We’ve all heard that unit-level economics is important in franchising, but moving from understanding it in theory to turning it into action is a big step forward.
After working with over 900 franchise brands, we have found that a common practice is to work with their franchisees to improve their economics at the unit level – not only their top-level sales, but also their bottom line. If you don’t do this today, you’ll have a hard time selling franchises in the future.
But what do we mean by economy at the unit level? Simply this: unit-level economics is a means by which franchisors and franchisees identify, measure, track and manage the performance of their businesses at the individual unit level.
Effective application of these principles requires skills in management accounting, as well as the application of correlation analysis to determine the key factors (often referred to as KPIs) that will allow a franchised unit to achieve an acceptable level of profitability. . Identifying the key factors that will determine whether or not you can achieve an acceptable level of profitability for a specific unit is important when looking at where operations can improve.
Common business knowledge tells us that you can’t improve what you don’t measure. Thus, franchisors need access to data to help their franchisees continuously improve. What data? Sales, cost of goods sold, labor, customer satisfaction scores, field audit scores, number of proposals sent last month, territory information, and more.
The basic premise of Continuous Franchise Improvement is that you can take a snapshot of these KPIs in a unit and compare them, not only with past results, but also with the franchise average (or any comparable segment of stores within the franchise). These comparisons give you tremendous insight into the details of your business, allowing you to iteratively address your weaknesses and continuously improve. Below, we dig deeper into why unit-level economics are so important in franchising and how you can implement them in your organization.
Why unit-level economics matter to franchise businesses
A strong unit-level economy is the foundation upon which all business success is built. Even though most franchisors earn royalties on revenue, not profit, long-term franchisee success creates real referrals and organic growth. Those who want sustained growth for both the franchisor and the franchisee pay particular attention to this. A strong unit-level economy can also help with franchise development, as franchise candidates are looking for the following:
- Does your business make money?
- Is the business sustainable? Will he continue to make money for the foreseeable future?
- Can I see myself in the company?
A goal like this can grow your franchise business from many angles.
The starting point for a unit-level economic initiative will consider the following:
- Unit gains and losses (P&L)
- Break even
- Recovery period
KPIs are central to the deployment of any program.
Example of deploying an economic program at the unit level
Are you ready to deploy a program? Surprisingly, we’ve found that sometimes more established systems are behind newer systems that may have had strong programs in place from the start. The best deployments start at the top, where the owner or CEO sets the tone, and the franchisor’s team is full of people who care about the success of the franchise on an emotional level.
Step 1: Determine KPIs
Every business is different, so using the wrong KPIs can do more harm than good. Develop these benchmarks with input from franchisees and industry experts. As a starting point, we have developed KPIs for four specific sectors: Restaurant, Health and Fitness, Spa and Salon, and Education.
Step 2: Track and improve KPIs
Now that you have the basic information you need, you can manage your KPIs together with your franchisees. If you are a franchisor with business locations, you have your skin in the game and can experiment with the business model. Having franchise committees or forums can also help develop and share best practices. Another way to drive performance is to have a portion of your franchise consultant’s salary variable based on the franchisee’s KPIs.
Step 3: Share information about your KPIs
Sharing KPI information is key to an organization’s success. In fact, we now have a growing number of customers tracking dashboard performance on a monthly basis, as well as information from their outlets or online reviews.
Today, franchisors who strive to improve profitability at the unit level are doing more than is expected of them. They are also reaping the rewards of their hard work as their system outperforms others and their franchisees are more engaged. In turn, this helps them sell more franchise units – a perfect example of a virtuous circle. After a few years of small improvements that have dramatic effects, it will become clear to potential franchisees which franchise is right for them.
This article first appeared on the FranConnect website and is used here with permission. For more information on how to improve the health of your franchise business, download The Executive’s Guide to Franchising Tech in 2022, which comes in 3 versions (CDO, CFO, COO).