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Industries Demanding Local Discretion

Franchising tends to be more effective in industries such as equipment rental or formalwear rentals, in which fixed prices and a standardized approach work poorly, and managerial discretion to negotiate with customers is very important to making sales. To make sales in these types of industries, the person negotiating with customers needs to be given a strong incentive to take actions and make decisions that will result in sales. Franchising is effective in this situation because it replaces, as the party negotiating with the customer, a hired employee whose compensation is not affected by the number of sales made or the price at which they occur, with an entrepreneur who will benefit from making only profitable sales.

Stop! Don't Do It!

  1. Don't franchise unless customers in your industry are served from fixed locations; otherwise your franchisees will end up fighting with each other over customers and you won't be able to stop them.

  2. Don't own outlets in industries in which you need to give outlet operators an incentive to adapt products to local markets; franchising provides them with an incentive to do that.

  3. Don't own outlets in industries in which outlet operators need discretion to negotiate with customers; salaried managers won't have the right incentive to do that well.

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