sales at pre-opening events – something that can help propel a new business to success early on.
While Gordman cautions business owners not to overemphasize discounts, he says using giveaways to study consumer behavior can also be beneficial for understanding what customers want after opening. Offering the example of a giveaway conducted while working with a national sandwich franchise in its early days of operations, Gordman says it can sometimes be possible for franchisors to break even when giving away free items – a potentially cost-effective strategy business owners can use to learn about customer preferences.
“We would measure how many people would buy a drink and chips – and the reality is, you are pretty close to breaking even on the order when they bought a drink and chips. But the reality is, you put several thousand people through the process very quickly to build [business], and then you'd give him something to come back again for that next trip,” Gordman says.
Beyond consumer buying habits, it’s also important for franchisors to determine their customers’ lifetime value. To do that, Gordman advises using a specific methodology.
“For you to get a customer, what are they worth over three years, or whatever the lifetime of that relationship should typically be – two to three years. And then, based on that profitability you get from that lifetime value, what portion of that should go to acquire that customer?” Gordman says.
According to Gordman, it’s important to look at the model from two directions when evaluating customer lifetime value – the first being determining how much to spend on acquiring a customer, and the second based on unit-level economics to understand the value of a single transaction.
“We also look at it from just a straight gross margin. So you look at unit economics. … Build a proper unit economic model that understands the value of a single transaction and how much you should use to acquire that. And then say, ‘Okay, well, I need to get to X number of customers over this period of time.’ Then, use that dollar, that cost per acquisition, times that number of new customers you want in order to generate that budget,” Gordman explains.
Develop a growth-oriented franchise network
While building up new customer acquisition is key for growing a franchise system, it’s also important for startup franchisors to focus on growing the lifetime value of their customer base early on.
“Even in those first six months, if you have that customer that ideally would be there once a month or several times a month, if they're not, don't wait six months or a year before you handle that. Do that early, because growing that lifetime value at the same time you're growing new customer acquisition is very valuable,” Gordman says.
By gaining a clearer understanding of the lifetime value of customers early in the process, franchisors can tailor their marketing and sales strategies to focus on sustainable expansion over the long term.
“We've got a client that they've got people who are really great at just getting out and building networks and community – I call it the ‘mayor of your market;’ I heard somebody use that term years and years ago – and these people are amazing. Their business grew so much faster. And the other ones who just stood behind the counter and waited for people to come in, or call to make an appointment, were definitely slower in growth. And these are two different personalities,” Gordman says.
For many startup franchisors, it’s a smart idea to build that growth-focused mindset into onboarding and training processes for new franchisees – a strategy that can streamline the process of boosting unit-level economics and sales across the entire network.
“When it comes to training and onboarding, when you’re doing the grand opening plan, [franchisees should] have whatever the length of the process is – six months, step by step, the things they need to do. Then, either the marketing team or the operations team, who are hopefully very hands-on early in their growth, are absolutely checking if those are right,” Gordman says.
Internicola agrees, noting that building step-by-step plans into the onboarding process can also help ensure franchisees understand what will be expected of them – and what they should expect as they develop their businesses.
“When I see brands, really great people and founders, and they come to us, they're struggling a little with franchisee dissatisfaction. And one of the things you see along the way is that they're doing a good job as a franchisor, but the franchisees, when they onboarded, have the wrong expectations about customer acquisition, cost of acquisition,” Internicola says.
To overcome those challenges, Internicola says communication is key – not only in marketing but also when it comes to making sure franchisees are set up for success.
“The value of a franchise system is the network. So in your team's meetings, if everyone is meeting up and checking those boxes and having those conversations – that's where the wins happen,” Internicola says.
To learn more about yorCMO, visit https://yorcmo.com.
