Royalty Fee For Franchises – All You Need To Know About It
Franchising is still a budding genre in India. However, it holds tremendous potential for the years ahead. So, being aware of the franchise basics is helpful for beginners. A critical aspect of the franchise world is the royalty fee concept. All franchises don’t charge royalty fees, but most do. Hence, having a working knowledge of it is crucial. In today’s article, let’s understand what’s royalty fees and how they work.
What’s Royalty Fee and its importance
Royalty fees are payments made for continued usage of a product or service. This means that the more people buy the product, the more royalty is encashed. Unlike a franchise fee, a royalty fee for a franchise is not a one-time fee. A franchise owner gets daily income based on the sales made. But a franchisor doesn’t have a daily income source. So, a franchisor makes money through royalty checks from all the franchises owned.
Once a business can scale and open several franchise units, each unit has its own operational costs. However, some costs have to be borne by the company alone. These costs could be for accommodating industry changes or branding and marketing. Apart from these, there are certain system maintenance costs and also basic expenses like utilities, employee salary, etc. To justify the costs of owning and operating franchises, owners have to charge royalty fees. Royalty fees also help in the scaling of a brand name. For example, say a company wants to expand its services and open outlets abroad. Taking the business to a global scale would require capital for running ads and finalising locations. The better the company’s image gets marketed, the higher the chances of success. For all these reasons, the royalty fee for franchises is a crucial factor for the franchisor as well as franchisees.
Is paying a royalty fee worth it?
While royalty payments may seem like added costs for the franchisee, they’re not empty expenses. There are several benefits associated with paying royalties. In some instances, royalties indirectly help in branding or marketing because no other active capital will be spent on designing a new campaign. A campaign covers many things- from research and development to finalising a concept. All main benefits associated with owning a franchise come at the cost of franchise and royalty fees. It’s only fair that franchisors get their share of capital when every franchisee gets a readymade sales and marketing model.
The franchisee gains rights to the market created by a franchisor, and the already existing brand name helps gain customers relatively quickly. Hence, franchisors have to charge a royalty fee to cover the upfront expenses they bear. Royalties usually get put back into the company for scaling. Creating new service lines, cracking a new market, and retaining current ones need maintenance capital, most of which is financed through royalties. To summarise, here’s a list of all the things that become accessible to the franchisee in exchange for royalty payments.
Avoiding obvious roadblocks
When an entrepreneur becomes a franchise owner, the existing roadmap of the company becomes accessible. Factors that slow down growth or create losses will likely already be taken care of. It’ll undoubtedly be more challenging for individuals to dodge these deterrents if they’re not part of a larger franchise.
Shared brand value
When you start a franchise under a particular brand name, any success seen by the company will translate into a higher brand value for each outlet as well. Hence, through this shared approach, more cohesive outcomes can be experienced.
Supply chains or customer groups
Franchises with multiple outlets usually have great supply chains and also have their loyal customer groups. As an independent owner, none of these advantages is accessible. Gaining a single advantage doesn’t guarantee anything, but combining multiple advantages creates a significant edge over competitors and brings in better sales.
3 Common Ways A Royalty Fee Is Charged
Royalty fees are charged monthly or quarterly basis on the profit generated from the sale of products or services. Here’s a list of three ways a royalty fee can be charged.
Fixed percentage
Some franchises have a fixed percentage for royalties, which is the simplest way to make or take royalty payments. This is the reason that many franchises prefer this mode of charging.
Location-based percentage
It’s a fact that some places are busier than others, and some areas are more lucrative. In such cases, higher royalties are charged to keep things in fair trade. This system of calculating royalty benefits those who operate in sparser areas that don’t make the same numbers as a big and busy city.
Incentivised system
Some franchisors like to charge the best-performing franchise outlets with a lower royalty as an incentive. Some believe this method encourages people to be more ambitious and work actively towards making their outlet more profitable instead of relying upon the existing business model’s benefits.
The no-royalty system
For those who still aren’t convinced if royalty payments are a good fit for the franchise world, many franchises don’t charge a penny of royalty fee. The franchise agreement for these deals is set up in slightly different ways. So, entrepreneurs are always advised to ensure there’s no other disagreeable condition associated with the non-charging of royalty fees in a deal.
Also read: Top 5 Lucrative Franchise Opportunities For Budding Entrepreneurs
Conclusion
A royalty fee may feel like an extra responsibility for a new owner, but in reality, it does help eliminate a lot of unnecessary hindrances in the initial stages. There are no specific guidelines for deciding the chargeable amount in most cases. However, the amount is set according to the current market standards by most franchisors. If you want to ensure that the amount you’re paying is fair, do your research, and consult an expert if essential. At the end of the day, starting a new franchise is a significant step, and a royalty fee shouldn’t act as a problem in the equation.
