The previous chapter was about building an intentional culture centered on the premise of win-win and collaboration. Let’s now discuss the philosophical and cultural norms that must exist to maximize the outcomes in improving franchisee unit economics. The health of the entire franchise system is essentially based on continuous improvement in two metrics: unit-level economics (at the franchisee and franchisor levels) and franchisee satisfaction. Each is a relentless pursuit.
First you must incent the right behavior for corporate personnel. In chapter 4, we discussed the design of our quarterly bonus program. We review projects and initiatives to ensure that they are driving improvement for franchisees in the following four areas: revenues, margin, costs, and efficiency. Some departments, such as field support and BrightStart, may have a greater opportunity to impact revenues, while another, such as national accounts, may have a greater opportunity to impact margins (I discuss this later in the chapter). Having our senior leadership team collectively review the quarterly goals for each employee enables us to monitor and assure that progress is being made for the franchisees across all areas.
The next philosophical belief is not for the faint of heart: You must constantly evaluate a franchisor-franchisee scorecard and challenge yourself, as the franchisor, to look for ways to deliver more in value to the franchisee than you receive in payments from the franchisee. Having begun as a franchisee, I recognize that a common problem within the franchisee–franchisor relationship is that the franchisee pays an initial franchise fee to learn the business model, license the marks, and receive initial support, but two or three years into the relationship the franchisee forgets the initial support he received and begins to wonder, “What have you done for me lately?” In other words, he begins to question the ROI on the royalties he pays.
True, the franchisor is entitled under the contract to the royalties, and the franchisee acquires great value in being able to use the trademarks, systems, and processes that the franchisor spent lots of money developing and maintaining. However, one measure that I believe deserves consideration from time to time is this: In the aggregate, for franchisees who are following the system and executing on all that is expected of them, shouldn’t the royalties paid be buying quantifiable value, if they are leveraging all the tools we have developed for their use? In fact, the gross margins on business that we bring to franchisees (through national accounts and surge programs), as well as the discounts on products and services the franchisees buy through approved vendors, need to contribute more to their bottom line, on average, than what they pay in royalties. There should never be any question about whether being a franchisee is better than being independent, provided the franchisee has followed the system, played by the rules, and given everything he has in being part of the team. I believe this also ensures a higher likelihood of renewals when the 10-year mark (or whatever your renewal period will be) comes around.
We won’t balance the scorecard in the franchisee’s favor for every franchisee, but that is our goal, and it is a measure that we are beginning to look at more closely as our system matures. We haven’t reached our first renewal, but I want to drive our accountability to ensure that, by the time our franchisees start renewing, all of them will know unequivocally that renewal is in their best interest. This also allows me to set the expectation of and empower the various teams to achieve this result—or at least closing any imbalance and moving in the right direction until renewal. This also is the ultimate scorecard that we can review on an exception basis as an organization to know which franchisees we need to focus on and to investigate the root cause if franchisees are not taking advantage of the resources we make available to balance the scorecard.
Keys to Improving Franchisee Unit Economics
Now that we have discussed BrightStar’s philosophical guidelines and how we integrate them into setting the vision for our culture, let’s begin to look at improving franchisee unit economics. There is no better way to ensure strong relationships with franchisees and a strong financial model for the franchisor than to have all the right people in the franchisor organization focused on improving franchisee unit economics. There should be a relentless pursuit of constantly improving in at least one, and preferably all, of four key areas: (1) increase franchisee revenues, (2) improve franchisee gross margins, (3) reduce franchisee expenditures on products and services, and (4) improve franchisee efficiency to increase their revenues-per-dollar-of-payroll (for us, this is just for office staff since our field healthcare employee costs are included in cost of goods sold). The following sections describe what we are doing and what future investments we are making to impact each of these four areas.
