Taking the leap of franchising your business means making decisions … a lot of them. One of these decisions is whether or not you should require franchisees to contribute to a cooperative marketing fund. This article will run through what you need to consider before making this decision.
Why a Marketing Fund Can Drive Growth
Marketing funds allow you to combine contributions from franchisees. This enables you to undertake large-scale advertising or create promotional campaigns on behalf of the whole network. Having your franchisees make a weekly or monthly contribution to this fund can give you enough money to implement campaigns that would have otherwise been beyond reach.
These types of campaigns can have a significant impact and boost the recognition of the brand. Therefore, you may be able to significantly increase the franchise network’s customer base over a sustained period.
Operating a marketing fund also allows you to be thoughtful and creative in the kind of marketing you will use to benefit your franchise network. You can use this marketing fund for, among other things:
- engaging advertising specialists such as copywriters, graphic artists, web designers or marketing consultants to work on promotions and the franchise’s website and social media pages;
- the development of advertising and promotional material such as sound and video recordings, printed material, online positioning and software;
- the development and management of a customer database. This database can be used to establish a rewards program to engage the customer base;
- researching products, services, prices, and customers to gain a better understanding of the franchise’s competition;
- holding an annual conference for all franchisees in the network to promote franchisee engagement and strategic collaboration; and
- operating a ‘mystery shopper’ program to ensure consistency across the franchise network and compliance with the manuals and other procedures.
Another important consideration is the strict compliance requirements under the Franchising Code of Conduct.
One of these requirements is that a separate bank account must hold any contributions to the marketing fund. The account must only be used for legitimate expenses of the marketing fund. You must provide yearly financial statements of the fund’s expenses along with an auditor’s report supporting those statements.
If operating a cooperative marketing fund, you will also need to disclose various details in the disclosure document concerning the operating of the fund, including:
- who must contribute to the fund;
- how much each franchisee must contribute and whether any franchisees need to contribute a different amount;
- the kinds of expense a franchisor can use the funds for;
- whether the franchisor (or its associates) supply goods or services which the fund pays for and, if so, the relevant details; and
- whether the franchisor must spend part of the fund on specifically promoting the individual franchisee’s business (as opposed to only promoting the franchise network generally).
New franchisors should be mindful of the Code’s requirements in deciding whether to operate a marketing fund. You may be required to pay up to $63,000 if you breach the Code.
There are several alternative approaches that you can choose instead of operating a marketing fund. For example, you can incorporate the marketing cost into the franchise fee itself instead of having a separate marketing fee. This avoids the regulatory requirements of establishing a marketing fund.
Ultimately, you should consider the most appropriate and viable approach to implement your marketing strategy. These alternatives may provide some helpful insight into what others have done:
Local Marketing Expenditure
Set a minimum amount per month or quarter which franchisees must spend on promoting their franchised business.
Pro: The franchise will be promoted in every area where a franchised business is located.
Con: While you can specify what sort of marketing is acceptable, it can result in an inconsistent marketing approach across the franchise network.
Promotional Initiative Participation
Require franchisees to participate in specific promotions and nominate a maximum price franchisees must pay to participate.
Pro: Allows you to run network-wide campaigns.
Con: Marketing is limited to promotional initiatives and other marketing channels may be under-utilised.
Require franchisees to pay a set amount of money for the administration and promotion of the centralised website. You can use this money for search engine optimisation and social media advertising.
Pro: Social media advertising allows you to market your franchise to specific groups of people which is an increasingly important marketing medium.
Con: Again, marketing efforts will be limited to a single medium and you may miss out on the benefits of promotional initiatives.
Additionally, you can operate several of these alternative marketing strategies at the the same time. Furthermore, it is also possible to run any of the alternatives above while also operating a marketing fund.
When to Start Operating a Marketing Fund
You should be aware that you don’t necessarily need to operate a marketing fund from day one. Rather, you can reserve the right to open and operate a marketing fund in your franchise agreement and set out the terms determining how it will operate.
Due to the compliance requirements, it may be beneficial to implement the marketing fund once you have reached a network size of 5-10 franchises. If you choose to do this, the contributions will likely total enough money to implement a desirable marketing strategy and warrant the costs of complying with the disclosure requirements. This will allow you to focus on early recruitment efforts which can be critical to the network’s long term success.
Ultimately, there is no one size fits all approach when deciding whether to operate a cooperative marketing fund. However, the most important considerations when choosing a marketing strategy for your franchise are:
- determining which strategy best fits the industry you’re operating in;
- the profile and capacity of your franchisees; and
- the consumer market you’re aiming to reach.
If you’re in the process of franchising your business, or planning to do so, get in touch with LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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