Franchise Marketing Funds One of the key advantages of joining a franchise is the strength of the franchisor s brand, and the power of the marketing that supports the brand. According to the Franchising Australia survey, about 70% of franchise systems will charge a separate marketing fee in addition to the royalties a franchisee will be required to pay. This is often referred to as the central or national marketing fee, and may range from 1% to 15% of turnover (with an average of 3%) in those systems where royalties are calculated as a percentage of total turnover. This fee is paid into a central marketing fund which then pays for marketing and advertising activities to promote the brand and its goods and services for the benefit of the network as a whole. It is not generally expected that costs associated with advertising and marketing to recruit franchisees are paid from this fund. The sort of activity that might be paid from a central marketing fund might include design and production costs of: Point of sale materials including menu boards, posters, displays, price tickets and so on; Catalogues, brochures, stickers and other printed materials; Print advertisements including magazines, newspapers and directories, including Yellow Pages; Radio and television advertisements; Franchise website development, maintenance and search engine optimisation; Online advertising including banner, pay per click, directory and other forms of advertising; Promotional items such as pens, keyrings, fridge magnets, and so on; Sponsorship of charities, events or other things relevant to the mission or values of the franchise; and Public relations activities including the creation and distribution of media releases, customer and stakeholder newsletters, and general publicity. A franchisee will often receive a minimum quantity of items for promotional, printed and point of sale items produced by the marketing fund, such as a minimum quantity of brochures or catalogues. 1
They may then have the option to purchase additional quantities at a much lower cost per item than if the franchisee were to produce the items themselves. Likewise for advertising coverage, a minimum amount may be paid by the marketing fund, but additional or top-up marketing may be possible if the franchisee chooses to pay for additional coverage. Benefits of the Marketing Fund By pooling franchisee funds for the collective benefit of the network, a franchise system can generate substantial economies of scale that has the potential to lower overall marketing costs than for the same marketing done by an independent small business. Additionally, a franchisee need not expend as much time and energy on marketing activities, compared to an independent small business, allowing for the marketing support provided by the franchisor. Of course this level of marketing support may vary from one system to another, and will generally be in proportion to the level of marketing fee charged. The higher the fee the greater the support likely to be provided. Marketing Fund Structure In franchise systems where royalties are charged as a fixed regular amount (and not as a percentage of turnover), marketing fees are also likely to be charged by the same method. This is particularly the case for many mobile service franchises, where the main focus of marketing activities may include directory or internet advertising. Larger marketing funds may even contribute to or pay in full the salaries and associated costs of the franchisor s marketing personnel, whereas this cost is often absorbed by franchisors with smaller funds. The marketing fund itself will be controlled and administered by the franchisor in most systems, however some systems may have a committee of franchisees who advise on or even control the fund and determine how it is spent. Marketing Fund Regulations Under the Franchising Code of Conduct, the marketing fund must be audited unless 75% of the franchisees in Australia agree not to have an audit conducted. The cost of the audit can be paid from the marketing fund, and as 2
a result, franchisees of small systems might choose not to have an audit if the cost represents too great a proportion of the total value of the fund. However, whether or nor an audit is chosen by the franchisees, a franchisor must still prepare an annual statement for the fund which details all its receipts and expenses for the financial year. This must be produced within four months of the end of the financial year and made available to franchisees within 30 days. Marketing Fund Disclosure The Code also requires information about the operation of the marketing fund to be made available as part of the Disclosure Document. This disclosure includes: Who contributes to the fund? (Which might be parties other than franchisees alone, such as suppliers through rebates, and the franchisor themselves either for contributions from companyowned stores or as a co-contribution from general revenue); How much the franchisee must contribute, and whether other franchisees or the franchisor contribute at a different rate; Who controls or administers the fund? Whether the fund is audited, and if so, by whom and when? The kind of expenses for which the fund will be used; The fund s expenses for the last financial year and the percentage spent on production, advertising, administration and other expenses; Whether the fund pays for goods or services supplied by the franchisor or associates of the franchisor, and details of these goods or services; and Finally, the disclosure document must also state whether the franchisor must spend part of the fund on promoting the franchisee s business. 3
Additional Local Area Marketing Requirements For both percentage of turnover and fixed dollar amount marketing fee models, a franchisee may also be expected to spend an additional proportion of turnover or dollar amount on Local Area Marketing, or marketing specific to the franchisee s trading area. This Local Area Marketing may be necessary to supplement national marketing to increase overall marketing effectiveness. For example, the national marketing fund may pay for the design, production and delivery of a minimum quantity of catalogues per franchisee. A franchisee may then have the discretion to purchase additional catalogues for distribution above their minimum allocation to further penetrate their trade area. This additional expenditure would generally be considered as a contribution to local area marketing. Similarly, specific local promotions partnering with schools, local sporting organisations or charities would also be likely to qualify as local area marketing. Advertising in local newspapers, local coupon promotions, competitions, customer referral incentives, local billboards and other activities may also contribute toward local area marketing. Franchisee-driven marketing in local markets must generally still be done within a national framework endorsed by the franchisor. This means that franchisors may provide templates and guidelines for a range of local marketing campaigns that a franchisee can implement as appropriate. Alternatively, a franchisee can have the freedom to propose their own marketing initiatives, which will require the franchisor s approval to ensure the consistency and integrity of the brand. Local area marketing does not require the franchisee to pay money into a central fund, but instead requires the franchisee to demonstrate that they have spent either a certain percentage of their turnover, or at least a certain amount over a given period on the promotion of their business in their own market. The percentage to be spent on local area marketing may range from 1% to 5%. 4
Franchises without Marketing Funds It is also possible that some franchise systems will not charge a marketing fee or even a royalty, and may instead supply goods or services to franchisees and apply a proportion of the wholesale price toward marketing. In this case, there may or may not be a central marketing fund. Likewise for systems that charge higher royalties but no separate marketing fee, there may be no marketing fund per se, although marketing will still be undertaken at the franchisor s discretion and paid from their general revenue accordingly. Marketing is a critical element in the success of any business. Potential franchisees should give this careful consideration when assessing a franchise offer. 5