Franchising
What is meant by the term “unit economic model”? Explain why Unit Economics are the key to any franchise. What are the prerequisites to profitable unit economics?
Below is an example of what your response should be about. Looking for unit economic model of a franchise which the unit is the franchise unit not a product.
You gave a good basic definition and explanation of the concept of unit economics. Your discussion seemed to pertain more to units of a product that might be produced in one location. For example, cost per donut, or cup of coffee, or assembled car.
In franchising, the unit is the franchise unit. For example, a franchisor might start a business in one location, succeed with it, and then franchise it in many locations. Each separate location is a unit.
One of the challenges franchisors face it to develop a model that can produce profits similar to the original store as the concept is expanded to stores in other locations.
The better the franchisor understands why his first store made money (i.e., its unit economics) the more likely he will be able to relplicate the results in other locations.
What are the key profit-drivers in a franchise unit? Many are common to all franchises, although each type of franchise will have its own prioritized list. For example, a quick service restaurant needs a visible location convenient to a critical mass of customers.
A fitness center benefits from a clean facililty with modern equipment. Massage Envy (a popular franchise) needs expert massage therapists and welcoming customer service. Those are the key drivers. How do they translate into unit economics?
For example (just pulling these numbers out of the air to illustrate the concept; don’t expect them to be realistic), my quick service restaurant can attract people in a 3-mile radius.
We need at least 30,000 people in that area. We target lower-middle income people, so we want average household income of $40,000. We want households with children, so the average household size should be greater than 3.
Given these parameters, and an advertising budget of $25,000 per year, we expect to generate sales revenue of $900,000 per year. We need a 5,000 sq ft building on a .5 acre lot, which costs.
Building and equipment cost $1.5M. We need 10 employees to run the restaurant times 14 hrs per day times $9 per hour times 365 days per year, or $459.900 per year, Food costs are 30% of food sales, or $270,000.
Rent, utilities, etc. cost $50,000 per year. Advertising cost= $25,000. Franchise fee is $20,000 per year. That leaves $75,000 as owner compensation.