Ready For Takeoff
When is a good idea a marketable idea? For would-be franchisors and franchisees, the answer to that question makes all the difference in the world.
Remember how every episode of the original Star Trek TV series began with Captain Kirk proclaiming that he was about to "boldly go where no man has gone before"? Well, that's often what you'll be asked to do when you sign on with a franchised business. The burden is on you to take a product or service and sell it in markets that may be untried, untested and, if you don't watch out, unsuited to your franchise. So before you try to take that McDonald's, Sir Speedy or 7-Eleven where no McDonald's, Sir Speedy or 7-Eleven has gone before, find out if it will work.
The Value Of Research
Before you decide to buy a franchise, you need to determine the extent of the demand for its products or services. By systematically collecting, analyzing and interpreting market data, you can uncover key trends, form a better understanding of the franchise's market, customers and competitors, and make an educated decision about whether to purchase it. Those insights can help you answer questions such as the following:
- Who are my potential customers?
- Where do they live?
- How often do they buy the products or services the franchise offers?
- What styles, colors or flavors do they prefer?
- Why do or don't they buy from the franchise?
- How do the strengths of the product or service match their needs and wants?
- What hours do they prefer to shop?
- How do they rate the franchise vs. its competitors?
- What advertising media are likely to reach them?
If the research shows that demand is sufficient to support your prospective franchise, you can use the results to help find an ideal location and develop a start-up marketing plan. Investing in market research before you buy will also help you organize information for prospective lenders.
And if your research reveals that customer demand for a franchised product or service is declining or non-existent, you'll avoid making an expensive, heartbreaking mistake.
Getting The Scoop
Primary market research entails getting answers directly from customers, fellow franchisees or suppliers. Interview a wide variety of franchise system representatives. Talk to current franchisees in several areas of the country as well as franchisees who have left the system. Ask them what their customers are like. What are their demographics? What are their favorite products, and why? Always use open-ended questions that encourage in-depth answers.
Secondary research should also play a role in your investigation. Secondary market research comes from published information such as census data, surveys and government statistics. Even the franchisor's audited financial statements can be considered secondary research.
The following three steps-plus four marketing elements you must consider-will help you investigate your intended market and determine demand for your franchise.
Conduct An Industry Analysis
Every franchise operates in an industry that has a direct impact on the way the franchise conducts its business and on its potential for success. McDonald's operates in the fast-food industry; Jiffy Lube operates in the automobile services industry. Some franchises operate in more than one industry, like quick-print franchises, which operate in the printing industry and the marketing industry. Industries are constantly in flux. New consumers and competitors enter the marketplace; technologies are replaced; and new methods of reaching customers are discovered.
Before you decide to purchase a franchise, you need to understand its industry's big picture. By conducting an industry analysis, you'll learn how rapidly an industry is growing and how long it's expected to thrive. You'll discover its strengths and weaknesses, and be able to confirm whether you're about to join an industry that's robust or one whose prospects are dwindling.
You can gather primary field data on the industry by talking to the following people:
- Customers can provide clues to satisfaction with the industry and the product or service supplied. If you get lots of complaints, listen to them.
- Suppliers and distributors are in an excellent position to comment on the financial strength and market practices of major firms in the industry and to assess the demand for an industry's products and services.
- Employees of key firms in the industry will be able to provide insider information about your potential competitors.
- Direct and indirect competitors can tell you about the intensity of the competition for customers. If three major competitors are sharing a market, is there room for a fourth? Are they acquiring new customers or merely fighting over existing customers? Visit trade shows to quickly identify major players and assess the strength of their market strategies.
- Current franchisees can also share their perspectives on where the industry is headed.
- Industry experts who report on particular industries for the media can provide global information and identify major players and issues that may affect a franchise.
- Attorneys, accountants and other professional service providers who work within the industry are also knowledgeable sources.
Acquaint yourself with basic industry knowledge before you meet with key industry figures. The people you want to interview are busy and may not have the time to bring you up to speed. Demonstrate your knowledge of the industry, and show a genuine interest in it. Don't forget to offer the person a summary of your analysis. Follow these guidelines, and you'll begin to gather a great deal of information as one interviewee refers you to another, and so on.
