FL08

Barry and I have been keeping a watchful eye on this discussion and wanted to digest the information a little bit before we committed our thoughts to writing. It is clear that there is a lot of emotion surrounding this issue, and it is well warranted. The 100% increase in royalty fees is going to be a bitter pill to swallow. It is not only a big increase, but represents a significant change in Corporate’s business model.

One point that should not be lost in all of our discussions is that the reaction of the state owners will only be a fraction of the response we can expect from the franchisees. In light of this we need to be as unemotional as we can in our analysis of matters.

There are many gloom and doom claims of how many franchises will fail as a result of this price increase. I don’t know if this will put any of our guys under, but in our franchise operation at current revenue levels, the increase would eventually wipe out all our profits. That may or may not be true in 2011 when the full effect of this takes place, but given our current challenges, hearing that its going to be that much tougher in 2011 to turn a profit is demoralizing.

If we are honest, our competitors offer better brand awareness, more professional packaging, broader product lines, greater marketing support, more thorough product testing, and more complete training programs than we do. This criticism is not made without consideration,as I believe I can show objective facts to support each of these claims. What is important is that despite these apparent disadvantages, we are still successfully selling franchises and retaining franchisees. When purchasing our franchise, Barry and I didn’t pick Heaven’s Best for its brand awareness, packaging, marketing support, product testing, or training programs. We picked Heaven’s Best because the cleaning product was amazing, the price was right, the corporation did not dictate how you had to run your operation, and because every one we talked to said that Cody was the rare breed of businessman that you could trust to never cheat you. We have never regretted the decision. I think that most people who buy our franchise do so with their eyes open to these truths, and make the same decision that we did for most of the same reasons.

Take a look at the list of competitive disadvantages in the preceding paragraph, and compare them to the reasons why we bought the franchise. Do you know what gives me the greatest sense of optimism when comparing the two? It’s the fact that there isn’t any advantage that our competitors have that we can’t buy, and yet our competitors will never be able to buy ours. Money can get us better brand awareness, more professional product lines, greater marketing support, more thorough product testing, and more complete training programs. Our competitors can’t say the same thing. Can they go out and “buy” a CEO with Cody’s reputation for honesty, integrity, and fairness? Can they go out and “buy” a corporate philosophy that cherishes success as defined by the individual rather than success defined solely by the bottom line? They can’t.

Judging by the response of the state owners to this announcement, and based on my perception of what my franchisees will say, I think that this price increase as it is currently packaged will so significantly damage the reputation of Cody and the company at large that it will eliminate a major competitive advantage we have when selling franchises. I met with one of Cody’s prospects last week for 4 hours. He was most impressed by every franchisee’s opinion of Cody and the company. His wife (a naturally suspicious Baltimore Cop) said that Heaven’s Best sounded too good to be true. She didn’t believe that there were people that good in the world, because where she comes from they don’t exist. I am certain that if we come out with this announcement in May, our franchisees won’t have the same opinion of us. What do we become at that point? Just another franchise company with a slightly lower price, and less brand awareness. In short, nothing special.

Does this mean that the price increase is totally unfair, unnecessary, or the wrong thing to do? Not necessarily. I think in the long term we would all like to see the company improve brand awareness, marketing support, and a number of areas where the competition has an advantage. In order to do these things, money will need to be raised from the community. Philosophically, I have no problem with a price increase if it can be demonstrated to be worthwhile. Well considered and executed programs will actually improve the value of my franchise license. For example, Cody significantly improved the company image two years ago by revamping the corporate logos and creating some updated marketing pieces. The conversion to the new logos was not inexpensive. It cost my operation well over $10,000.00 to convert our trucks, uniforms, equipment, and marketing materials, but it was money well spent. It was an easy change to adopt because we were able to see the new image in advance of purchasing it. We could see what that $10,000.00 was buying and we thought it was worth it. In this situation, Cody asked the franchise community to spend some money, and despite some grumbling, everybody did as we were asked and the company was better off for it. The company’s image and reputation were actually enhanced by this transaction.

I would like to propose that the increase be structured in such a way as to diminish any problems of perception there may be in the franchise community.

The current proposal says we will be doubling the royalty fee to cover Corporate’s additional operational costs and to prepare for national and regional advertising. In most franchise relationships the royalty fee is separate from the advertising fees. Royalties provide income to cover the general operating costs and profits of the corporation and its sub-franchisors, while advertising fees are spent on the marketing of the specific product or service provided by franchisees (not the marketing of franchises). If we are doubling the costs of the royalty fees, it is reasonable for the franchisees to ask what they will be getting in exchange for their money. Is corporate going to give greater support to the franchisees since the money is going to them? As state owners are you going to double the amount of support you are providing to your franchisees because you feel obligated to? If so, in what form will that support come? I know that we have been very aggressive in trying to provide support to our franchisees. Several have come to our offices and met with us. I have prepared web sites for them. Each month we give them marketing pieces they can mail out. We have offered to help them complete their monthly customer mailings, and have made repeated offers to visit them in their territories and work with them in any capacity they would like. The fact is that our franchisees don’t seem to need, or for that matter want any more support than we are currently giving them.

