One expense that almost all franchisees pay is the royalty fee. The fee is usually a percentage of gross monthly revenue, although depending on the agreement between franchisee and franchisor, it could be a percentage of weekly revenue. The actual percentage also depends on the nature of the agreement, but it typically ranges from 4-12%.
That’s a very brief summary of what a franchise royalty fee is, but the question that remains is: what does it get you? Throughout this article we will discuss some of the main benefits you, the franchisee, get in exchange for the royalty fee that you pay the franchisor. Read on to learn what they are!
Investing in new technology
While the hamburger itself has changed quite little over the years, the system by which its components are obtained, packed, shipped, put together, and ultimately delivered to customers is subject to constant innovation. As new technologies continue to emerge around automation and other practices relating to an industry, franchises need to make use of them in order to stay competitive. This involves a consistent revenue stream, and franchise royalties are a component of this. Of course, as the franchise’s business model improves, so too does the franchisee’s individual business.
Create and market new products and services
Some brands are based on simplicity. Take In ‘N’ Out, for instance: they have offered only a handful of items for about as long as anyone can remember. Take even their secret menu into consideration and you still have a fairly simple set of offerings.
This is certainly not the case for everyone, as many of the most well-known chains are continually tweaking their menu to find new items their clientele will love. This sort of tweaking costs money: new materials, testing, surveys, advertising. And, of course, the employees who spend time working on these initiatives need to get paid. Your royalty fees will go toward funding these new endeavors, which will ultimately benefit you because you will be able to draw in more customers with these new products.
Expenses at franchise headquarters
Whereas the franchise headquarters has many expenses, from utilities and salaries to paying maintenance staff, it doesn’t exactly have a way to generate its own revenue. They do not, after all, sell hamburgers at the McDonald’s headquarters. Nonetheless franchise headquarters are obviously an essential part of a franchise’s success, and therefore it makes sense that some of your royalty fees will go toward keeping the lights on there.
Expanding into new countries or regions
Expansion is yet another endeavor that costs franchises money. It comes with all the usual costs, such as marketing and employee training, and there are likely a few new ones as well, such as licensing fees. It may not be immediately apparent how a franchise’s expansion into new territory will directly benefit your location, but there can be no drawback to increasing your brand recognition around the globe.