You have decided to buy into a franchise. You ask your franchisor how your area has been established, and you get a blank look. The beer and pizza method has been used again and this is not good. Peter Buckingham explains.

A franchise system has an obligation to provide you with a business operation that is, in its view, a viable business. As part of the due diligence on your new business opportunity, you should be comfortable that there has been logic used in establishing your territory or marketing area, which has been allowed around your site to give you sufficient opportunity to make a profit.

Many franchise businesses begin on the smell of an oily rag. The initial territory or market area planning is often what one of our clients called the beer and pizza approach, where a group of people bought beer and pizzas, stood around a map with a black Texta, and divided the areas. Some franchisees are fortunate, and have excess business opportunity in the area, and others come up short.

One ex-client of ours (I think they went broke), told us that their territories were all OK, and once they were electronically mapped, one had more than 800,000 people, and another one (in the country) had 36,000 people. The franchisor was wondering why some sold very quickly, and others were hard to sell!

Territory versus marketing area

I am of the view that if you have a service business (not based in a retail shop), then a territory is the way you should proceed. This territory can normally be readily defined on a map, and is probably a combination of postcodes or suburbs with very definite boundaries. Any lead generated within the territory is then passed on to you to service. The area is yours to promote and work, to the best of your ability.

If you are a retailer, then you do not have much influence on who will come to your store. It is very unrealistic to knock back a customer because they come from outside a pre-determined area. In retail, we normally recommend you have a marketing area, or an exclusive area, within which you have the right to promote your store. This marketing area should also be seen by your franchisor as an area within which another store cannot be located, at least for a certain period of time. The reality is you cannot or will not refuse a customer a sale if they come from elsewhere.

Who is our customer?

There are two major methods that can be used in setting up territories of similar potential, depending on if you are a B2C (business to consumer) or a B2B (business to business) seller. In some cases you can combine the two methods and calculate territories based on 30 per cent of the business coming from B2B, and 70 per cent coming from B2C.

B2C businesses: A typical B2C business is one where the product is something that is personally used, and the demand for the product mainly relates to the number of households or number of persons in the area. The usual base of information is the Census 2006, where you can see how many people or households are in the nominated territory or trade area. B2C businesses could relate to clothing or food sales, or leisure related business.

The idea is then to make some adjustment, so that if the type of person in the area is deemed as good for what you are selling, then you expect there will be less than the average number of people in the territory. If on the other hand, the type of people are not favourable to the business, then you will need more than the average number of people in the territory to give a similar level of demand.

B2B businesses: If you are taking on a B2B business, then the number of people living in the area may be some form of indicator, but far more important is the number of business opportunities that are in the territory. Typical of the B2B businesses would be the printing industry, couriers, leasing of business vehicles and sales of tools to tradesmen.

The Australian Bureau of Statistics provides information that we call The Australian Business Counts, giving us the number of businesses, type of business, and the approximate number of employees in a specific area. Using this information, you can give weighting to more favourable business types, and whether larger or smaller businesses offer more opportunity.

In some cases, you may have a business that has a very specific client base, so you can estimate how many of those types of business are in each postcode, and make it so each territory has similar potential.

Combinations of B2C and B2B: This arises in many cases, and the two databases can be used together, so the territories are balanced to represent how much of the business is B2B and how much is B2C. An example of this is the mortgage market where you may ask for a broker to come and see you at home (normally in the evening) which is typical B2C, or you may ask them to visit you at work, or go to their office near your work (daytime), and then they are acting like a B2B.

What should your franchisor be able to show you?

If a professional territory planning job has been undertaken, you would expect the franchisor to be able to explain the logic behind how the territories or market areas have been created. The franchisor should have an overall map of the whole market, and be able to provide you with a relevant map of your territory.

Many good franchisors will also provide you with the residential demographics of your area, and if a B2B operation, then a business demographic of your area. To further assist in the opening of your business, many franchisors can give you a business hit list for you to use in direct mail outs, or phone invitations to your prestigious opening.

Summary

You are investing your money in a business opportunity that is being sold to you as a viable business operation. You really need to be comfortable that the franchisor does understand the logic of how the territories or marketing areas have been established and have used their best endeavours to have each territory or marketing area of similar potential for you, the investing franchisee.

Peter Buckingham is the managing director of Spectrum Analysis Australia, a geodemographic, territory planning and retail sales modelling company.

Contact: peterb@spectrumanalysis.com.au, www.spectrumanalysis.com.au.