How do strategic pricing approaches influence franchise fee decisions?

Abstract

In the franchising market, transactions involve franchisees paying franchisors for the right to use their business models. In such transactions, the franchise fee functions as the transaction price, which is a critical component of profitability and the long-term survival of franchise brands. Based on Ohmae’s 3Cs (i.e., cost, competition, and customers) model, this study investigates how strategic pricing approaches influence franchise fees. The empirical results suggest that franchise fees are influenced by the cost-based and the value-based approaches but not by the competition-based approach. Furthermore, among the approaches, the cost-based approach is found to have the greatest impact on the franchise fee, followed by the value-based and the competition-based approaches, respectively. Additional analysis found that the different pricing approaches are used depending on the business characteristics. By delineating the pricing mechanism of the franchise fee, these findings contribute to the literature on franchising in the hospitality industry, strategic management, and marketing and have important implications for industry practitioners.