Debbie Cornelius issue was how she could expand her venture from home based business in order to capture the customer from different places. She decided to form Wee Piggies & Paws to address the opportunity that would focus on high quality physical impressions of the feet and hand of babies and children. She did not like the kits that were available in the market and decided to search for suppliers who could supply higher quality materials required for the opportunity.
However, after making use of her business idea, another issue come up with how to franchise her business to other interested mothers who had entrepreneurial drive and would benefit from this home based business. The Canadian franchise association recommended lawyer who assured her the franchising idea was feasible and legal issues could be managed.
On the franchise possibilities, Debbie was to consider what kind of people to accept, how to market the company as a franchise opportunity and how she could structure franchisee payments. The critical issue that Debbie faced was how to structure payment of the franchise because her decision would affect expansion plans, several risks were involved and would affect their income. She opted to consider compensation strategy which involved initial franchise fee and royalty payment, but the significant issue was how to price franchise.
Since the royalty payments depended on the sales revenue, I would recommend Debbie to charge 5 percent. The cost is reasonable given that the opportunity is new in the market and has not captured large market segment. This indicates the sales volume is low and charging a higher royalty fee would increase the expenses.The royalty fee is the charge that will add up to the total expenses and Debbie should focus on what she will receive based on the gross profit. Similarly, the cost of the servicing franchisee in the less established markets is much higher and will affect the expansion of the business in the future. Thus, setting the royalty fee too high means Debbie will give minimal profit for the franchisee and will complicate marketing strategy. The 5 percent is viable for both Debbie and franchises because both will have sufficient revenue and the company will have the proper resources to protect and enhance brand and continue in the business. This is based on the fact that the investment could generate from $2000 to $4000 sales revenue per month, which translate to contribution margins of 60 to 80 percent.
The franchise fee of 5 percent is reasonable because the rate is financially justifiable based on the profit both franchisee and the franchisor are going to generate. The 5 percent fee will ensure there is sufficient revenue to out-service the competition and Debbie will do not depend on out-marketing to compete in the market. The fee is reasonable considering the value of the products which are attracting several franchises. The fee will meet the competition in the market because it depends on the value of the products and the benefits that franchise will deliver. Hence, the franchisee will not go at a loss because the fee will enable them to recover the investment cost within a short period because of the value of the product.
Therefore, the 5 percent fee will meet the service mix where the franchisee and Debbie will have an opportunity to improve their financial performance. The present value of a franchise matches the 5 percent fee because it has short-term budget constraints which call for cost sharing for the future of the business. Therefore, I recommend Debbie to charge 5 percent royalty fee that will be included in the franchise agreements.
Work cited
MacKenzie, H.F. and Doyle James. Wee Piggies &Paws. Brock University, 2007.
