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? We’ll be taking a look at the main benefits franchisees get in exchange for their royalty fees paid to their franchisor.
Investing in New Technology
While the franchising business has evolved over the years, the system by which components are obtained, packed, shipped, put together, and delivered remain the same.
As technologies emerge, consumers are constantly subjected to new innovations. As consumers adapt to trends, so must franchisors and franchisees. In order to stay competitive, franchisors must expand company practices to fit an ever-changing market.
Royalty fees benefit the franchisor and franchisee when revenues are successfully invested into new technologies or services which can better their competitive advantage.
Creating and Marketing 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
Franchise headquarters have many expenses including utilities, salaries, and fixed overhead costs. Businesses that operate on a large scale generate millions of dollars in revenue through franchise royalty fees. Royalty fees cover administrative and development expenses for franchisors, along with the opportunity for brand expansions.
Although franchisees must pay a significant amount of revenue in royalty fees, this money will be reinvested back into the company, thus increasing long-term revenue.
Company expansions are another cost that are covered by franchisees’ royalty fees. These sorts of expansions, from international efforts to new office space and new vendors, may not be immediately and directly beneficial to the individual franchisee. But, the benefits of global brand recognition are phenomenal for long-term revenue.
In conclusion, royalty fees are an essential component to a successful franchise. When you partner with a large franchisor, any losses of revenue through royalty fees are balanced out by high levels of brand recognition. Studies have shown consumers are more likely to buy from a recognizable brand. Overall, royalty fees are an essential and beneficial aspect to franchise success!