The Truth About Franchise Development Series: The Cost of Leads Will Increase

Budgeting for franchise development activities is not as simple as taking an industry average marketing cost per deal (between $7,000 - $15,000) and multiplying it by the number of deals you are expected to get through the pipeline in a given year. That is certainly a good starting point, but in today’s super competitive sales world, there are many other data points you should look at as the leader of development for your brand.

Sales is not as simple as numbers. However, most in sales deeply want it to be about numbers. They want A + B to equal C. It doesn’t.

I often look at our agency, No Limit Agency*, as the testing ground for lead generation innovation. I used to be an A + B equaled C guy. I used to say, "Well, we exhibited at that conference and got some leads, but no deals; therefore, the value of that show was zero." This is not the truth.

The truth was in the impressions, handshakes and engagement. Deals take time--even longer in today’s digital world. Pre-leads don’t want to simply talk with a few of your brand validators, they want to dissect you. They want to look deep into your brand crevices and interrogate you. Not to your face, but with their fast-moving fingers that enter search terms across the Internet.

So, a show that equals no deals does not mean A or B didn’t have value. Those are ingredients within the funnel. Eggs and flour may go into a beautiful cake--but in the end, you don’t see them in the final product. And yet, we all know that a cake is ultimately the sum of its parts.

The other thing that is overlooked in sales is the depth of the process. It is not just the widget you are selling that impacts the deal pipeline, it is the validation, costs for the franchisee, ROI, emotional hot points, and timing that all impact the lead. So, even if you spend all of the money in the world, that lipstick won’t necessarily cover the pig if your franchisees are frustrated, not making money, spending too much on build-out, and gently losing their life’s savings.

The cost of leads is skyrocketing. Thus, having a basic understanding--a foundational viewpoint at development--is an essential first step to brainstorming ways to intercept lead traffic during a super competitive time. The foundation is understanding that every little activity counts. Your marketing, your shows, your PR, your Website, your handshakes and your engagements—they all matter. Each has small value, but when added together, will drive more leads.

So, why are the cost of leads going up?

Well, look at the data.

Let’s say, for argument’s sake, that there are 100 new franchise brands created each year. And each brand has a budget of $50,000 (much lower than they should, but it’s for argument’s sake). Total to be spent is $5,000,000 additional funds to find that perfect, qualified ghost prospect > lead > qualified candidate > franchisee. Now, let’s take the 4,000 franchise brands that are already in place. Let’s say, on average, they spend $50,000 on franchise marketing each year. That’s now $205 million spent on finding that prospect in the same places you want to find your prospect.

Now, let’s pretend your budget is $500,000--$500,000 into $205 million is .002 percent.

Where are they spending this budget? In the same places that you are. Because the options are limited.

So, your budget isn’t huge. Now, let’s take a look at the candidate.

First, let’s think about the value of a candidate. What is a new franchisee worth? Most brands would say that $30,000 franchise fee. Most would be incorrect. What is the value of having a location in an emerging market? How much will come in from royalty? What if that franchisee is growth focused--how many more units could they open? The value could be millions to your brand, yet, you are only willing to spend $10,000 to get that deal done? Look, I get it. I, too, would love to write you a check for $10,000 in exchange for you giving me $1 million. But, it doesn’t work that way.

So, if the value is greater, shouldn’t the budget be greater so that you can do everything it takes to find the right franchisee?

In a world where jobs are readily available, layoffs are not as gruesome and the economy is much stronger, the need and desire to make a change is limited. This means that time into making that decision is increased. So, for argument’s sake, let’s just say there will be the same number of people making a decision to buy a franchise year in and year out. Same number of people and an increase in total budget spent by all brands means more costs, less deals.

This can’t be the truth, you say. Your brand is killing it.

OK, let’s break lead generation into categories. Start-up franchisors with under 50-units; emerging brands with 51 – 250 units; emerging/established 251 – 500; and established 500+. Industry experts will use “average” claims for overall franchise trends. This may be mistaken. If you break those categories into restaurant, service and retail, and then investment levels, now the average cost per deal and average cost per lead could be properly determined. To my knowledge, no one has done this.

But, for this scenario, let’s try simplifying with some questions.

Do you think an established franchisor needs to spend as much on franchise lead generation as a start-up? Traditional thinking would be that the start-up can scale its budget up over time to reach the spend of the established franchisor. This is incorrect. I recently wrote about how 84 percent of leads/deals comes from referrals. A brand with 500 units has raving customers who turn into franchisees. Their focus is primarily on the multi-unit candidate--convincing someone to invest in their brand versus their current portfolio. Therefore, established franchisors don’t spend as much, on average, as the rest of the field.

Did you know that nearly 35 percent of all total franchise brands have less than five units? Probably because they are battling with little funds to attract the right franchisee--the same candidate the bigger guys are talking to and saying, “Why go with them (especially when the territory is available), when you can have built-in revenue streams thanks to the strength of our brand?” It’s a battle for start-up franchisors.

So, what’s the solution? Well, there isn’t one. Remember that if A + B doesn’t equal C in sales, then a little bit of everything gives you the best chance to win.

The cost of leads is going up. And, chances are, you don’t have the budget to properly get the deals done that your leadership requests. Should you quit? No. But, you will have to nail the foundation (your positioning, messaging and Website); create a strong brand biography; and evaluate all points of success to push for more funds.

It’s not doomsday. You just need to take a real look at the entire sales process, not just A + B, but A through Z to understand how to win at franchise development.

This column is a part of a four-part series on franchise development. Click here to read Part 1.