Benchmarking: do you use it in your franchise model?

Are you, as a franchisor, fully aware of the financial health of your franchisees? Do you also have concrete plans to maximize their profitability?

If you answered no, you are not alone. Many franchisors do not receive monthly financial reports from their franchisees. As a result, you may not be able to assist them as effectively in becoming more efficient and ultimately more profitable. At the beginning of the year, you create a plan with mutual goals and expectations. But what exactly does benchmarking entail?

What is benchmarking?

Definition of benchmarking

The definition of benchmarking is conducting an analysis and comparing the findings of the franchisees to assess the competitiveness, productivity, and efficiency of an enterprise. Benchmarking is the process of comparing the performance criteria (Key Performance Indicators - KPIs) and business processes of a franchise with others within the franchise system.

Some performances that are often benchmarked include:

• the average gross profit margin achieved in a month,
• labor costs as a percentage of revenue,
• rent and other costs as a percentage of revenue.

By comparing all franchisees within the same franchise system on such KPIs, the franchisor can determine what the average standards are and how they perform compared to the standard.

The franchise coach

The franchise coach should use the financial reports of the franchisee from the previous month as the core of their visit. By using benchmarking, the franchise coach can point out the KPIs that need attention. If franchisees are just breaking even or are unprofitable, they should receive extra attention from franchise management.

The benefits of benchmarking

From the perspective of the franchisee

• It compels the franchisee to evaluate the financial reports monthly and fully analyze their business.
• They can compare their target performances and ratios with those of their fellow franchisees.
• They can set measurable goals to achieve.
• They will realize and believe that the franchisor truly adds value to their enterprise.
• Problems can be identified and resolved early on.

From the perspective of the franchisor

• You are now fully aware of your franchisees' performances and can help them maximize profitability. Because: “a profitable franchisee is a happy franchisee.”
• You can add value for your franchisees.
• You can assist franchisees who are breaking even or are unprofitable in time by giving them extra attention.
• You can draw broad conclusions, such as if all franchisees have low margins. What can you do as a franchisor to address this?

How to benchmark effectively?

Measure the performance of the franchisee

To benchmark effectively, it is crucial to measure performance accurately and objectively. The closer to the source, the better. Financial performance statistics can be easily quantified by analyzing the financial records. Customer satisfaction can be determined through a Net Promoter Score (NPS), Google Reviews, or another customer satisfaction tool. In short, ensure that performance is based on “hard numbers” rather than the perception of the franchisee and/or franchisor. This ensures uniformity in benchmarking among franchisees.

Compare franchisees' performances

During performance comparison, a top three “best franchisees” will emerge. Highlight them, for instance, by awarding a quarterly prize like McDonald's does. Have them speak about their success so others can learn and be inspired to also achieve that award. For those underperforming, it's wise to give extra attention through more management visits or training facilitation.

How to handle not meeting KPIs?

If a KPI is not met, it's important to determine how to address it. Franchisees must take immediate action on some KPIs, while others can serve as a learning opportunity for the future. We distinguish between proactive and reactive responses.

• Proactive: part of the franchisee's planning process, striving for a better KPI.
• Reactive: for example, in response to an audit violation. Improvement points can also come from broad analysis from headquarters, applicable to all franchisees and requiring immediate action.

Create a project or action plan

A revenue target alone is not sufficient to motivate a franchisee to achieve the goal. They might not know how to achieve that revenue target. So instead of focusing solely on the revenue target, it's advisable to make the underlying goals concrete. For instance, one customer appointment per week, number of leads per week, or number of visitors. Action plans are the building blocks for goals. Allow the franchisee to make concrete actions to achieve the goal.

Implementing benchmarking in your franchise model

Develop a financial reporting template so all income and expense statements are submitted in a standard format, often referred to as a financial dashboard. Collect all financial dashboards to calculate an average, allowing the group's average performance to be assessed. Based on this average, develop (financial) performance goals to strive for. This can be broken down into different phases of the franchise business cycle, such as a startup business, a business in the growth phase, and an established business.

Once benchmarking is integrated into your franchise system, the franchisee can focus more effectively on daily operations. Need help with implementing benchmarking? Check out our pages on training to assist you. Or fill in the form below. We're happy to discuss it with you!