We have all heard that Unit Level Economics is important in franchising, but going from understanding it in theory to transforming it into action is a big step. According to QSR Magazine, “the success or failure of a franchise concept can pivot off of how well unit economics are tracked, managed, and improved.” In this article, we will take a look at why Unit Level Economics are important in a franchise business, and how to put it in place in your organization.
Why Unit Level Economics for Franchise Businesses
Strong Unit Level Economics is the foundation upon all business success sits. Even though most franchisors get royalties from revenue, not profit, having franchisees succeed in the long run creates genuine referrals and organic growth. Those who want sustained growth for both the franchisor and franchisee pay close attention. According to Joe Matthews, strong Unit Level Economics can also help in Franchise Development as franchise candidates look for the following:
- Does your business make money?
- Is the business sustainable? Will it continue to make money into the foreseeable future?
- Can I see myself in the business?
So the focus builds that franchise business from many angles.
The starting point of a Unit Level Economics initiative will take the following into account:
- Unit Profit and Loss (P&L)
- Break-even point
- Payback period
Key Performance Indicators (KPIs) take center stage when it comes to any program rollout.
Sample Unit Level Economic Program Rollout
Are you ready to rollout a program? Surprisingly, we have found that sometimes more established systems are behind newer systems who may have set up strong programs from the beginning. The best rollouts start from the top, where the Owner or CEO sets the tone and the franchisor team is full of people who care about franchise success on an emotional level.
Step 1: Determine the Key Performance Indicators (KPI)
Every business is different, so using the wrong KPIs can do more harm than good. Develop these benchmarks with input of the franchisees and industry experts. As a starting point, we have KPIs for Restaurant, Health and Fitness, Spa and Salon, Education and Automotive.
Step 2: Track and Improve KPIs
Now that you have the information that you need, you can manage your KPIs together with your franchisees. Franchisors who have a “corporate location” have more skin in the game and can experiment with the business model. Having franchise committees or forums can also help develop and share best practices. Another way to encourage performance is to have part of your franchise consultant’s salary variable based on franchisee KPIs.
Sharing information about KPIs is key to an organization’s success. In fact, at FranchiseBlast we have seen an increasing amount of customers tracking scorecard performance on a monthly basis as well as getting information from their POS or online reviews.
Critically Reassess the Basis of Controllable Franchisee Variable Costs
The franchise landscape changes over time. For example, off-premise has appeared in a substantial way in the past few years leading to changes in procedures, facilities and digital assets. Reviews have also taken a front-seat in marketing, when as little as 5 years ago they were a second thought. Reassess those KPIs over time, making sure your programs are relevant.
Overall, a strong Unit Level Economics program is alive, with participation and tracking throughout. To learn more, download our Ultimate Guide to Franchisee Scorecards.