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Chapter 6. The Service Delivery System a... > Potential Marketing Problems

Potential Marketing Problems

Distribution of Benefits

One problem in marketing a franchise system is that there will not be an even distribution of the benefits of the advertising. This discrepancy should be stipulated in the license agreement and understood by the franchisees. By that, we mean you must not get in the way of good media purchases because there is an unequal distribution of the benefits. An example of this potential problem would be if Alpha Graphics decided to run an ad during the Super Bowl and the New England Patriots were representing the American Football Conference. New England-based franchisees would clearly receive more benefit than franchisees based in Texas or Michigan. As a result, some advertising councils have gone as far as to stipulate that there will be an attempt to balance the benefit going forward based on the results of past media buys. Franchisees who receive disproportionate benefit from one campaign will either contribute more to the fund or receive a lower benefit on a future campaign. While this is theoretically possible, it is impractical to execute.

Franchise Marketing and Pricing Issues

Some of the pricing issues that can emerge as a result of the franchise marketing relationship include promotional campaigns, antitrust issues, and regional disputes. Promotional campaign problems occur when the franchisor wants to boost revenues without regard for the short-term effect on your profitability. The franchisor constructs a promotional campaign that often includes a price discount. The promotion is designed to drive more traffic into stores. While this might result in increased revenue, the price decrease reduces the franchisees’ operating margin and might negatively affect profitability (again, at least in the short run). However, the franchisor derives its income from a percentage of total revenue in the form of a royalty, not franchisee profitability. So, some promotions may benefit one party at the other’s expense, resulting in the franchisor making more money and the franchisee making less. For example, when Midas Muffler runs a 2-for-1 special for two weeks, the franchisees have to bear the extra cost of such a promotion. In this case, the phrase “at participating stores” is always part of the promotion; however, it is difficult for a franchisee not to participate when customers are coming in expecting the special deal from every dealer. The franchisor is happy because the system will sell more mufflers and therefore enhance royalty revenue. The Midas example also highlights issues regarding tying agreements and antitrust issues if Midas (the franchisor) also manufactures the muffler and exhaust components that its North American franchisees sell to the public. There must be careful language written into the license agreement regarding the pricing, limitations, and franchisee purchasing options.


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