Franchise Fees Are ‘Not' Inelastic

There is an adage in marketing that you get what you pay for, but higher prices without real (or perceived) benefits generally result in fewer buyers. This logic pertains directly to the addition of new units to any given franchise system. Or to put it succinctly, franchise fees are the opposite of ‘inelastic' and thinking otherwise will lead to the demise of a system.

I make this statement because I recently read of an expert arguing that franchisors should think of fees as being inelastic.  This argument is illogical and nonsense.

While a product like gasoline tends to be ‘inelastic' because its rising price (notwithstanding what might be coming our way) generally does not lower demand, the opposite is true in franchising. The economics of our industry make it extremely ‘elastic' because ‘fees' charged between competitors in a given franchise ‘segment' are usually one of the first comparisons made when creating a ‘shortlist' of specific opportunities.

I recall years ago as VP Franchising at a large international organization that the founding father kept up a constant footrace with his oldest competitor and that footrace resulted in a contest of ‘who could get the highest franchise fee'.  Now, while understanding the egos involved I still argued that a higher franchise fee without attendant benefits would result in fewer sales. The fee went up and sales went down. But the founder retained bragging rights, so all was not lost.

The fact that fee fluctuations between same segment franchisors tend to affect new unit sales would, in my opinion, make the argument that franchising is a shining example of an ‘elastic' not an inelastic industry. Now, fees may be referred to as 'static' or fixed, but still subject to great elasticity.