Print Page

Franchise Tutorial 6: Intro to Advertising Fees

In most franchise systems the franchisee is required to contribute a certain amount of money, called the advertising fee, for regional and/or national advertising. It is the pooling of advertising dollars so that the franchisees can create a greater marketing impact by spending collectively on promoting and advertising the brand versus if each franchisee were to spend their advertising dollars independently.

Advertising creates name recognition so that all franchisees may benefit. By combining advertising fees into one fund, there is more money available to spend on larger advertising projects like radio, large-scale newspapers and TV.

Advertising fees are calculated on a percentage of a franchisee's gross sales and are usually collected once a month. Advertising fees often range from one to four percent. Some franchisors charge a flat fee while other franchisors have no advertising fee at all. Some franchisors will put a cap on minimum and maximum advertising fees. With maximum advertising fees, a franchisee is only expected to pay up to a certain amount. When that amount is paid they are not expected to pay more. This method helps to alleviate the most successful franchisee supporting the advertising fund. Instead, it becomes a collaboration of all franchisees in the system. Every franchise system works differently and it is important for franchisees to understand how franchise advertising fees work.

The management of the advertising funds is often separate from royalties and the general revenues of the franchisor. It is not considered income of the franchisor but rather funds collected "in trust" for a specific purpose: to market and advertise the brand, or sometimes to rebrand or refresh the brand. The fund is often collected through a separate bank account and sometimes through a separate company. Franchisors may charge a management fee for administering the advertising fund. Franchisees can typically request to see the financial statements regarding the advertising fund and how the funds were spent. This ensures that the fund is being used appropriately.

To further support the management of the advertising fund, some franchisors will set up an advisory council or marketing committee wherein franchisees have a voice and can provide input into the use of the funds. Input from franchisees leads to better decisions on how to utilize ad fund dollars as well as lead to greater buy-in to those decisions. Advertising/marketing programs are often evaluated for effectiveness to ensure the return on investment of marketing dollars.

For the most part advertising fees are constant and do not change. An exception to this would be if a franchisee were awarded a franchise from a fairly new and emerging franchise system. Emerging franchise systems may require lower advertising fees. As the franchise grows so does brand awareness and the franchisor may find that there are not enough advertising fees being collected to support the advertising and marketing initiatives required. They may then ask franchisees to increase the percentage they make to the advertising fund.

In addition to the national/regional marketing funds, franchisees should be aware that they will typically be required to spend money on local marketing initiatives over and above the advertising fees. While the national/regional advertising drives brand awareness, local marketing initiatives drive customers to specific locations. Most franchise agreements stipulate that franchisees are financially responsible for carrying out local market advertising each month, often predetermined as a percentage of monthly sales ranging from one to three percent. Franchisees may also be required to participate in local co-operative advertising with other franchisees in their area.

It is recommended that franchisees review advertising fee requirements in their franchise agreements. Here are a few questions to ask for a better understanding of the national/regional advertising fund:

What type of advertising has been done in the past?
What advertising/marketing initiatives are planned for the near future?
How is the money held?
Is the fund segregated from the franchisor's regular
accounts?
Will the franchisor provide accounting or financial statements, pertaining to the funds expenditures, to the franchisees?
How much of the fund is used to pay administrative
expenses?
Is there an advisory council set up and how many
franchisees sit on this advisory council?

There are strong benefits to franchisees contributing to the advertising fund. Advertising is expensive and when all the franchisees put their money together, they are able to execute advertising initiatives that may not have been affordable otherwise.

Different types of advertising, whether it be radio, newspaper and TV, can be tested to see what works best for franchisees. A national ad campaign along with local advertising can reinforce brand awareness to the customers and, in turn, encourage the customer to patronize franchise locations.

© 2011, Canadian Franchise Association. All rights reserved. The contents of this website may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher.

Disclaimer: The opinions or viewpoints expressed herein do not necessarily reflect those of the Canadian Franchise Association (CFA). Where materials and content were prepared by persons and/or entities other than the CFA, the said other persons and/or entities are solely responsible for their content. The information provided herein is intended only as general information that may or may not reflect the most current developments. The mention of particular companies or individuals does not represent an endorsement by the CFA. Information on legal matters should not be construed as legal advice. Although professionals may prepare these materials or be quoted in them, this information should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

Posted Date: January 2011