Where should you locate your services business?
If you're investigating whether or not to invest in a business in the growing services sector it is inevitable that you will have questions about franchise territories. So where should you go and how do you know your territory is sufficient to support a business?
A service franchise can focus on house maintenance, cleaning, ironing, oven cleaning, even providing a care service. Or if you like the outdoors – working in the sun, rain and wind – maybe one of these is for you: pool cleaning, dog walking and washing, building and renovating, antenna installation, roofing, paving, gardening and landscaping.
Perhaps the master of service franchises has been the Jim's Group, which now has about 3,200 individual franchisees operating in areas from mowing (the start-up business for founder Jim Penman), through to cleaning, test and tag, fencing, tree lopping and into services such as the latest venture, locksmiths.
THE DEMAND CURVE
So how do you choose your territory? The demand for these types of services correlates very closely to high economic areas. As a Melbourne based mapping, demographic and statistical consultancy we look at this in terms of SEIFA (Socio Economic Index For Areas), which is an Australian Bureau of Statistics product, and tells us a score for every area in Australia, centering around an average score of 1,000.
High SEIFA areas are typically those with top end housing prices; where most people are in employment – in most cases in professional or other well paid jobs. Examples of such areas would be the northern suburbs of Sydney, Melbourne's inner east and Perth around the Swan River. Lower SEIFA areas would be both Melbourne and Sydney's western suburbs in general.
How do we know the demand for household services is definitely stronger in higher socio economic areas?
SEIFA map of Melbourne
We can turn to the 2009 /10 Household Expenditure Survey (HES) which was conducted with about 9,000 individuals questioned on how they spent their money. The HES allows you to break down what people spent their money on, and when we look at the map of Melbourne for example, we would see a correlation to the higher and lower economic areas.
These maps confirm the relationship the HES shows us to spending on household services, as compared to higher/lower economic areas.
Smart franchise systems try and adapt the size of the territory so that each gives a similar opportunity for a franchisee. As you would imagine, if we simply split up a market into territories each of 40,000 households, you would much prefer to have the service franchise for pool cleaning, gardening, or dog washing around Camberwell, Toorak, Double Bay, Hunters Hill or Claremont than around St Marys, Cabramatta, Sunshine or Broadmeadows.
Some franchise systems wonder why some of their franchises are keenly sought after, whilst others seem to have no interest at all. Inevitably they have split their territories very poorly.
Good franchisors move away from what we call the 'beer and pizza' map to a proper, statistical based system so they can give each franchisee similar opportunity within their territory.
The 'beer and pizza' map has traditionally been done with a black text on a large map, strongly influenced by some early entry franchisees enjoying a beer and a pizza while carving up the territories. The down side is that no data has been used, just a keen eye, and it is perhaps self-serving.
The first step in setting out appropriate territories is to understand who is going to be the franchisee's customer. This can be done by creating a picture of who the ideal customer is, or if the business already exists, plot the customers, and look for areas (postcodes ideally) with a high concentration of customers (we consider how many customers in 1000 will be our target market).
By then comparing areas with higher penetration to the Census 2011 graphics, we can see where our service franchise works best: in high or low income areas, areas of older or younger people, family-strong neighbourhoods, or whether ethnicity may have some effect on the business.
Once we know which drivers are good for the business, we can calculate a score for each postcode. For example if one household was likely to spend $20 on your service on average, then a household in a high demographic area may be considered to spend $30 per household, and a household in a lower demographic area may spend $10 per household.
Image below: Spectrum Analysis
If each postcode was equivalent in the number of households, say 10,000, then the higher area would offer you $300,000 of potential sales, while the lower socio economic area would only offer you $100,000 of potential sales.
So if we decide to do this across the whole area, say Melbourne, we may conclude the total market offers us 1,200,000 households at an average of $20 per household = $24,000,000.
A good franchise system may have concluded it wants 40 franchises across Melbourne, and wants each franchise to have $600,000 of potential.
To balance the potential so each territory is similar, in a high socio economic area, when we add the post codes together to come up with $600,000 of potential, it may take 29,000 households, and in a lower socio economic area, we may need 50,000 households to give the same amount of opportunity for the franchisee.
This type of calculation can be done for any market, and rather than trying to adjust the franchise fee for a higher potential area, compared to a lower potential area, we believe it is better to keep the franchise fee constant, and adjust the area's size, so each franchise area is considered to offer similar opportunity.
Our experience is that outdoor service businesses definitely have more opportunity in higher socio economic areas than lower ones; however a good franchisor will balance the territories they create so that each area gives a similar amount of opportunity for the franchisee.
If your potential future franchisor cannot properly explain how they have cut the territories, I suggest you look for another franchise system. The wet finger in the air approach is NOT what you want to hear, or be part of.
Peter Buckingham is the managing director of Spectrum Analysis Australia Pty Ltd, a Melbourne based mapping, demographic and statistical consultancy: email@example.com