Franchise Myth Six: Franchising Creates a Critical Mass of Market Penetration

Part Seven of a Nine Part Series Exposing Franchising Myths.

Too many prospective franchise buyers I know assume that a franchise is successful because it is “big enough” to sell franchises or because it already has hundreds of franchises in operation.

The mere fact of franchising does not equal successful market penetration, nor does a specific amount of existing franchises. The truth is, almost any company can decide to franchise. There are no minimum performance or quality standards, no certification and no oversight board that qualifies a business to franchise.

Likewise, a business with ten franchise locations can have ten strongly performing franchises or ten terribly performing franchises. The number of franchises doesn’t necessarily mean the franchise is safe and successful.

True market penetration means that a chain embraces enough units to enjoy a broad customer base and economies in purchasing, distribution, and advertising. Many franchise systems fail to achieve business synergies for a variety of reasons, including:

• While the brand has potential, there are not enough units in business to constitute critical mass.
• The brand may be well established in its home market, but is unknown in new markets. Franchisees may be paying for local goodwill that doesn’t exist.
• Although there may be hundreds, even thousands, of existing units, the brand may be tired and losing market share. For many brands, their best days may be behind them!
• And saving the worst for last, many strong brands in the public eye make unfair demands of their franchisees and deny (or simply fail to achieve) the economies of scale that prospective franchisees expect and need to be successful.

For sure, achieving a critical mass for marketing, purchasing, and other economies of scale is an important potential benefit to be gained through franchising. But if you detect our common theme you are learning – not all franchise systems are created equal!

Great brands that seek to achieve and cultivate economies of scale in their branding, purchasing and marketing efforts can supercharge your business. Franchisees working for common cause with their franchisor can benefit from the combined marketing and purchasing power of the entire network. But as we have seen, where franchisors have complete control over suppliers and marketing funds, there is a huge opportunity for abuse. Franchisee associations that are vigilant advocates for their members provide the best protection from abuse.

Prospective franchisees do your homework. Research your potential brands to determine if critical mass has been achieved for the brands that interest you. Ask yourself this equally important question: When critical mass is achieved, does the company use its buying and marketing power to the benefit or detriment of the franchisee network? The answer to his question could be critical to your success in franchising.

***
The content in this blog post is based in part on Chapter One of The Franchise Fraud, written by Robert Purvin. The Franchise Fraud is available for purchase in print and for the Kindle on Amazon.