Appeared in Franchise Canada Magazine May/ June 2008 as a Tutorial
In most franchise systems the franchisee is required to contribute a certain amount of money, called the advertising fee, for regional and/ or national advertising. It is the pooling of advertising dollars so that the franchisees can create a greater impact spending collectively on promoting and advertising the brand, versus if each franchisee were spending the same money independently. Advertising creates name recognition so that all franchisees may benefit.
Advertising fees are calculated on a percentage base of the franchisee’s gross sales and are usually collected once a month. Advertising fees can range from 1 percent to 4 percent. Some franchisors charge a flat fee while other franchisors have no advertising fee at all. Some franchisors will put a cap on minimum and maximum advertising fees. This is when the franchisee is only expected to pay up to a certain amount and when that amount is reached they are not expected to pay more. This method helps to alleviate the successful franchisee supporting the advertising fund and making it a collaboration of all the franchisees. Every franchise system is differently. Be sure to understand how your franchise advertising fees work.
The management of the advertising funds should be separate from royalties and the general revenues of the franchisor. It is not considered income of the franchisor but rather funds collected “in trust” for a specific purpose, to market and advertise the brand, or sometimes to re-brand or refresh the brand. The fund will often be collected through a separate bank account and sometimes through a separate company. Franchisors will often charge a management fee for administering the advertising fund. Franchisees can typically request to see the financial statements regarding the advertising fund and how the funds were spent. This will help to ensure that the fund is being used appropriately.
To further support the management of the advertising fund, some franchisors will set up an advisory council or marketing committee so that franchisees have a voice and input into the use of the funds. When the franchisor combines all of the advertising dollars there is more money to spend on larger advertising projects like radio, large-scale newspapers and T.V. It is often difficult to decide what the best use of the fund is and the nature of advertising is that it is not an exact science. Input from franchisees will often lead to better decisions and much greater buy-in to those decisions. All advertising/ marketing programs should be evaluated for effectiveness so ensure that there is a return on marketing dollars invested.
For the most part advertising fees are constant and do not change. An exception to this would be if you were awarded a franchise when it was fairly new. When you come into a franchise system during the early stages of growth you may be able to receive the benefits of lower advertising fees. As the franchise grows so should brand awareness through the many different mediums of advertising. The franchisor may realize that there are not enough advertising fees being collected to support the advertising and marketing initiatives required and they may request that the franchisees increase the percentage they make to the advertising fund.
In addition to the national/ regional marketing funds, franchisees should be aware that they will typically be required to spend money on local marketing initiatives over and above the advertising fees. While the national/ regional advertising drives brand awareness, the local marketing initiatives drive customers to your location. Most franchise agreements will stipulate that the franchisee is financially responsible for carrying out local market advertising each month, often stipulated as a percentage of monthly sales ranging from 1 to 3 percent. Franchisees may be required to participate in local co-operative advertising with other franchisees in the area.
It is recommended that the franchisee review the advertising fee requirement in their franchise agreement. Here are a few questions that you may want to ask to get a better understanding of the national/ regional advertising fund.
- What type of advertising has been done in the past?
- What advertising/ marketing initiatives are planned for the near future?
- How is the money held?
- Is the fund segregated from the franchisor’s regular accounts?
- Will the franchisor provide accounting or financial statements, pertaining to the funds expenditures, to the franchisees?
- How much of the fund is used to pay administrative expenses?
- Is there an advisory council set up and how many franchisees sit on this advisory council?
There are strong benefits to the franchisee contributing to the advertising fund. Advertising is expensive so when all the franchisees put their money together you can execute advertising initiatives that may not have been affordable otherwise. Different types of advertising, radio, newspaper and T.V., can be tested to see what works best for the franchisees. A national ad campaign along with local advertising can reinforce brand awareness to the customer and in turn encourage the customer to patronize your location.