Is your system monitoring your franchisees performance? The best way to answer this question is by looking to unit-level economics, or the performance of individual locations within your system. It’s easy for franchisors to neglect unit-level performance, since their royalty payment comes from system-wide revenue. However, a lukewarm commitment to individual franchisee’s financial success can have dire consequences for the health of your brand.
Conversely, a strong commitment to the success of individual franchisees will reap benefits across the system: more referrals, higher franchisee satisfaction, greater interest in multi-unit ownership, a more reputable brand and increased system-wide revenue.
If you’re not taking active steps to improve unit-level economics for your franchisees – i.e. if your average unit profitability is not growing over time – now is the time to start. Here are the basics of unit-level economics and how to use these measurements to improve franchisee profitability.
Determine the Variables
The first step to improving unit-level performance is to measure it. You should be gathering data from all locations in order to pinpoint the factors that contribute to success or failure.
There are a few ways to do this. You can gather data from POS systems. You can deploy field staff to collect data from franchisees, or you can let franchisees submit data voluntarily.
Once you have the data, you can start determining which variables have the greatest affect on profitability at a given location. These are the variables you’ll want to target as you work to improve unit-level economics.
You also can stratify your data by region, type of location, designated market area or return-on-investment for advertising. This will help you get a more accurate idea of what affects profitability, as well as ensure that you’re not comparing apples to oranges.
Here are some measurements to consider as you examine unit-level economics:
- Unit financial ratios
- Break-even point
- Payback period
- Pretax Return on Investment
- Unit continuity given the franchisee selection process
- Unit continuity given the site selection process
- Failure rates
- Distressed unit program relative to failure rates
Compare Against Internal and Industry Benchmarks
Once you’ve determined which variables contribute to high and low performance, it’s time to develop a plan to optimize them, typically through a franchise self-audit.
Start by reviewing your financial measurements, such as sales, COGS, gross margin, operating costs and profits. Look at your system average, top 25 percent and bottom 25 percent, then determine your own benchmarks.
Next, look at your operational aspects, such as number of transactions or average ticket. Identify the key financial drivers in your business and the main issues that are holding back your franchisee’s financial performance and list them out by each organizational department.
Let’s say that you identify employee productivity as a critical variable that drives up costs and affects the success of a given location. The next step is to compare productivity across units – What makes some units more productive than others? Then, compare productivity to industry standards – How do we stack up to the most successful units in our industry?
The goal of these comparisons is to illuminate ways that a given location can change its approach in order to improve productivity and, in turn, increase profitability. The process of finding a way to improve productivity should be a joint effort of the franchisor and the franchisees.
A franchise advisory council is an excellent way to collect franchisee input as you build new models based on your data and analysis.
Introduce, Measure and Evaluate Changes
After you develop new models that will help franchisees improve unit-level economics, the next steps are to implement, measure and evaluate these new models.
Openness to change starts with franchise leadership – everyone from the CEO down must work to create a culture of constant improvement. Once this culture is in place, it becomes easier to introduce new models. Franchisees aren’t always open to change, so it’s important to specify up front how franchisees will benefit from a new practice. If leadership isn’t genuinely invested in the success of franchisees – financially and emotionally – your efforts to improve unit-level economics will come off as self-serving.
One way to facilitate positive change is to set goals. Use the data you gather from the best performers in your system to set two or three goals for the system as a whole. Share the goals regularly, make them specific and incentivize everyone to hit them. Maybe you invite your most-improved franchisees to share their tactics at a conference, or perhaps you compensate corporate employees for improving franchisee profitability.
Make sure that all franchisees have access to system-wide data and any best practices that come out of your efforts to improve unit-level performance. Share the results of the changes you implement, whether they’re good or bad. Creating transparency and giving franchisees a voice will increase buy-in and show franchisees that you’re invested in their success.
One more note about buy-in: This is perhaps the most important element of improving unit-level economics. Buy-in is contagious; it spreads from company leadership to franchisees to their employees. When, as a franchisor, you show that you care about franchisee’s individual profitability, it increases franchisee morale. This morale then trickles down to field employees, and then to the customers they serve, improving unit-level economics for that location. The logic is circular, but the effect is real: Unit-level economics are the key to unleashing your brand’s full potential.
If franchisee success isn’t at the top of your agenda, it’s time to shift your priorities. Success at the unit level fuels your success as a system, and happy franchisees have the power to kick your brand into overdrive.
The experienced franchise management consultants at Winmark Franchise Partners can help your business reach its full potential. With 30 years of franchising experience and more than 800 franchise owners representing more than 1,200 locations for five brands, Winmark Franchise Partners is a trusted name in franchise consulting. For more information about how we can help grow your brand, contact us here or at (844) 452-4600.