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Chapter 16
FRANCHISE MARKETING CHANNELS
Teaching Notes
This chapter discusses franchise marketing channels, a growing channel within the larger
field of marketing channels. It continues by describing the difference between the two
Chapter Objectives
This chapter examines how franchises are defined and the implications of participating in
a franchise, both from the perspective of the franchisor and the franchisee. This
discussion will enable the reader to understand both the financial and channel
management issues related to franchise channel management. Finally, a discussion of
franchisee motivational factors is presented.
Learning Objectives
1) Realize that franchise channels are a particular type of marketing channel.
2) Be familiar with some key franchise jargon.
Chapter Topics
1) Franchise channel concepts and terminology
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Chapter Outline
Franchise Channel Concepts and Terminology
A) Franchise
Key Term and Definition
▪ Franchise: a legal agreement between two independent parties whereby one of those
parties grants a license to the other party to sell a trademarked product or service.
There are two major type of franchise, the product distribution franchise and a business
format franchise.
1. Product Distribution Franchise
This type of franchise represents the original concept of a franchise described early in the
2. Business Format Franchise
In this form of franchise, the franchisor licenses the franchisee to sell the franchisor’s
trademarked product or service, but the franchisor also provides the complete system or
B) Franchise Channel Structure
Arrangements between franchisor and franchisee are generally structured in two ways,
either as a single-unit franchise or a multi-unit franchise.
1. Single-Unit-Franchise
In this type of structure, the franchisor grants the franchisee the right to own and operate
2. Multi-Unit-Franchise
Under this structure, the franchisor grants the franchisee the right to own and operate
more than one unit at the outset of the relationship. This multi-unit franchise structure can
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C) Franchising
Franchising, referred to as an industry or type of business, is actually a method of
distribution that utilizes franchise marketing channels to make products and especially
channel members is broader and more encompassing.
D) Franchise Fee
A franchise fee is typically a one-time flat fee paid by the franchisee to the franchisor
E) Royalty Fee
Royalty fees are required payments by franchisees to franchisors in the form of regular
and continuous royalty fees for as long as they hold the franchise. Usually, this fee is set
Scope and Importance of Franchise Channels
Franchise marketing channels play a huge role in the distribution system of the United
States. By the mid-point of the first decade of the twenty-first century, the total output of
franchise channels measured in dollars was almost $881 billion per year accounting for
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Rationale for Franchise Marketing Channels
From the franchisor’s point of view, three major reasons have traditionally been cited for
distributing via franchise channels: (1) capital advantages, (2) potential to reduce
distribution costs, and (3) the possible high level of managerial motivation fostered by
franchising.
Capital advantages are often cited as the most important reason for adopting franchised
Some Downsides of Franchise Channels
Although franchise marketing channels offer both franchisors and franchisees some very
substantial benefits over conventional channels, there are also some downsides associated
with franchise marketing channels for both franchisors and franchisees.
A) Downsides for the Franchisor
A franchisor seeking to develop and operate a franchise marketing channel faces at least
state and federal regulators.
1) Limited Flexibility
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Limited flexibility of the franchisor is linked to its programmed business model or format
2) High Franchisee Expectations
Overly high franchisee expectations relate to their expectations about what franchisors
3) Increased Regulatory Scrutiny
Finally, another potential downside to franchise channels from the franchisor’s point of
view is the increased regulatory scrutiny the franchisor is exposed to. Franchisors are
B) Downsides for the Franchisee
From the franchisee’s point of view, three potential downside risks are often associated
with franchise channels which are: 1) limited independence of the franchisee, 2) royalty
fees, and 3) the negative halo effect.
1) Limited Independence
Limited independence of the franchisee is primarily due to the pre-packaged and
2) Royalty Fees
The obligation of franchisees to provide a percentage of their gross revenues to the
3) Negative Halo Effect
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Channel Management Implications of Franchise Channels
In the following sections, the text examines some channel management implications of
A) Channel Design and Franchise Channels
The channel manager seeking to develop a channel that offers a high degree of control
will almost certainly have to consider the franchise channel model as one of the
B) Selection of Franchise Channel Members
In a franchise channel of distribution the selection of channel members poses a peculiar,
even paradoxical challenge for the franchisor. Specifically, the franchisor wants
C) Motivation of Franchisees
The motivation of franchise channel members differs somewhat from the motivation of
channel members in conventional channels. Although this basic framework still holds
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D) Managing the Marketing Mix in Franchise Channels
Because of the nature of modern franchising that, in effect, pre-packages the marketing
E) Evaluating Franchisee Performance
For effective evaluations of channel member performance degree of control and
importance of channel members are especially relevant.
