Owning a franchise is not cheap. Many franchisees do not just buy into an existing business, get a retail location, brand it, put a sign with the franchise logo on the door, and sell the franchise’s products. They also contribute an ongoing fund toward marketing purposes.
When looking at potential companies to buy into, you’ll frequently come across the concept of franchise advertising fees. Most franchise systems require the franchisee to pay a specific sum of money, known as the advertising fee, for local, regional, and national advertising.
Advertising is one of the highest and most necessary expenses in running a franchise. It can be the traditional form of advertising, such as radio, TV, and billboards, or the digital format of advertising, such as social media marketing campaigns and email marketing strategies, or a combination of both. The advantage of franchise advertising is that you’ll not be spending money on advertising alone. The cost of franchise advertising is split among the franchisees.
This article will examine a franchise advertising fee, the average cost, and what it covers.
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A franchise advertising fee is an annual or monthly fund (often less than three percent of the franchisee’s annual sales) pooled together by franchisees. The fund is given to the franchisor to cover corporate advertising expenses and support system-wide initiatives that will benefit all franchisees and raise awareness of the brand as a whole.
With this, franchisees can make a more significant impact when they spend money jointly on marketing and advertising the brand than they would if each spent the same amount separately. Here, advertising builds brand recognition for the advantage of all franchisees.
The advertising fee can be a fixed rate or a percentage of sales and is kept in a bank account managed by the franchisor.
While some franchisors insist on control of all forms and content of all advertisements and do not permit or require local advertising, you may be needed by some to perform local advertising in your location — in addition to being obligated to contribute to the central advertising budget — such as community sponsorship, search engine optimization, printed ads, and brochures. The franchisor may occasionally specify the type of local advertising that the franchisee conducts.
Franchise advertising fees typically differ from company to company and are determined by some variables. Franchisors usually set fees that will enable them to make the most out of their advertising strategies.
Depending on the franchise, advertising fees are usually collected monthly based on a percentage of the franchisee’s total sales. They can be set in dollar sums or ongoing fees. Some have a minimum fee demand, and others have no advertising fees.
The average percentage of advertising fees might oscillate between 1% to 4%. Some franchisors may set minimum and maximum advertising fees —when the franchisee only needs to pay a particular amount up front and is not required to pay any more after that.
Franchise owners must also watch out that their advertising fees are not too high. They cannot demand overly high or unattractive fees for potential franchisees. As with setting any price for anything, the key in this situation is finding the perfect balance between market potential and financial sustainability.
A franchise advertising fee typically covers the advertising/marketing initiatives of the franchise. Franchise systems use various advertising programs per their industry and business style.
The top three advertising programs are National – nationwide advertising campaigns for national brand recognition. Local – local advertising campaign particular to the franchisee and promotes their particular unit. Regional or cooperative – this advertising campaign focuses on a specific region or geographical area. The advertising fee may cover all or any of the costs of these top three advertising programs for franchise promotion and brand awareness.
Franchisees should note that some franchisors may require them to spend money on local marketing activities in addition to the national/regional advertising fees. While national/regional advertising increases brand awareness, local advertising campaigns bring customers to your location. Most franchise agreements will state that the franchisee is financially responsible for monthly local market advertising. This financial responsibility is frequently expressed as a monthly sales percentage ranging from 1 to 3 percent. Franchisees might need to work with other local franchisees on coordinated local advertising campaigns.
Advertising fees are a vital investment for a new franchise system. However, it also covers the ongoing advertising strategy throughout the company’s existence, including social media, online videos, smart TVs, mobile devices, print media, radio, and the internet.
When considering advertising fees, remember that you might not immediately benefit from the sums you give; the franchise agreement will probably make this clear in some way. Look closely at the activities the ad fund usually supports to get a sense of where the fund will be used and whether you’re okay with it.
It is advised that the franchisee carefully read the provision in their franchise agreement requiring advertising fees. You might want to ask the following questions to learn more about the national/regional advertising fund:
Proper management of advertising funds will help avoid conflict in a franchise system. A dispute arises when franchisees are not given the necessary transparency on using their advertising fee contributions. This may instigate suspicions that money is being frittered away, and franchisees may believe that national or regional marketing initiatives don’t directly benefit their location.
In managing the advertising funds, franchisors must keep the fund apart from the general revenue stream and royalties. The advertising fee should not be taken as the franchisor’s income but as funds gathered “in trust” for a specific purpose, such as marketing and advertising or, occasionally, re-branding or refreshing the brand.
It is common practice to collect the money through a different bank account or, less frequently, through an independent company. Franchisors sometimes charge a management fee for handling the administration of the advertising fund.
Franchisees should have the right to ask to see the financial records of the advertising fund and its allocation. This will make accountability easier and ensure the fund is being utilized properly.
While the franchisor keeps and manages the advertising funds, it can be challenging to decide the best use of the fund and the nature of the advertising that will be most suitable for the business. This is where setting up an advisory council or marketing committee comes in. The advisory council consists of the franchisees. It creates an avenue where franchisees have a voice and can make input on the advertising fund usage.
Franchisees’ input generally results in better judgments and substantially higher accords in decisions. The franchise system must assess the effectiveness of every advertising and marketing activity to ensure a return on advertising fees invested.
Franchisee contributions to the advertising fund have the following benefits:
It would be best if you started spending your advertising fee on:
Want to plan it better? Read this article:
No matter what, make an effort to keep in mind whether the franchise you’re considering has real potential. Franchise advertising fees are non-negotiable for many companies, so be careful when buying a franchise.
It’s important to remember that not all franchise systems have the exact advertising costs. Smaller systems lack the national marketing options that larger systems do. Consult with other franchise owners and closely examine the revenue generated by their advertising fees. You can also evaluate the advertising costs in franchise systems by consulting some sources that provide data on fees.
Ultimately, advertising fees should help an entire system grow its brand and raise its profile. The franchise system should determine what works best for the franchisees by testing different advertising formats, including radio, newspapers, online, social media and television.
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