Secondary sources are also a vital part of an industry analysis. Use them to gather statistics on sales, products and prospects as well as information on key figures in the industry. Don't let the magnitude of available facts overwhelm you. Your goal isn't to write a formal report on the industry but to learn enough to confirm that it's the right place for you to be.
In the end, your industry analysis should tell you the following:
- Current size of the industry
- Industry growth potential
- Geographic concentration
- Industry trends
- Profit potential
- Sales patterns
- Typical gross margins on products
- Major players and their product lines and market strategies
- Channels through which products reach end users
- Typical buyer behavior
- Major suppliers
- Economic environment
- Regulatory environment
- Sociopolitical environment
Conducting an industry analysis is an important part of the due diligence that goes into a sound franchising purchase decision. Skip it, and the consequences may be dire. You could find yourself owning equipment that will be obsolete in a matter of months-or, worse, find yourself locked into a 20-year contract in an industry with three years to live. Before you sign any franchise contract, you need to evaluate the industry and make sure your franchisor is aware of, and planning for, industry changes. After all, the only sure thing in business is change.
Conduct A Market Analysis
If step one reveals the health of an industry, step two confirms whether enough target customers are in a particular area to support a business.
The industry and your franchisor have probably identified a particular demographic segment as target customers for its products or services. Your job is to make sure that demographic segment resides and makes purchases in the general market area you propose to serve. A market analysis or market feasibility study will tell you whether there is potential demand-that is, enough target customers-in your market to sustain your business. Even the most ideal products and services in the world will go unnoticed if there aren't enough potential customers.
To conduct your market feasibility study, compare a reasonably detailed profile of your typical customer with statistics on the population to determine how many of those consumers live in the market area you're considering. Your customer profile will have emerged as you conducted your market research. Franchisees can give you firsthand descriptions of typical customers; your industry analysis will yield insights as well. Secondary data from the U.S. Department of Commerce and other sources offer a wealth of information on the buying patterns of Americans in relation to particular businesses. They can also reveal the characteristics of the market area you're looking at.
Visits to existing franchises in similar markets can also tell you a lot about your prospective customers. You can draw many conclusions merely by observing customer buying habits and confirming your observations with franchisees.
All this information is pertinent to your market analysis. For example, industry studies may show that males 18 to 38 are a growing market for the franchise's products or services. Now determine the number of 18- to 38-year-old men in your market area, and compare their buying habits to the locations you have in mind. Does your proposed site match the target market's traffic patterns? Is it nestled among stores offering complementary products that appeal to the same group? If research shows that your product is an impulse buy and will do best in a high-traffic mall, that's the kind of location you need to look for. Don't settle for a strip mall instead of a shopping center, or your business may be doomed. Use the insights generated by your industry analysis and your market research to evaluate the appropriateness of every location you consider.
Review The Data And Draw Conclusions
Listen to your research. Kenneth L. Bernhardt, a professor of marketing at Georgia State University, says that initial research for the ill-fated DeLorean automobile showed a large demand for a specialty sports car in the $15,000 to $20,000 range. But DeLorean ignored the research, adding features that resulted in a $25,000 price tag-and ultimate failure.
It's a good bet that DeLorean turned his back on his research because he loved his own product so much he couldn't be objective about it. He wanted those features; why wouldn't others embrace them?
Sadly, many would-be franchisees make the same mistake. They're so delighted with a system and so eager to feel a part of it that they dismiss the hard facts turned up in research-or they skip research altogether.
Pay attention to your research. If industry and market analyses reveal a major flaw-insufficient demand, a looming change that threatens to cause an industry shakeout, or strong competition that is likely to launch a counterattack if you enter the market-think twice. If you can't sell your product, you won't succeed.
The 4 Ps Of Marketing
Four elements play a role in a customer's decision whether to buy what your franchise offers: product, price, place and promotion.
