TERRITORY OR EXCLUSION ZONE?
As a franchisee it’s vital you understand the differences between the terms used to describe areas, as well as your franchisor’s legal commitments around these.
What franchisors really mean.
The phrase territory planning is commonly used by franchisors and analysts who are trying to shape a geographical area as part of a franchise’s marketing arrangements. But the word territory is overused, in my view, when it comes to defining an area as part of a franchise agreement or understanding.
I believe there should be three different ways to describe an area for a franchisee depending on certain situations, and to me they are really as clear as black and white:
• territory
• exclusion zone
• marketing area.
WHAT IS A TERRITORY?
Think of a national border patrolled by armed guards, that no one can cross. This is a very hard line to be observed. I believe a territory is really only relevant when a franchisor is allocating leads to franchisees. The territory is the commitment from head office that every lead that comes from within this area will be correctly allocated. This may mean a territory is an exact number of postcodes or suburbs, or a fine line down a road so that all the leads from one side go to Franchisee A, and all on the other side go to Franchisee B.
This is extremely important in a business like mortgage broking, as a business like Aussie Home Loans or ANZ Mobile Bank needs to be completely confident when passing on a lead.
Franchisee A would be quite upset if he finds Franchisee B was given a lead, which should have been his, that ended up generating a $20,000 commission!
In my view, a territory must be correct, and must have exact geographic boundaries using the mapping boundaries provided by the ABS or exact roads so an area is defined. This may result in a franchisor using Google Maps to locate an address and ensure it is assigned to the correct franchisee.
EXCLUSION ZONES
When you talk to most franchisees, especially if they are opening a store, their concern is not where the customer comes from, but rather if another franchisor can open a store too close to them and, in their view, damage their business.
What they are seeking is an exclusion zone, which is in writing, and is to be honoured by the franchisor, and gives them exclusivity and security to being the only one of that brand of store in a certain area.
In reality, no one can tell a customer which store they must buy from, so thinking you have any control over where the customer goes to buy the product is unrealistic. The best you can ask for is to be the only one selling this product range in a certain area.
While an exclusion zone may constitute suburbs or postcodes, in many cases it is just a description of the shopping centre the franchise is located in. So if the franchisor wants to open a second store in the shopping centre, the
franchisee may have the first right of refusal, or maybe can veto the second store unless an agreement is reached.
An exclusion zone may be set up in exactly the same way as territories – based on populations, households, and weighted to recognise customer behaviour. But it cannot force a customer to use one store over another.
In my view most franchisees are seeking an exclusion zone from their franchisor, and it is a pity we do not adopt this as the language of franchising.
MARKETING AREA
The softest definition of an area is a marketing area. In many cases this may be much larger than the territory or exclusion zone, and is more representative of where the franchisor may want the franchisee to market by way of letterbox drops or cold calls. A marketing area is reasonably flexible and should allow the franchisor the right to vary this if, for example, a new shop opens (making the marketing area smaller) or if a shop closes (making it larger). A marketing area should cover, at minimum, the exclusion zone but allow franchisees to cover any vacant or unallocated areas at any point in the franchise rollout plans.
A franchise could almost do without a marketing area if it wants everyone to market all over Australia. The point, however, is to create a level of efficiency so one person (Franchisee A) covers one area, while another (Franchisee B) covers another area, without dropping the same flyers into the same letterboxes or cold calling the same customers.
USE THE “T” WORD SPARINGLY
I have said for many years, “Don’t use the ‘T’ word unless you have to.”
Logic and processes need to be undertaken to give similarly balanced territories or exclusion zones. And
I guess for simplicity we all call this territory planning, so that each area in a franchise system offers the franchisee similar potential for their business.
In my view territories refer to customers and customer/lead allocation, where the normal franchisee opening a store is mainly interested in the exclusion zone granted to them by the franchisor, to legally commit to not opening another store in the agreed exclusive trading area.
I hope this helps you to clarify your thinking, and introduces the correct terminology to describe what the franchisor is granting, and what you are taking on as a franchisee.
Peter Buckingham is managing director of Spectrum Analysis, a demographic mapping, franchise territory planning and statistical analysis company. Peter is a Certified Franchise Executive.
In reality, no one can tell a customer which store they must buy from, so thinking you have any control over where the customer goes to buy the product is unrealistic. The best
you can ask for is to be the only one selling this product range in a
certain area.