3 Approaches to Determining Franchise Fees and Royalty Fees


3 Approaches to Determining Franchise Fees and Royalty Fees

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Franchise or franchise business is often found in big cities in Indonesia such as Jakarta, Surabaya and Bandung. The franchise itself is a type of business that buys the name or system of an advanced product or service. At the beginning of the establishment of a franchise business, the franchise owner is the most benefited.

Nevertheless, the franchise fee or royalty fee must be fulfilled first by the prospective owner before selling the business being undertaken. Franchise fees are initial fees that must be paid by a franchisee to the franchisor before starting a franchise business. While the royalty fee is a fee that must be paid within a certain period that has been set after the franchise business is running.

For example, regular payments on the 5th of every month, or it could be once every 3 months on the 20th depending on the agreement of the franchisor. The determination of the franchise fee and royalty fee should be calculated appropriately so that you as a franchisor do not feel disadvantaged. Vice versa, you also should not overload the franchisee.

Therefore, in calculating it you need to consider pricing policy or policy in charging prices which will be explained below.

Market Oriented

To set the price of a franchise fee and royalty fee on a franchise business, you can use a market-oriented approach. This approach is carried out by looking at the prices set by your business competitors in the field. For example, company A sets a price of 5% of gross sales and company B sets a price of 6% of gross sales.

So with this method, you can determine the average price of each of these competitors. Even if you don’t want to bother, you can also choose from one of the existing competitors.

Customer Oriented

Pricing can also be done with a customer-oriented method that refers to consumer purchasing power. In this way, the price determined for each region will be different because the community’s judgment is taken into consideration. The price is more expensive for areas where people dare to pay high.

Whereas for areas where the community demands a fair price, then do not set prices too high. For example, if the franchise business runs in Bali and Jakarta, then the price determined will be more expensive for businesses in Bali because the Balinese pay power is greater than Jakarta.

Cost Oriented

The price calculation can also be determined based on the costs needed to develop the franchise business system. Using this method, you must carry out appropriate qualitative and quantitative calculations. The specified selling price should cover all production and operational costs and add to the expected profit.

You can determine the franchise fee and royalty fee in a franchise business using one of these three methods. Even if the price generated is not right, you can also combine several methods. Whatever method you use and whatever the price is set, the franchisee must still have the advantage and can return the initial capital. You as the owner and franchise provider must also receive benefits that can be used as passive income in the business.

To develop a franchise business, you must involve many parties, that’s why the financial calculations and reports presented are not simple. To avoid any calculation errors or losses that can result in the loss of trust of one party, and accurate financial reporting system is needed.

Choosing the right financial reporting system is not difficult at this time. Especially with increasingly advanced and sophisticated technology. Many systems are available that can help you manage your company’s financial statements. However, problems arise when the system used is already integrated and safe to use.

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