Expanding your business into a franchise can be a game-changing step towards growth, but understanding your competition is crucial before you dive in. Conducting a competitive analysis will not only help you understand what makes other franchises successful but will also reveal how you can position your business to stand out. Here’s a guide to conducting an effective competitive study, with insights on where to find essential information like Franchise Disclosure Documents (FDDs), and key metrics to evaluate.
Begin with Franchise Disclosure Documents (FDDs)
One of the most valuable resources in your competitive study is the Franchise Disclosure Document (FDD). This document provides a treasure trove of information, including financial performance, franchise fees, and other critical business details. If you’re looking for free access to these documents, the State of Wisconsin Department of Financial Institutions is an excellent place to start. Business owners can access these documents through their Franchise Search tool. This online database allows you to search for FDDs by franchise name, offering a wealth of information at no cost.
You can also check out our article Wisconsin FDD: The Best Resource for Locating Free Franchise Disclosure Documents.
Key Metrics to Analyze in a Competitive Study
To thoroughly assess your potential franchise competition, focus on these key metrics:
1. Number of Units and Growth Rate
Understanding how many units a franchise has and how quickly it’s growing can provide insights into market demand and the strength of its brand. A franchise with hundreds of locations and a consistent growth rate is likely well-established and has a proven business model. However, new franchises with a steady increase in units may indicate emerging competition in the market.
Tip: Use the FDD to see a breakdown of unit growth over the past few years. This can highlight whether a franchise is expanding rapidly or experiencing a decline in new units. Your can find this in Item 20 of the Franchise Disclosure document; called “OUTLETS AND FRANCHISEE INFORMATION.”
2. Royalty Fees and Marketing Fees
Royalty fees are the ongoing payments that franchisees make to the franchisor, often a percentage of their gross sales. Marketing fees, on the other hand, support regional or national advertising efforts. Knowing the fee structure of competitors can help you set competitive rates for your own franchise model. You will find this information within Item 6 of the FDD titled “OTHER FEES.”
Comparing these fees helps you gauge what prospective franchisees might expect. Royalties within a segment typically are in a reasonably tight range. For example, in a brick-and-mortar pet care concept, a royalty of 6% to 8% is typical. In other industries, such as the restaurant space, royalties can be between 2% – 5.5% on average. This can further change when diving deeper into the restaurant category based on the primary product. Think pizza vs. sandwich vs. coffee concepts. Additionally, the type of service environment might impact this royalty fee, such as between fast food, fast casual, and dining concepts.
Royalty fees and marketing fees will eventually help you build your franchisor model. Before selecting a franchise fee for your concept, ensure you have a franchisor model that budgets for your support needs.
3. Product and Service Offerings
A key part of understanding your competition is analyzing the products and services they offer. Are they catering to a specific niche or offering a wide range of options? Consider how their menu, product line, or services compare to yours. This is especially crucial if you plan to operate in a similar market space.
Ask yourself: What sets your offerings apart? This could be anything from unique menu items to exclusive services or advanced technology to enhanced operating hours. Understanding these differences can help you highlight your unique selling proposition (USP) when sharing your franchise to potential investors.
4. Investment Costs (Item 7)
The initial investment is often a make-or-break factor for potential franchisees. Item 7 of the FDD provides a detailed breakdown of the total investment required to start a franchise, including expenses like franchise fees, equipment, real estate, and initial inventory.
By comparing these costs among competitors, you can identify where your brand falls within the market. Are you a more affordable option for first-time franchisees, or does your higher investment align with a premium market position? Understanding the investment landscape will help you strategically position your franchise opportunity.
If you find the fit and finish of your brand are similar to others, but your initial investment is significantly higher, this is the perfect time to compare line by line. Why is this the case? Typically, cost savings can be found in strategic partnerships and vendor agreements. Further savings can be found in value engineering during the build-out process. This can be done in partnership with a trusted architect or other construction-based resources.
5. Brand Recognition and Market Presence
Brand recognition plays a pivotal role in attracting franchisees. A well-known brand can offer a significant advantage regarding customer trust and marketing effectiveness. Analyze how much brand awareness your competitors have built up and the effectiveness of their advertising campaigns.
Consider conducting a survey or using social media to gauge public perception of competing brands. You can also review media coverage and customer reviews to understand how each franchise is perceived by the market. This research will help you understand where your brand stands in comparison and what opportunities you have to increase your visibility before your franchise launch. In addition, setting some longer-term goals to increase brand recognition and market presence as your franchise concept scales.
Use Competitive Insights to Stand Out
Armed with insights from your competitive study, you’ll be better equipped to position your business as a franchisor of choice. The information gathered from FDDs and market research will help you set competitive fees, highlight your unique offerings, and design a compelling franchise package.
Remember, a thorough competitive study is not about copying what other franchises do; it is about finding opportunities to differentiate your brand while staying competitive in the researched categories. By understanding the competitive landscape, you can carve out a unique place for your business in the franchise market and attract the right partners for long-term success.
Visit our Franchise My Business Corner (FMB) for more resources.
