When you’re looking for the best franchise business investment for your specific needs, you pay a lot of attention to some prices. The initial start up costs of the franchises you consider, for example. The prices of labor and supplies and marketing probably are on your mind from the beginning.
But what about the prices franchises charge? How does that figure into your calculations?
Take the example of Buffalo Wild Wings. Last year, the corporate-owned locations swallowed the price increases on the beer that they sold, and didn’t raise their prices at all. This year, they’re passing on the price increases to customers, probably at the rate of 2-3% of the price of a beer.
Franchisees, however, set their own prices on beer. They might choose to follow the corporation’s example and raise prices this year, whether or not they chose to raise those prices last year.
The franchisor explains that beer costs are rising, whether because of wage increases, taxes, or the increasing appeal of craft beers, which are discussed as seriously by beer connoisseurs as wine is by wine fanciers. At the same time, wages are rising in the hospitality industry, so the corporation doesn’t want to take a chance on subsidizing another year of price increases.
Franchisees in an area where costs are lower or competition is tougher might be ready to wait and see when it comes to a price increase.
Compare this with another example: Australian Pizza Hut franchisees are suing Yum! Foods over a price war that forced them to drop their prices to unsustainable levels. Or the McDonald’s Dollar Menu items, or Subway’s ill-fated pastrami promotion that cost one franchisee $500.00.
Does this mean that you can ask a franchisor one simple question — “Do you set the prices or do I?” — and feel confident that you know how pricing might affect your profits?
Maybe not. An AllBusiness survey found that promotions usually cost franchisees a bundle, and most didn’t feel that they could refuse to participate, even if the franchisor said the promotion was not mandatory.
One reason is the prevalence of online coupons. Back in the day, if you were the only tax service in town, rumors about coupons in another town didn’t cause your customers to complain, because they were just rumors. Now, everyone can see and download special offer coupons, and consumers may get angry (or picket you, or mount a Twitter smear campaign) if your particular location tries to opt out.
So it’s worth asking your franchisor about special promotions, especially long-running or annual seasonal specials. Franchisors in the survey mentioned above were adamant about the long-term improvement in the bottom line that they know follows their promotions, but it’s something to keep in mind. If you choose a franchise that sets prices or pushes promotions, you’ll need to reflect that reality in your budget.
In any business, balancing pricing, promotions, and profits is a must. A franchise business is no different.