With regard to the degree of control, the generally high level of control that the franchisor
has over the franchisee enables the franchisor to request and receive a great deal of
performance data from the franchisees on a regular and frequent basis. Franchisors also
Answers to Review Questions
1. Franchise channel is just a particular type of marketing channel, franchise channels
often present peculiarities and challenges that vary significantly from conventional
channels in terms of the nature of the relationship between channel members and the
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2. There are two different types of franchises: a product distribution franchise and a
business format franchise. In a product distribution franchise the franchisor licenses
its trademarked product (or service) to franchisees who then have the right to sell the
franchisor’s products or services. In this type of franchise, the franchisor provides
3. Arrangements between franchisor and franchisee are generally structured in two
ways: a single-unit franchise or a multi-unit franchise. In single-unit-franchises, the
4. A franchise fee is typically a one-time flat fee paid by the franchisee to the franchisor
usually when the franchisee signs the franchise contract. Royalty fees, on the other
5. Franchise marketing channels play a huge role in the distribution system of the
United States. By the mid-point of the first decade of the twenty-first century, the
total output of franchise channels measured in dollars was almost $881 billion per
6. Franchising and franchise channels continue to grow dramatically. In 2010, the U.S.
Department of Commerce estimated that one out of every two businesses in the
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7. From the franchisor’s point of view, three major reasons have traditionally been cited
for distributing via franchise channels: (1) capital advantages, (2) potential to reduce
distribution costs, and (3) the possible high level of managerial motivation fostered
by franchising.
8. Three downsides of franchise channels for franchisors are: limited flexibility, overly
high franchisee expectations, and increased regulatory scrutiny. The franchise
business format drastically reduces the flexibility of both the franchisee and the
franchisor. The business format developed by the franchisor is a set of expectations
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9. Channel control is a key benefit of franchise channels. The channel manager pursuing
10. In a franchise channel of distribution the selection of channel members poses a
peculiar, even paradoxical challenge for the franchisor. Specifically, the franchisor
11. The motivation of franchise channel members differs somewhat from the motivation
of channel members in conventional channels. In particular, the cooperative and
partnership approaches commonly used to support and assist channel members in
12. A programmed approach to providing channel member support and assistance is the
option used in most modern franchises.
13. Managing the marketing mix in franchise channels presents the channel manager with
a dilemma. On the one hand, he or she would like to quickly adapt product, price,
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15. Because the franchisees are the sole source of the franchisor’s revenues and provide
all of the contact points for customers, each and every franchisee is important.
Commentaries on Issues for Discussion
1. Because of the nature of modern franchising that, in effect, pre-packaging the
marketing mix into a programmed format that franchisees are legally obligated to
follow, the implementation of marketing mix management in franchise channels is
different at least in degree from conventional channels. The Snap-on Tools franchise
is a good example of how difficult it is to adapt individual franchisees to local
2. In a franchise channel of distribution the selection of channel members poses a
peculiar, even paradoxical challenge for the franchisor. Specifically, the franchisor
wants prospective franchisees that are highly motivated and entrepreneurial yet not so
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payroll services, twice-a-week consulting services, etc. Indeed, the extensive services
3. From the perspective of the potential franchisee, there are a number reasons to buy a
franchise. First, the amount of uncertainty involved in going into business is reduced
because the franchise presumably has a documented record of success. Second, the
franchisor in many cases offers an established brand and logo which is likely to
4. A royalty fee is that fee a franchisee pays to the franchisor on an ongoing basis.
Royalties are usually paid monthly or quarterly, and are usually calculated as a
percentage of gross sales, however, there’s no single franchise fee formula. Royalties
can vary greatly and franchisors expect its franchisees to keep various books and
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5. The question of whether the royalty rates are too high can be answered from two
perspectives, the franchisee and the consumer. From the franchisee’s perspective, an
analysis is required to compare the benefits of the franchise against its associated
costs. Certainly the H&R Block brand is well known and provides immediate