The national advertising fund, national marketing fund or by any other number of titles, the fund refers to the fees paid by franchisees to the franchisor who manages and spends it for the benefit of the franchisees. In this episode we will look at the fund from the franchisee’s perspective.
Hi and welcome to another episode of All About Franchising. Today, we’re going to cover what can sometimes be controversial, the ad fund. In this episode, we’ll be covering the ad fund from a franchisee’s perspective and how to understand it a little bit better. We’ll also touch on, what an ad fund is, how they’re set up, and how they are sometimes managed well and sometimes poorly.
It is important to know, a well-run ad fund can be the biggest benefit in any franchise system beyond the initial product or service training. So, once you understand the business, having a very well-run ad fund is probably going to be your biggest benefit in the long run with a franchise. So, it’s really important to understand it.
In most franchises, there’s the National Ad Fund, the local ad spend, and then a co-op. You’ll see these fees in most franchise companies. Some ad funds are calculated by percentage, and some are done by flat fee, while others can be a combination in which you pay a percentage or the greater of the percentage or flat fee amount. So, we’re not going into too much depth on specific fees since they can vary greatly.
What is a national ad fund? A simple explanation of a National Ad Fund is that each franchisee pays a certain percentage or a flat fee every month, some franchisors collect the funds bi-weekly, but most usually collect the fees monthly. Then the franchisor, at their discretion, is able to use the money to promote the brand and franchisees, either directly or indirectly.
A national ad fund is usually combined with a local ad spend, allowing the franchisees to have some discretion where they spend the remainder of their monthly marketing money. So, let’s say it’s determined that it takes $4,000 a month in the first 12 months to get a business up and rolling and on its way to profitability.
The monthly $4,000 could be determined through a percentage of monthly volume, or the franchisor could charge a flat monthly fee. The franchisor would collect $2000 of the $4,000 and the franchisee will also spend $2000 locally each month. The $2000 would be paid to the National Ad Fund every month, and then the other $2000 would be spent locally by the franchisee at their discretion.
The local spend is still going to be determined somewhat by the franchisor. Most of the time the franchisor provides options for the franchisee on what to spend their local marketing funds on each month. The franchisor has already determined what marketing works and they provide a variety of proven options for you to allocate your funds to each month.
The co-op fund can sometimes get a little confusing, it just means that a franchisor can take a portion or all the National Ad Fund and your local spend and reallocate it to a regional, state, or local market. For example, let’s say the Olympics were coming to a certain state and they wanted all the money to go towards advertising to be a sponsor of the Olympics. The franchisor says, “for this six-month period, three months leading up to the Olympics, during the games, and for a couple of weeks after, we’re going to allocate all the national and local fees to being an Olympic sponsor”. That would be an example of how they might use the co-op fund. The main thing is that the co-op should not exceed the combination of the national and local spends. If you’re reading a franchise agreement and it doesn’t say the co-op should not exceed the combination of the national and local spend, you’ll probably want to ask for that to be put in the agreement.
The biggest misnomer by franchisees about ad funds, and I would even say by many franchise attorneys, is that they see companies like Pizza Hut, Subway, and McDonald’s, advertising regularly on TV, and they expect all franchises to do the same.
There are a few things to note about these large franchise companies. They are mature companies who have a lot of money in their ad funds, they have a huge number of units paying into their funds. And everybody has to eat three times a day. If you’re watching football on a Sunday, you’re going to see ads by those companies constantly because everyone who sees them needs to eat.
You would think that’s a big advantage and every franchise should be doing TV commercials. But that is not necessarily true. Those companies don’t have any waste in their advertising when they do mass media. Meaning everyone who sees the ads is likely needing to eat soon, and in most cases, there is a franchise unit nearby, so they don’t really have any waste by using mass media.
For smaller franchises that are growing, it really doesn’t make much sense to use mass media because there would be a lot of markets where there wouldn’t be a unit close by. The ads might hit markets where many people seeing them don’t have a need for the service. But for the large food franchises for example, their ads don’t have much waste, young and old, male, female, everybody needs to eat.
However, there are many products or services, let’s say something like house painting where mass media doesn’t make sense. There are many people who don’t own a home. So, does it make sense to have mass media as your number one marketing spend for a house painting franchise? Probably not. So, there are a lot of companies that shouldn’t be doing any mass media.
For the money contributed to the ad fund, emerging franchisors may choose to create ads, either TV ads or radio that can be personalized for the local market, with the cost falling to the franchisee to air the ads. It makes sense, because it takes the burden of creating the ads off each franchisee, and then the ads can be slightly modified for each market.
Creating advertisements can be a big benefit of an ad fund. Some franchisors create templates that can be anything from fliers and postcards, to sign packages and trade show booths. These benefits should not be overlooked because it does take time to meet with a vendor, design the item, pay for the work, and make sure the materials are effective.
Many franchisors have created vast amounts of templates for all sorts of different signs, graphics, and brochures, which is one of the big advantages of an ad fund. Ad funds may also provide items like one-on-one marketing coaching where experienced staff reviews and coaches you on your marketing options. Sales training is another service often provided from an ad fund.
There are other marketing items to consider as well, like pay per click advertising while you’re ramping up SEO. SEO being search engine optimization, which in some businesses, is the most important marketing item.
If you think about many service and repair businesses, when something happens, consumers want to find you now! Consider a business-like garage door repair. Your garage is broken, and you need it fixed immediately! Everybody is going to pick up their phone and Google, Garage door companies near me.
And if your franchisor has a good SEO plan in place and a quality website, they can drive those leads to you, and that can be worth its weight in gold. While a TV commercial might have no value at all for garage door repair companies, because 99% of the people seeing a commercial, don’t have a broken garage door.
One of the biggest mistakes in franchising is demanding the ad fund money be spent locally in the franchisee’s market. Lawyers and franchisees are often exclaiming to franchisors, you must spend a franchisees monthly ad fund contributions directly back into the franchisees market.
On the surface this seems to make sense, but if you think about the relationship with the franchisor, you’re going into that relationship because you think they’re good businesspeople and you want to be part of the franchise system. So, you don’t want to tie the franchisor’s hands as to how the ad money is spent. They’re experts at marketing the franchise. They have been in the industry much longer than you. They know what ads, brochures, and marketing techniques work and how to manage SEO. You need to trust in them to make good decisions with the pooled ad fund money. That’s why you’re joining the franchise. If you’re not confident in them managing the fund, you probably shouldn’t join the franchise. You want to make sure they’re spending the money wisely, but you want to give them the flexibility to do their job.
Franchisors do have to provide an accounting of the ad fund every year. So, you can review the ad fund spending and see where the money was used and based on your personal experience you can provide feedback to the franchisor.
Hopefully, this episode helped you understand National Advertising Funds for franchises.
If you have any questions or comments, please put them below and we’ll be responding to all your inquiries. By commenting, it also helps us determine what future episodes to create.
We appreciate you joining us for another episode of All About Franchising.
