Frequently Asked Questions About A Franchise Marketing Fund

Jan bio photo
Jan Muhleman
September 12, 2014
September 12, 2014

toy houses sitting on top of coin stacksFranchisors often ask us when they should activate their franchise marketing fund. They may have a requirement for marketing spending in their franchise disclosure document, or FDD, but may not be collecting or spending the money centrally. They may also have older agreements with different spending requirements in their system and have concerns about how to structure a fund that is equitable. We recently helped a 300-unit franchise system activate their national marketing fund. They took a very thoughtful, inclusive approach and successfully launched their program with nearly 100% compliance. We thought that it would be helpful to recap that approach for our blog, but realized that we needed to back up and explain a few things about ad funds first. The result is a series of posts that will cover a lot of related topics, of which this is the first.

Why do you need a fund?

The basic premise behind collective spending for marketing is the same as for cooperative purchasing of supplies or products. That is, it ensures brand consistency and realizes purchasing efficiency. It also provides a framework for the franchisees and their franchisor to work together to develop and implement integrated plans for successfully marketing the brand.

How do you structure the fund?

National marketing funds are often set up as separate fiduciary entities with independent advisory boards. This keeps the monies separate from the corporate profit and loss for tax purposes, and it provides the opportunity for the franchisor to grant as little or as much control of the fund to the advisory board as it wishes. Most franchisors share decision-making power with their advisory boards, but retain legal control and final decision-making of their funds.

Many franchise agreements anticipate the creation of DMA or MSA market co-op funds. These are legal entities that are created for the purpose of leveraging collective marketing at the co-op level. The specifics of how the co-op monies are managed and decisions are made are spelled out in a co-op bylaws agreement. Usually, officers are elected by the co-op members to manage the entity. Corporate may or may not contribute to the co-op, but usually has authority over structure and policies regarding brand marketing.

The FDD may also specify a minimum amount of money that should be spent locally. This local marketing spending is usually at the discretion of the franchisee, although the franchisor may provide guidelines and require proof-of-marketing placement. They also may have the right to disqualify a particular expense as a legitimate marketing expense fulfilling their local spending requirement.

How much contribution should you require?

The percentage or fee required, and how it is collected and spent, varies by the category of the brand, the competitive market, the business model (and margins) and the development of the system. Marketing royalties are usually higher for consumer brands, such as fast food and retail systems. It is not unusual to have a 5-10% of gross sales marketing spend requirement (including national co-op and local spend).

Fast food and retail purchases can be impulse decisions. Convenience/location and price/offer are important consideration factors, in addition to product or brand preference. As such, it is important to maintain top-of-mind awareness and prompt purchase through new product news or limited time offers. An integrated marketing plan with support at the national, co-op and local level is the most effective way to ensure awareness and stimulate purchase. But even small systems can benefit from having a centrally coordinated fund to help defray development costs of advertising implemented at a local level.

Business-to-business and service brands are often a more considered purchase with a relationship sell. Marketing royalties for these brands are considerably less, usually 1-3% of sales. Why? Because they rely on the franchisee, or their sales team, to make face-to-face contact with the decision-maker. National marketing programs can provide the brand image/awareness, point-of-sale infrastructure and customer database tools to support relationship marketing efforts on the local level. It can also help generate leads through targeted online marketing and social media.

Of course, there are all kinds of variations and exceptions to those examples. We have seen systems that only require a flat weekly or monthly fee, although that structure is really difficult to rationalize and expand if the market turns competitive and more spend is required. We have also seen systems where franchisees were initially told that all they needed to do was local marketing and PR or cause marketing. When the market environment changed, corporate had to admit their initial direction was shortsighted and needed to evolve.

When do you collect the money?

Traditionally, mature franchise systems have marketing funds that are corporately collected and managed. Younger systems sometimes choose not to collect their marketing royalties despite having that option in their FDDs. They risk facing franchisee resistance when they decide it’s time to implement a “national” fund. After all, some franchisees may have been doing very well spending their money locally and do not see the need for collective spending.

To avoid this potential conflict, we advise collecting the marketing fund monies early on, even if you rebate it back with proof of advertising. Yes, it may be more difficult to manage initially, but franchisees then clearly understand that those monies are earmarked for system-wide support for the duration of their agreement.

An added benefit to require a franchisee contribution is that corporate can establish metrics to track the success of centrally coordinated programs—and even locally executed ones. The franchisor can even require performance reporting in order for franchisees to receive their rebate. Without metrics, it is really hard to tell what is working and what is not. The presence of a franchise marketing fund—and a potential rebate—can be the incentive zees need to collect and share metrics that benefit the entire system.

Once you decide you are going to collect the required contribution, make sure you treat it with as much importance as your corporate royalty. We have worked with systems in which the failure to pay the corporate royalty immediately put the franchisee into non-compliance, but a delinquent marketing fee was not considered a serious breach of agreement. Don’t fall into that trap; when you are planning (and often spending) marketing monies a year in advance, it is critical that collected revenues match budgeted expense. Failure to enforce collection of the marketing fund can also create a perceived inequity among franchisees. Requiring payment creates accountability, equality, and an effective marketing spend.

Look for future blogs that address how to prioritize marketing fund spending and how to implement a change in a system that does not have one in place.

Photo Credit: Flickr’s Images_of_Money