How to Start a Franchise System in a Competitive Segment
Franchising is hot. With the number of franchise locations in the United States increasing from 708,974 in 2014 to an expected 759,236 in 2018, there’s no doubt franchising can be a fantastic way to grow a business. But, because of that, competition in the industry – especially among food, fitness and retail store concepts – has increased, too.
If you want to begin franchising your business in a competitive segment, you will have to enter the fray well-prepared to fight. As an emerging franchisor, you will be the David going up against several Goliaths, as well as other emerging brands scrambling to get a foothold in the market. But, coming out on top is not impossible. Here are some steps you can take to successfully break into a competitive segment:
Identify Your Competition
First, you will have to know who the franchise competition is in your segment. Beginning to franchise without knowing as much as you can about the established and up-and-coming competitors is folly, and you risk failing.
Competition comes in two forms – direct and indirect competitors. It’s important to identify which each of your competitors is. A direct competitor is a business that provides a product or service very close to what you provide, and could be easily substituted for yours. A direct competitor also operates in the same geographic region as you. An indirect competitor is a business that provides a product or service that isn’t the same but could still be used to fulfill the same customer need that your product or service satisfies.
Conduct a Competitive Analysis
Next, you will want to conduct a competitive analysis to learn how your concept stacks up against the competition and whether franchising is worthwhile. Start with your direct competitors and make it as in-depth as possible.
A competitive analysis will identify the competition’s strengths and weaknesses, which will allow you to develop strategies to gain distinct advantages. With clear insight into the competitors and what makes them tick, you can customize your sales efforts to attract prospective franchisees who might otherwise be interested in opportunities with similar concepts. When you do start franchising, the findings from the competitive analysis will provide your franchise development staff with information to help them answer questions about competitors from franchisee prospects.
There are several areas to analyze in order to compare your business to your competitors, but the four to start with are product, sales, marketing and return on investment. Here are just a handful of questions to ask when conducting your analysis:
- How alike/different is their product or service in terms of quality and cost?
- What’s their market share?
- What are their pricing strategies?
- What are the needs of their customers?
- How do they distribute their products or services?
- What is their sales process like and what channels do they use?
- How many locations do they have?
- Are they expanding, stagnant or decreasing their number of locations?
- Why are consumers not buying from them?
- What’s their annual revenue?
- What is their sales volume?
- Do they discount products or services?
- Are they creating blog articles, whitepapers, ebooks and other content marketing material?
- Are they using videos, webinars or podcasts?
- Do they have a media kit?
- Are they using public relations services to secure media coverage?
- What kind of online and offline advertising are they running?
- Return on Investment
- What is the average sales volume per unit of your competitors?
- What is the initial investment range for the competition?
- Do they disclose gross margins and operating costs in their Item 19?
- Do they share unit level profitability in their Item 19?
- What does the return on their initial investment look like compared to your own?
Ultimately, the best way to beat your competitors is to provide a superior product or service to your consumer as well as providing a segment-best return on investment to your franchisees. If product or service differentiation is difficult, focusing on helping your franchisees to better their bottom line will serve as the fastest way to best your competition.
Create Barriers to Entry
You will have to develop barriers to entry to gain advantage on competitors and keep copycats at bay. A competitive analysis will help you understand your competitors better and may aid in the creation of barriers. Some of the most common barriers to entry include proprietary processes or systems, patents, trademarks, brand identity, government regulations and higher customer switching costs. Other barriers to entry emerging franchises may want to consider include exclusive rights, trade secrets, scale, vendor and supplier networks, and more.
With 30 years of franchising experience and more than 800 franchise owners representing over 1,200 locations for five brands, Winmark Franchise Partners can help emerging franchisors break into competitive segments. Contact us here or at (844) 452-4600.