Why Do I Pay A Royalty Fee?
The first point to make about Royalties is that good Franchise
systems should look at them not as a payment but rather as a
remittance. It is the Franchisor's share of the income derived
from customers or clients. The Franchisee collects that fee
along with all other revenues from the customer.
It's an important concept because it emphasizes that the
customer ultimately pays for everything, including the
Franchisor's royalty, the Franchisee's overhead, all costs of
sales, employee's salaries, and the Franchisee's profit.
Therefore it's all about the customer - as it should be.
The Franchisee should want the Franchisor to earn a significant
amount of royalties because that's really the oil that makes the
engine run. Each Franchisee collects and remits a small portion
of that oil to the Franchisor. All elements of the system can
continue to improve as long as the royalty stream is strong.
The Franchisor's royalty will be based on the fact that they
have provided a system and strategy that has ultimately served
the customer. The Franchisee delivers that system to that
customer. The royalty represents the Franchisor's share based on
the various parts of the Franchise system, which has four
elements.
The four elements of a Franchise are:
a) Brand b) Operating System c) Support System d) Franchisee
Brand - the name associated with the services delivered in a
memorable and satisfying experience to the customer
Operating System - institutionalizes the excellent service
delivered in a memorable experience so it can be done over and
over again from Franchise to Franchise in a consistent manner
Support System - helps the Franchisee get better and better at
delivering the service in a memorable experience - helps a
Franchisee improve their performance
Franchisee - the individual motivations or reasons for being in
a good system, as well as the talents and experience delivered
to the business.
The Operating and Support systems will generally provide access
to advice at the level of professional consultants in the fields
of marketing, management, advertising, execution of the delivery
of the product or service, customer support, etc. The cost of
these types of consultants on the open market will often far
exceed the value of the royalty fees that are remitted by the
Franchisee that participates in a system that delivers these
items from a position of experience. In fact, it's the exact
experience the Franchisee requires as opposed to open market
advice.
Now here's the test. If each of the four elements of a Franchise
system is evaluated in terms of the percentage of contribution
to the overall success of the business, then the royalty can be
assessed in a proper light. Many people will say that each of
the four elements contributes equally - or 25%, to the overall
success. That means that the Brand, Operating System, and
Support System provide 75% of the success formula. Therefore, as
long as the royalty is less than 75%, it's a good decision to
participate in the system. That's a little silly, but it
emphasizes the point.
Most royalties range from 2% to 10% depending on the type of
system, so as long as the Franchisor's systems contribute 10% or
more to the success of the business, it makes sense to
participate, and remit the collection of royalties to the
system.