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Keller Center for Research

INSIDER: Efficiency of Franchising

Nov. 1, 2008

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by Jacqueline Simpson, MBA Candidate

Is franchising in the residential real estate brokerage market efficient? What are the impacts on firms by franchising? What are the benefits for firms when franchising? In The Efficiency of Franchising in the Residential Real Estate Brokerage Market (The Journal of Consumer Marketing 1998) Randy I. Anderson and Robert Fok examine the decision to franchise and how it impacts efficiency levels for these firms. Their research gives insight to the positives and negatives when franchising in the residential real estate brokerage market. Please note, although the industry studied here was real estate, the study included 276 total firms (92 affiliated with a franchise and the remaining 184 were unaffiliated) and not all markets were included in the study. The results of this research should not be applied blindly, but with serious thought as to how they might be relevant in your particular market. Specific types of marketing media, measures of time, and percentages should be altered to fit your industry.

1. "Because the information needed to make enlightened decisions in this market is costly to acquire, and could easily exceed the expected benefits from an extensive search, the assurance provided by a franchise brand name may be particularly valuable to buyers and sellers, and thereby provide a rent to the franchise."

THINK: A franchise provides customers with a brand name they will recognize in the local market.

2. "Many of the services provided by real estate franchise organizations would prove very costly if paid for directly by local firms."

THINK: It costs less for the franchisees to pay a royalty fee to a franchisor than to pay for training, research, and referrals individually.

3. "These firms are substituting increased variable costs for higher fixed costs of providing these services internally. The reduction in operating leverage thereby achieved may be very desirable for risk averse owners in an industry where demand is highly volatile."

THINK: By only paying a fixed fee to franchisors, fewer units will have to be sold in order to recoup the costs incurred by the franchisees. Due to the high uncertainty of the housing industry, franchisees may be better able to withstand slumps in the market than non-franchised competitors.

4. It is possible that franchising could reduce the efficiency and image of individual firms in the franchise.

THINK: A franchise can include poor performing firms and high performing firms. If a franchise has both, the poorer performing firms could have lower quality products, services, and standards than the higher-quality performing firms. Because the two firms are in the same franchise, the higher performing firms could be associated with the lower performing firm's standard performance and hence damage their own image and reputation.

5. "Franchised firms are more allocatively efficient than non-franchised firms..."

THINK: Being efficient at resource allocation, for example referral networks and name recognition, gives franchise firms a competitive advantage in producing revenue transactions more efficiently. Less time, effort, and money is spent when obtaining properties to list or finding buyers to purchase homes.

6. "Non-franchised firms were shown to be more scale efficient than franchised firms."

THINK: Non-franchised firms are larger than franchised firms and may already have name recognition and an established reputation in the local market. Large firms would gain little from joining a franchise.

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About the Author

Jacqueline Simpson, MBA Candidate, May 2009, Baylor University
Graduate Assistant, Keller Center for Research

Jacqueline is a second year graduate student from Georgetown, TX. She earned her BBA with a double major in Marketing and International Business from Baylor University.

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