Franchisor: How Much Did That Franchisee Cost You?

by John Hayes on April 15, 2009

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When franchisors realize the cost of selling (capturing) a franchise, they often pay more attention to keeping franchisees. Because it’s a whole lot less expensive to keep one than it is to capture a new one!

Economics of capturing franchisees

First, let’s examine the cost of acquiring a franchise and later we’ll look at the cost of keeping a franchise. Add up all your lead acquisition costs (including expenses for print advertising, online portals, expos, referral fees, etc.) and divide by the number of leads generated. On average, it costs franchisors about $100 to get a lead. Your number may be lower or higher, and it’s important that you know what it is and that you track it month after month.

Franchise lead generation is seasonal for most concepts. Leads are generally strong January through June, then they fall off for a couple of months and resume after Labor Day, remaining strong through Thanksgiving. Depending on the franchise concept, seasonality may be more or less of a factor. Well-known, trendy and “hot” franchise concepts seem to attract plenty of leads all the time.

Number of leads to get one sale

Once you know the cost per lead, it’s important to know how many leads you need to make one sale. Typically, it’s 100. But this number varies greatly from franchisor to franchisor and is dependent on many variables, including:

  • Investment level
  • Business desirability
  • Franchise sales team’s effectiveness
  • Speed at which leads are followed up
  • Quality of information provided to prospective franchisees
  • Validation by existing franchisees (another reason to keep them!)

So if a lead costs $100 and you need 100 leads to sell one franchise, obviously it costs your business $10,000 (for lead acquisition) every time you sell a franchise. Lot of money. . .and we’re not finished yet!

How much is the cost per sale?

The cost per sale is greater, of course, because you have to pay sales commissions, typically 15% to 20% of the franchise fee. So let’s say that your franchise fee is $50,000 and you employ an in-house sales person who receives $8,000 per sale. Now your cost is $18,000! With a lead generation cost of $10,000, and sales commission of $8,000, you net $32,000 per sale.

Economics change when you use a broker

Your cost per sale may increase if you use a broker to generate the lead. Brokers typically do not close franchise sales; the closing is handled by the franchisor. However, brokers typically get substantial fees for delivering qualified leads to a franchisor.

With a broker involved in the transaction, let’s say you pay the broker $15,000—$5,000 more than you normally pay for lead generation. Since the broker has qualified the lead for you, and educated the lead about franchising and possibly even about your concept, you may be able to pay a smaller commission to the closing sales representative. After all, the lead was teed up for closing, and the closing sales representative should not have had to spend as much time qualifying and educating the prospect (although that’s not always the case). So let’s say you pay $15,000 to the broker for the lead, plus a reduced $6,000 commission . . . now you net $29,000 per sale.

Either way, is this a good deal? Are you paying too much?

We’ll find out . . . in my next blog.

Also . . . Franchisee: Who Much Did That Customer Cost You? . . . I’ll explore that issue soon, too.

Photo image by: jesse.millan

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