Are You Capping the Franchise Market? And Should You?

When it comes to business ventures, it’s always about the bottom line. Knowing how much money a business is making vs. how much it’s spending, and in earlier stages, the potential for earning. Understanding how much room is there to turn a profit. While you’re determining these numbers – looking at what and when something can work, as well as how – there’s an incredible amount of planning. Generally, we think of a business man in a suit is saying things like “But is there enough room for growth?” and “Show me the numbers!” Like any sitcom would have them do. But there’s a reason for this ongoing stereotype, whether or not the person in charge chooses to wear a suit, they’re performing due diligence. Ensuring that a business is on its best path for success, before there’s much at risk. Waiting until later could prove to be too late, so simply more difficult (and likely costly) to correct.

It’s likely that you did the same. Or, if you’re still looking into franchising, that you will do the same. It’s just good business practice.

When looking at your margin of profit, you also must look at the market. What’s already offered in your area, and how many consumers live within driving distance. When there isn’t any room for profit – for instance, if there are plenty of pizza restaurants in relation to the number of people, or cleaning ladies that can be booked on short notice, no matter the day – your market is “capped.” There’s not room for another business; customers have already found a service provider, likely with an option to spare.

Chances are, if you already own a franchise, you know the answer to this question. Your franchising company has done the research (or maybe you’ve done the research yourself), and you know just how much the town needs to expand before it can support another location. Whether it’s your brand, or a competitor with a similar product.

If you don’t know whether or not your market has room for additional locations, talk with your franchising company, or perform some simple research on what’s expected from your target audience.

If you’re not capped within your industry, you might be in talks to expand – if not in the near or semi-distant future. While, for those whose franchises don’t have room to grow, wanting to expand often means reaching into the next town.

By ensuring you’re making the highest possible profit margin, you can also cap the market yourself. Put just as many facilities in any given area, while preventing others from doing the same.

But is this a good business practice? And is it something that should be done?

It depends on what you’re trying to achieve. For those with more experience in franchising, this is absolutely a goal. They want to put in as many businesses as possible, while keeping them as busy as possible. It locks out their competition and works toward growth. That’s their ideal scenario. However, it’s also a very difficult ratio to achieve, especially as towns expand. Markets will change over time, and it can be an overwhelming process to stay saturated, without over-doing it (and therefore losing money).

Capping is something for the seasoned franchisee to take on. But with the help of your franchising company, it’s also something that’s readily achievable, even for the new guy. So long as you work with the company and take all the necessary steps (have we mentioned research lately?), you can be well on your way to finding a market cap, while implementing as little risk as possible.