The Internet and the Advertising Fund– a game changer
- The franchise business plan is done.
- The money is secured.
- The concept has been chosen.
Legals are next: the Disclosure Document (in most provinces) and the Franchise Agreement – hundreds of mind-numbing pages to read
– and buried in all this is something called
…. the Advertising Fund.
A Franchisee will pay 3 – 4 percent of gross revenues to the Franchisor each month for advertising – the Advertising Charge; and the way Franchisors operate the Advertising Fund has changed dramatically in recent years; and frankly, Franchisees do not generally understood the implications of these changes.
Do the math.
Is 3 – 4 percent of gross revenues important to you? If yes, read on.
What is The Advertising Fund?
The Advertising Charge is not the same as the Royalty Fee. The Royalty Fee is the percentage of gross monthly revenues payable to the Franchisor (typically, 4 – 6 percent in the restaurant sector).
The Advertising Charge is a second fee a Franchisee pays based on monthly gross revenues – as noted, usually 3 or 4 percent. Unlike the Royalty Fee, which goes into the Franchisor’s coffers, the Advertising Charge goes into a trust account, called the Advertising Fund. Franchisors use the Advertising Fund to pay for all advertising and promotional campaigns related to the franchise.
Prior to the internet, the Advertising Charge was a straight forward 2 percent for national advertising and 2 percent for local advertising. Some Franchisors let their Franchisees spend the local budget how they wished; others controlled that as well. Regardless, the 2 – and – 2 split was fairly uniform.
Along Came New Media
Then the internet came along, and then Google and Facebook and Twitter, and everything changed. Traditional advertising (print ads, radio, television, direct mail) began to compete with New Media (Social Media, websites, e-commerce, banner ads, mobile); and as a result, the national – local split became increasingly irrelevant.
- Is a website local or national?
- Is a Facebook posting local or national?
- What do we make of Twitter or Instagram?
The New Normal – a Blended Model
In the face of such radical developments, the traditional Advertising Fund has morphed into a blended model. The Advertising Fund has become a range, from 1 to 4 percent, with the Franchisor determining how much to put into traditional advertising and how much into New Media. The Advertising Fund is becoming a single depository.
This transformation has some important implications for Franchisees:
- Local advertising will now generally mean in-store specials, and will include printed materials, window treatments, flyers, and the like. You can expect 1 percent of the Advertising Fund to be earmarked for these forms of promotion.
- The remaining 2 – 3 percent will go to paying for New Media: the website, Facebook and Facebook advertising, Twitter, Instagram, Tumblr, blogs, banner ads, Google ads (the list is growing longer every day). Content and design is expensive, and will take an increasingly larger portion of the Advertising Fund every year.
Significantly, most franchise agreements do not require a Franchisor to spend the entire Advertising Fund each year. Franchisors are not required to return unused funds to the Franchisee, however. The money is carried over into the next year – or the next.
It’s critical therefore to understand how the Advertising Fund works. Once the money leaves your account and goes into the Advertising Fund, it never comes back.
Implications for the Franchise Agreement
Franchise agreements are changing rapidly to reflect the Blended Model. These changes have had the ultimate effect of reducing a Franchisee’s ability to carry out its own promotions:
- Franchisors are wary of multiple websites. They feel this confuses the consumer. Many Franchisors prohibit Franchisees outright from setting up their own websites. That means it’s more difficult to speak directly to your customers online.
- Likewise, Franchisors are worried about the messaging in social media. To that end, the Franchisee’s use of social media is generally restricted, as well.
- Be wary of administration charges imposed on top of the Advertising Charge. Ask what is currently being spent and what the Franchisor plans to spend in the coming years.
- Beware the Franchisor who is unwilling, or unable, to be effective online. The Franchisor who turns its back on New Media runs the risk of falling behind to more tech-savvy players.
We know the internet will continue to transform our lives. Franchising will not be exempt.
More difficult to predict is how the franchise industry and the Advertising Fund will evolve in the face of this transformation. For now, the only constant is change. Expect the Blended Model to continue to move along the continuum towards a single fund without a local-national split, as New Media takes up more and more of the advertising budget.
Exciting times – great opportunities – but you need to be informed, so ask questions.
BOOM Breakfast & Co. is a GTA-based franchisor in the Breakfast and Lunch Restaurant sector. Check BOOM out at www.boombreakfast.com.