What will your franchise advertising fund cover?
Most franchisors in Canada require their franchisees to make ongoing expenditures with respect to local and/or national advertising. A local advertising expenditure is money that a franchisee is required to spend in the general trading area of the franchise and often includes flyers, sponsoring sports teams and purchasing advertisements in community newspapers. A national advertising expenditure is most commonly an amount that each franchisee must contribute to an advertising fund that is administered by the franchisor.
The benefit of this type of advertising fund is that franchisees can obtain the benefit of large scale national advertising campaigns that most small business operators cannot afford. Almost all franchisors who require their franchisees to contribute to an ad fund will use this fund to pay for expenses to create and purchase advertising that benefits the entire franchise system. For example, advertising funds are often used to create radio and television commercials that are played on both local and national stations.
The amount of the contribution to the national advertising fund is commonly based on a percentage of gross sales of the franchise. It is not uncommon for franchisors to require their franchisees to contribute an amount that is in the range of 1.5 to 5 per cent of gross sales.
Unlike the national ad fund, the amount a franchisee is required to spend on local advertising is usually spent for the sole benefit of the franchisee. It is fairly common that a franchisee will be required to expend either a fixed amount each month, or a percentage of gross sales, on local advertising. In most cases, the franchisees will be the one who determines how its local advertising dollars will be spent. The ideas with local advertising is that franchisees can use their local ad dollars in areas that they believe will benefit their business the most.
One major challenge that is often faced in franchising is the balance between local and national advertising. Depending on the nature and maturity of a system the relative balance between local and national advertising will vary substantially. For example, some mature franchise systems with a national presence require their franchisees to expend only minor amounts on local advertising while contributing more than is usual to the national ad fund. This circumstance arises when a franchisor realizes that local advertising does not benefit the franchisees individually as much as national advertising campaigns do.
In contrast, many start up franchisors with only a handful of franchisees will require that their zees focus primarily on local advertising. Without a substantial pool of franchisees contributing to an ad fund, many start up franchisors find that it is impractical to mount a meaningful national ad campaign. In most cases, franchisees will still need approval from their franchisor on the “look” and messaging on all their ads placed locally to ensure that brand standards are being met.