Territory building – use logic, not opinion
Franchisors across Australia are sitting up and taking note of the recent spate of legal cases involving the business model.
Every Franchisor has obligations under the Code of Conduct to explain in their Disclosure Document that they have a process regarding territory selection, but in my experience, many only pay lip service. If tested in a Court of Law, they could be seriously exposed, given that there have been instances where some territories having 20 times the population of another in the same Franchise System are considered ‘equal’.
Territories are built based on the type of business and the corresponding number of potential customers in an area; for instance, for a residential-based business, one could consider the number of people or households in an area, or for a B2B business, the estimated number of businesses or employees in an area, or a combination of both. If the business is a residential based business, the census data becomes the main data source for accurate information. Examples of residential based businesses include home service businesses and in general a business where you probably are at home when you decide to use the service. A B2B business should rely more on where a person works. Examples of this would be printing, office services, and to an extent, lunchtime food business in the CBD.
Units of area in building territories.
The most common unit of area we use is the postcode. There are two types of postcode: the Australian Bureau of Statistic’s postcodes, which do not change between census; and Australia Post’s postcodes, which can change in small amounts annually based on a need to alter postcode boundaries, or add a new postcode.
If a project requires maps to define territories, we normally recommend that Australia Post’s postcodes be used and the date (year) be specified so there is no doubt on how the territory boundaries are created.
The scientific approach.
Our approach is to create ‘Units of Demand’ for each postcode in the market area based on population, households, businesses or employees, with a method to increase the potential demand of a postcode if it is favourable to what we are selling, or decrease it if unfavourable. Census variables such as age, income, family type, or business variables such as type of business or the ratio of white collar to blue collar workers can be used.
Once the algorithm is established, we can create the number of ‘Units of Demand’ for each postcode. If these are totalled up for the market and divided by the number of territories we want, we can calculate how many Units of Demand we need for each Territory. All that remains to be done is to cut up the market to give combinations of geographically suited postcodes, making territories give the correct amount of demand.
A lawn mowing franchise may have discovered from market research that their target customers are high income households. People in the higher income brackets have double the probability of using the service than people in the lower income brackets. Therefore it can be deduced:
• 10,000 households in Sydney’s Eastern Suburbs offer 15,000 Units of Demand
• 10,000 households in Sydney’s Western Suburbs offer 7,500 Units of Demand
When we calculate every postcode in Sydney based on the number of households (1,425,000), and the average income of the postcode, we may find we have 1,500,000 Units of Demand.
The Franchisor has decided from some research on what makes a territory large enough to sustain a Franchisee that he can operate 50 territories across Sydney. Knowing all postcodes are not of similar size, we have concluded that each territory should have between 27,000 and 33,000 Units of Demand.
Across Sydney Metro there are 260 postcodes, so we would be grouping around 4 – 7 postcodes together to make a territory of 27,000 – 33,000 Units of Demand.
Once this process is completed, we can produce a map of the market, and then individual maps showing the exact territory boundaries to be included in the Franchise Agreements.
Regardless of whether you are selling franchises, or buying a franchise, you would feel more confident if you know the creation of the territories on offer is backed by logic. As a Franchisor, you owe it to your Franchisees to be able to confidently say that there is logic in the territory formation process, and territories have been formed to try and generate similar potential for all Franchisees in your system.
Peter Buckingham is the Managing Director of Spectrum Analysis Australia Pty. Ltd., the leading Geodemographic, Territory Formation and Sales Modelling Company in Australia.