Increase Revenues
There is no single silver bullet to increase top-line revenues. A multi-pronged approach is needed to help franchisees acquire new customers, retain existing customers, and sell more to existing customers. The key to overall success in improving franchisee revenues is to guarantee that there is an absolute focus and commitment to the effort, starting from the top of the organization and reaching every level, and then ensuring that each initiative has measurable goals so that improvement can be documented and communicated to franchisees. Being able to communicate to franchisees the positive impact of these efforts in quantitative terms goes a long way toward maintaining high franchisee satisfaction while simultaneously improving franchisee unit economics.
Our goals to reach more customers include the implementation of online strategies and investments in our website, search engine optimization (SEO), search engine marketing (SEM), and social media. We track the increase in visitors month by month and the cost of new leads; we also compare the cost of the leads and the average amount spent by a new customer to document our franchisees’ ROI on their national advertising fund dollars. We track closely what our customers are saying about us with online reputation management tools. We have implemented tools and provided the incremental resources for our franchisees to build out their own web pages as part of our brand domain, and have trained and supported their use of social media tools such as LinkedIn, Twitter, Facebook, and blogs to build their local awareness. We made a great decision in hiring someone fresh out of school with a marketing degree and passion and interest in social media. We turned her loose, and she amazed us and our franchisees with what she was able to deliver.
National online referral sources must also continually be evaluated. It seems as though a new one pops up every week, so it is important to have your online expert perform due diligence on these sites to see how good their traffic and results are. Often it is better to have franchisees spend more on SEM that is directed to their own website page, within our main domain, than to build the awareness of another site. We try to keep a handle on the sites that appear to have a solid ROI and provide that
information to franchisees for them to consider advertising, but also make them aware of where their money will likely not be a wise investment.
Online presence can help new potential customers become aware of your brand. This is a critical priority and will only increase in the future as busy customers initiate more decisions and transactions online. In addition to increasing the number of customers who are aware of our brand through marketing, we also need to constantly assist our franchisees with new sales programs, marketing programs, etc., to gain more customers. We have a couple of initiatives that we work on to do this (some are more unique to our industry, but by dedicating time to thinking about similar initiatives applicable to your industry, you are bound to come up with a few great ideas). Tactically, to improve skills and to ensure that franchisees are making sales calls, we focus resources and measure the results for the BrightStart and boost programs.
Beyond BrightStart and boost programs, we release a new “Idea Kit” every three to six months to focus a franchisee on a new customer type or referral source to incrementally improve her business. The Idea Kit includes a how-to guide showing who they will call on and what they will say, as well as a customized, targeted collateral piece to support the sales effort. As with targeted revenue opportunities within preexisting revenue verticals, I think it is critical for the senior leadership team, the Franchise Advisory Council, and the board of advisors to spend time considering what new revenue verticals could be developed by servicing new customer types with similar services or offering new services to existing customers. We expanded to provide care for children in addition to providing care for disabled adults and seniors; this was a strategy to use our recruiting efforts to service a wider array of clients (and after we personally had a need, when our twin boys were born premature at 28 weeks). Look to the aftermarket car care industry and their expansion into transmissions, oil changes, etc., for ways an industry can reinvent itself to extend its array of services to reach more customers.
Although we always need new customers, it is probably true that it is easier to sell more to existing customers than to find new ones. In our business, that means deepening relationships with those who refer to us, to gain a larger percentage of the business they refer out, or looking for incremental services our clients could use if we offered them, such as transportation to a doctor’s appointment. For many types of franchise businesses, such as food and retail, it is important to prioritize strategies to increase the average dollars per ticket or per transaction.
Improve Gross Margins
Focusing on programs and initiatives to assist franchisees in improving their sales year over year are important and create a win-win for franchisees and the franchisor. For the franchisee’s business and the system as a whole to be healthy long term, the business that franchisees add needs to have strong gross margins so that money falls to the bottom line; in other words, there needs to be a focus on adding “profitable new business.” In addition to adding “good” business, initiatives need to be undertaken to assist franchisees in improving their gross margin.