These four Ps of marketing are variables that can be mixed, matched and manipulated to create an unbeatable blend of attributes that's sure to attract customers. Take hamburgers, for example. To appeal to a teenager, the product has to be tasty and conveniently packaged. The price has to match the teen's spending habits. The place where the teenager purchases the hamburger needs to be somewhere along his or her regular route. And the hamburger must be promoted in a manner that catches the teen's attention-probably not in a copy of Reader's Digest.
Your franchisor will already have made many of these decisions for you. The product is the cornerstone of most franchise systems. It's been extensively tested, and if you're buying into an established franchise, it has a strong track record in other units. In most cases, franchisees are responsible for maintaining product quality rather than developing new products. While antitrust laws prohibit franchisors from dictating specific prices for their products, your franchisor will probably suggest a pricing structure. Your franchisor will have suggestions about how to deliver the product or service in an appropriate place, but selecting the location is your job. So is promotion. The franchisor will provide some support, but most local marketing decisions are up to you.
Good market research is critical to achieving the right mix of product, price, place and promotion. Ultimately, you'll use your research to guide your promotional efforts and build sales in your franchise outlet.
- What is the physical product?
- What additional features/accessories are needed?
- What are the functions or uses of the product?
- What services need to be provided?
- Do customers expect guarantees or warranties?
- How should the product be packaged for shipment?
- How should it be packaged for consumers?
- What images should the product project?
- What brand name should be used?
- What price is needed to make a profit?
- What price will customers be willing to pay?
- Who determines the price customers will pay?
- Should discounts and allowances be provided?
- Should coupons, rebates, markdowns or sales be used?
- Should credit be extended to customers?
- How should the business respond to competitors' prices?
- How will the product reach the customer?
- How will products be handled, stored, displayed and controlled?
- How will orders be processed?
- Who will be responsible for products that are damaged or not sold?
- What kind of traffic patterns fit the buying patterns of target customers?
- What information do customers need?
- Should promotions be informational, persuasive or merely reminder messages?
- Do all customers need the same information?
- What combination of advertising, personal selling, sales promotion and publicity is needed?
- Will mass or individual promotion be most effective?
- What media should be used?
- How often must information be communicated to franchisees and customers?
On Second Thought
Secondary data is abundant, inexpensive and easy to find. Try these sources:
- Professional journals, trade magazines, reference books, government publications and annual reports of public corporations abound with data.
- University or community libraries are excellent sources for applicable publications.
- Small Business Development Centers are located at more than 950 colleges and universities and offer a variety of information on the marketing, legal, financial and accounting aspects of business expansion as well as state and federal business assistance programs.
- County government agencies can supply census tracts that show population density and distribution. Read them to discover who lives in the areas you're looking at and what population trends indicate about the area's future.
- Trade associations offer a wealth of information, including industry and market statistics, books and reference materials, and membership directories that identify key industry personnel.
- Local chambers of commerce or business development organizations can supply information that is pertinent to your research. Contact them for demographic reports on the local, regional and state level; relocation and site selection assistance; maps of major trading areas showing the major areas of commerce and reflecting the population's spending habits; and informational sessions on networking, managing, financing or developing a marketing plan.
About That Location. . .
Questions to ask before you move in:
- What type of neighborhood surrounds the potential location?
- Who lives there?
- What is the area's average household income?
- Is the population growing or declining?
- Are the families young with children or are they older families whose children have moved out?
- How many of your desired target customers live in the area?
- How many target customers live within five miles?
What Are They Up To?
Your industry analysis should reveal which companies would be your direct and indirect competitors in a particular business. Look for them as you conduct your market analysis. List all of the competitors located in your prospective market radius. Then shop them. Visit each one several times, and answer the following questions:
- What does each one do well? What does each do less well? In what areas do you think your franchise can do better?
- Who are the customers? When do they purchase? How many visit on weekdays? Weekends? Holidays? Do they visit during the day, evening or night?
- What is the business's peak hour? When is its slowest period?
Extrapolate the competitor's sales by learning its prices and then multiplying by the number of people who leave with packages during a particular period. Enlist family and friends to help log customers during different parts of the day, and do the math once you have a good sample.
Cheryl Babcock is the director of the Institute for Franchise Management and chief officer of the Society of Franchising at the University of St. Thomas in St. Paul, Minnesota.