Establishing a franchise business requires careful planning to ensure stable and continued growth of the franchise network as you grow.
At the heart of the franchise business is the relationships you build with your franchisees. In return for their commitment and financial investment they expect your professional support and the opportunity to be rewarded for their hard work.
Therefore it is critical to build a franchise network that provides sufficient revenue opportunities for every franchisee and maximises your penetration into your chosen market. Whilst there are several types of franchise business, this article will look at a common residential service-based franchise to illustrate the importance of establishing well structure franchise territories.
Whilst there are many sophisticated software solutions available to help you analyse, define and manage franchise areas, we’re going to go ‘old school’ and keep it simple just to illustrate the process. This article will show you how a basic franchise network can be planned and executed just using paper Postcode maps and spread sheets!
#1 Defining The Ideal Customer
Before you start drawing franchise areas on map, you have to consider who purchases your products or services?
If you sell services or products to businesses you may be able to describe your ideal customer in terms of SIC codes, business classifications and their size according to the number of employees or turnover.
If your franchise sells to the general public then you can use sophisticated demographic classification systems or simply use census data to help describe your perfect customer. Factors such as age, whether they have children, their level of education or their type of house can all be used to identify the ideal households that purchase your products and services.
In this example, we will look at a hypothetical franchise that promotes a type of home service and targets couples whose children have left home and therefore may have the disposable income to spend so they can free up their leisure time. Their broad ideal household may therefore be defined as:
a) The head of the household is aged 55 to 64
b) There are at least 2 people in the household; and
c) There are no dependent children in the household
Defining the ideal customer
However we define the ideal customer - whether through simple census variable or sophisticated demographic profiling - the result will give us the volume of matching prospects for any given geographic area.
#2 Establishing The Market Size
Once the ideal customer defined is defined, we can calculate how large the entire market is – whether for just a region or the entire country.
Estimating what proportion of those households we expect to convert to customers based on previous experience, market testing, competitor presence and other business drivers will then help understand how many franchise territories we actually need.
For our example customer profile outlined in #1; there are 2,463,926 households in England and Wales that match our target demographic. Taking all factors into account we may then estimate that we will convert 2% of those households into customers which gives us a potential total customer base of 2,463,926 x 2% = 49,278 in England & Wales.
Household counts by Postcode District help define franchise size
#3 Sizing The Franchise Areas
The perfect franchise would be structured in a way to be able to promote our service to every target household and service every available customer. And with some careful planning decisions these revenue opportunities can be maximised.
In our hypothetical business our customer profile will be a mix of repeat, loyal customers of various frequencies and customers that only use our services once. But taking all these factors into account, we determine that we have to create franchise territories with the opportunity to secure 500 customers in order for them to be a profitable and sustainable franchise opportunity.
We have already established that we believe we can convert 2% of the potential household into customers, so we now know that each franchise area needs to contain approximately 25,000 target households to hit that target.
Target household distribution across England & Wales from blue (low) to red (high)
Of course, the finished franchise sizes will also be governed by other factors such as driving time – if you operate a home service franchise in the highlands of Scotland then travelling time between customers is likely to become a serious consideration!
#4 Mapping Franchise Areas
So how do we create franchise areas with 25,000 target households each?
Fortunately in the UK we are blessed with a Postcode system that helps us with this task. Postcodes are familiar enough that it is easy to communicate to a franchisee the Postcodes that their franchise will cover and we can work at a Postcode level that suits our franchise model.
In our example franchise, we will create franchise areas from Postcode Districts which is the first half of the Postcode such as SL6, UB7 or LS1. There are 2,270 of these covering England and Wales and these are good sizes for creating many types of franchise territory structure.
From our census or business data (or other market information) we now have the quantity of our potential customers in each Postcode District; so the task now is to collect together Postcode Districts in areas across the country until we have the magic 25,000!
There are many ways of doing this but the most common way is to start with the larger towns and cities and create franchises there first – after all, this is where the greater potential will be concentrated.
We have created a franchise area around Bournemouth as an example. The thick black marker pen shows the extent of this franchise area and the spread sheet shows a list of the Districts it contains.
Bournemouth franchise mapped by Postcode District
This franchise area contains a total of 24,950 target households – very close to the target volume of 25,000.
#5 Targeting Sales & Marketing Activity
Using Postcodes to define franchise areas has benefits beyond communicating the area a franchisee will be responsible for.
Our advice is start simple and map out an overview of your network first. Then, once you have your proof of concept and you need more confidence in the implementation of the strategy, invest in more sophisticated analytical tools to help ensure your decisions are based on sound data intelligence so that you and your franchisees have the best chance of success.