In some industries, such as food, the cost of food must be continually looked at as well as processes to reduce spoilage and theft. Many industries also have the cost of labor in the cost-of-goods-sold area (like BrightStar does) that is part of the calculation of gross margin. To ensure adequate personnel and the retention of the best employees, wages have to be competitive, so cutting wages is likely not a viable option without negatively impacting customer retention. How, then, can we impact gross margin?
One way to impact gross margin is to cut costs in the cost-of-goods-sold category. If any of your costs other than wages are controllable, then plans should be developed to reduce these costs through better supplier negotiation and process efficiency. For BrightStar, we have worked to improve loss ratios through risk-management processes and training to drive down the cost of workers’ compensation and professional and general liability insurance for our field staff employees. We also have worked on volume pricing for the costs related to readying an employee for work, such as background checks and drug screens, to positively impact gross margin. Less obvious ways to assist franchisees in improving gross margin were two initiatives that went beyond supplier negotiations. First, we looked at opportunities to negotiate national or regional contracts on our franchisees’ behalf in niche markets that have higher gross margins than most of the franchisees’ locally generated revenue.
Second, we are investing in business intelligence tools—with a rules layer built on top—to alert franchisees when a client is below a target margin level so that they can take immediate action. We also can alert franchisees to non-billable overtime that negatively impacts their margin, because they may be unaware that their office personnel are scheduling cases in such a way as to require employees to be paid overtime that is not billable to the client (thus severely reducing margins).
BRIGHT IDEA:
Providing real-time information that a franchisee can use to improve the results of his business can have a positive impact on gross margin and overall results.
We also place an emphasis on helping franchisees understand how to sell the value of what they deliver and how their price is directly related to what they pay their caregivers. It is important to ensure we create the tools and training to prepare the franchisee to articulate her value proposition with customers and referral sources around pricing—customers of the franchisee need to understand that our pricing is slightly higher because our franchisees pay their healthcare employees more than market wages (usually by 2 to 10 percent) to attract and retain the best employees so the franchisee can deliver a higher quality and better service experience. We also have training tools for assisting franchisees in implementing price increases effectively with minimal or no loss in business.
Reduce Expenditures on Products and Services
We looked at the cost-of-goods-sold costs in the prior section. Still other expenditures can be reduced for the franchisee through active supplier management and helping franchisees identify opportunities to reduce expenses.
One of the largest expenses for many businesses is rent. It is prudent to take another look at the space requirements to see if they can be reduced. It is possible that you can negotiate with landlords to reduce rent. Sometimes the franchisor will need to step in and be a part of the discussion. At other times, the franchisor may be able to negotiate for multiple properties on behalf of various franchisees (particularly for retail space).
Beyond rent, anything that franchisees purchase at a local level should be evaluated for the opportunity to negotiate a national contract at a reduced price. Prioritize the evaluation of your suppliers based upon the amount spent on average by franchisees so you have a greater impact faster, and then continue through the list of suppliers. Once you have negotiated a supplier contract, don’t consider negotiating to be done. If your number of franchisees or if the volume purchased by each franchisee increases, there is likely an opportunity to renegotiate.
I recommend that you include in your annual franchisee surveys a write-in opportunity to identify categories of purchases that franchisees feel would be less expensive if purchased for the entire national system. And to obtain deeper discounts, consider bundling multiple products and services with a particular supplier. For example, bundling payroll processing, 401(k), and insurance may result in better pricing than negotiating each separately.
Improve Efficiency
Now let’s look at some initiatives that BrightStar has invested in to improve franchisee unit economics by assisting franchisees with improving productivity. We look for ways to allow franchisees to handle increased revenues with the same office labor, or minimal increases in labor, so that more money falls to the bottom line and the income percentage improves. Increasing revenue while holding office payroll costs level, or growing revenue faster than you grow office payroll costs, will improve the franchisee’s revenues per dollar of payroll (using labor in the general and administrative [G&A] section and not labor in cost of goods sold). This is the ultimate metric for measuring efficiency.