If one of the goals of the proposal is to improve Corporate’s funding/profits, then we need to find a revenue source to keep Corporate healthy and happy. Let corporate increase royalties by an amount that reflects the increased costs of providing non-advertising support to the general franchise community. $80.00 in 1994 dollars indexes to $113.00 in 2009 dollars. That’s an easily defendable increase. Add a little bit on for services that we have today that we did not use to provide and you can come to a reasonable number. For the record, I think that corporate revenue increases should come from an increase in the price of CLF101 – even if it means all of the additional revenue goes to corporate. It would be far cleaner and easier and avoid having the corporation trying to enforce collections on hundreds of different contracts.

If Cody wants to raise corporate revenues by increasing royalty fees and funneling all of those revenues to the corporation, he will be holding state owners to the 1994 pricing level for many years to come. Remember it is the state owners who have not received royalty increases since 1994, not the corporation. The corporation has increased product prices over this time to increase revenue. When I bought the state, I was told by Cody that we could increase the royalty fee, and I assumed that we would receive the money from such increases. Shame on me for making that assumption. Will I feel cheated by this? Yes, but Cody has been fair enough to me in the past that I will shut up and live with it.

Assuming that some portion of the increase is for national and / or regional advertising, for that portion we should implement a cooperative marketing fee that goes to a separate advertising account. When I worked for Dominos Pizza, franchisees paid an advertising royalty of 3% of sales, which the franchisees pooled – and controlled. There were regional councils of franchisees that oversaw how advertising was handled in their regions. Some portion was allocated to a national program. There can be endless discussions on how to spend this money. I personally am against national advertising at this point in our growth, but until there is a specific fund for advertising – nationally, or regionally – those discussions are purely academic. The purpose of this post is not to discuss the relative merits of national or regional advertising and the appropriate costs.

At this point, what is important is that our franchisees perceptions of this price increase are going to be greatly influenced by how it is packaged – and currently the packaging and timing would appear to be more detrimental than beneficial.
If we have to have the price increase – let’s at least apportion it openly and honestly so that it can be fairly scrutinized by the franchise community.

In summary we believe the following:
1) A price increase needs to be justified by a specific value proposition.
2) Given the state of the economy, the lack of a specific value proposition, and the size of the increase, the current proposed changes to royalty fees are a major threat to our competitive advantage in the marketplace.
3) By separating advertising fees and franchise royalties we will be able to communicate the value proposition more effectively to the franchise community.
4) The franchise community should have a voice in the spending of advertising fees within their own region.
5) The amount of the advertising fees should be determined by the cost of the programs agreed to by the franchise community.
6) The best way to increase corporate revenues is to increase the cost of product and not royalty fees.

We had several reviews on Angies list and finally decided to pay for a top listing. It has paid off incredibly well. We got lucky and landed a huge job the second day into the campaign. We spend about $500.00 a month in our market, but are averaging about $2500 month in revenue after taking out the big job. With the big job included our average has been much higher. In my opinion, if you have several good reviews under your belt, it is worth paying the money to have your name listed at the top.

We get ours made at a company called tele-pak. http://www.tele-pak.com. We get them pre-printed with our phone number and then use an ID card printer to custom print them with different dollar amounts. We call our customer loyalty program “Pennies from Heaven” and use the plactic cards for membership cards as well as gift card coupons. They have been great for generating referrals and building customer loyalty.

We have a few employees who have worked for servpro, stanley steemer, rainbow, and other companies. One of them had a Butler truck mounted system – supposedly the best truckmount in the business. All of them are amazed by the results they get with our system. They all say that the results are as good or better than their experience with extraction. Having said that – there will be some situtations that require extraction.

What we tell people is that focusing on process is not as important as choosing the company you want to work with. A bad technician will do a bad job with either process, and a good one will do a good job. If there is a problem, a good company will stand behind the work, a bad one won’t. We emphasize the fact that we do a great job, and stand behind our work.

When talking about the benefits of our process, we say it’s water based and safe for pets and children – so you get the quality cleaning and safety of a water based solution with the quicker dry times of a solvent based chemical dry cleaning. Best of both worlds.

Just be confident in your delivery and that is what the customer will hear.

Happy selling.

Jim