BRIGHT IDEA:
One of the major breakthroughs we had was evaluating each function in a franchisee’s business and matching the skills an experience required to accomplish the task.
We identified that we could retrofit the model in most states so that franchisees could have lower-wage personnel perform some functions full-time and have a higher-cost employee only part-time (rather than full-time) in the beginning. In any franchised business, the franchisee must constantly keep an eye on his employment decisions. These changes enabled the franchisee to make decisions that could result in improved employee retention for his business because the employees were better matched in skills and experience for the jobs they were hired for. These changes also allowed a reduction in franchisee personnel costs by approximately $25,000 per year.
We also identified opportunities to upgrade our technology so that it works for a franchisee’s employees, allowing a more user-friendly experience. You hear my repeated emphasis on seeing technology as a game-changer and one of the best areas for you to invest in. Although there are many positives related to technology investments—such as the scalability, ROI, and competitive advantage benefits—there are also a couple of negatives. One is the amount of time it takes to complete large technology projects. Our technology upgrade, for instance, took nearly two years. Another negative is that you never make a final technology investment. As soon as you complete one project, you will easily be able to identify new ways to leverage technology for continued improvements.
We achieved a large efficiency breakthrough for our franchisees and for ourselves by implementing the support center (which you’ll recall reading about in chapter 9). This center made it possible for franchisees and their office teams to receive a response to their requests, questions, or reported problems within four business hours. Rather than contacting their franchisee for process or technology questions and assistance, staff of our franchisees called corporate. All calls or online requests to the support center are logged into a system automatically, and reports are reviewed monthly to identify themes so that training can be adapted to address key knowledge gaps and/or so a franchisee can be alerted about possible competency issues with his staff.
It is great when we are able to identify ways to be of better service to franchisees and to keep them productive. It further helps us proactively identify improvements that we can make in the model, in our training, and in our online resources. We have also compiled frequently asked questions resources and a Wikipedia resource based on support center requests and franchisee-to-franchisee mentoring.
One of the biggest obstacles to continuous improvement within a franchise system to be mindful of is the rate of change introduced to the system. Corporate has much more bandwidth to identify system improvements than busy franchisees have to put these improvements into practice. It has taken us years to realize that bundling system changes into quarterly releases greatly increases the efficiency of adopting improvements. There is also the challenge of how to bring the early franchisees up to the same standards as those of the recently added franchisees as you grow. We discussed in chapter 9 the importance of continually training the franchisees and their core teams to current standards when I introduced the idea of investing in an online learning management system (LMS).
In addition to the LMS resources, we also began offering an annual Branch Leadership Conference (BLC) in our fourth year. We have held a franchisee conference annually since our second year to share best practices and communicate new processes to our franchisees. We realized, however, that the information was not consistently being communicated back to our franchisees’ teams. We also understood that our franchisees were receiving continual education and professional development at their conference, but the franchisees’ branch team was not receiving the same resources. The BLC provides a way for each franchisee’s team to be developed and to ensure that brand standards are taught and then taken back to the businesses for brand consistency.
Closing Thoughts
The initiatives discussed in this section can and should begin from the first day you have a franchisee. As your franchisees mature, make a note to yourself that you will need new tricks to continue helping them take their businesses to the next level. Franchisees in their third or fourth year begin to benefit less from field support visits and need a new, non-traditional level of support. We learned from other franchisors how they use performance groups to bring together similar franchisees for summits to discuss the actions, hiring, and investments needed to reach the next level. We have just begun this process, and doing so has been our new breakthrough for helping those franchisees who were starting to slow their growth trajectory to create a new chapter for their business, reinvigorating them to get to the next level.
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The next section stresses what is needed to differentiate your model in the eyes of your customers and what you must do to have your finger on the pulse of what customers think about the brand. You will learn how to leverage all that you’ve read throughout Grow Smart, Risk Less to consider the future possibilities of international expansion and/or the launch of additional franchise brands.
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