The word “Territory” is overused, in my view, when it comes to defining an area as part of a Franchise Agreement or understanding. We all use the words “Territory Planning” when we are trying to give any form of geographical area as part of our marketing arrangements, and in many cases it is an over use of the word “Territory”.
I believe there should be three different ways to describe an area for a franchisee depending on certain situations, and they are really as clear as Black and White in my view:
- Territory
- Exclusion Zone
- Marketing Area
What is a Territory?
Think of the Berlin wall with razor wire on the top, border guards and no one can come across it – this is a very “hard” border to be observed. I believe a territory really only comes into play when you are allocating leads. 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 zipcodes 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, and many other service businesses need to be 100% confident when passing on a lead.
Franchisee A would be quite upset if he finds Franchisee B was given a lead that should have been his, and it ended up generating Franchisee B 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 correct government authorities or exact roads so an area is defined.
Exclusion Zones
When you talk to most franchisees, especially if they are opening a store involving bricks-and-mortar, their concern is not where the customer comes from, but can the franchisor open another store too close to them, and in their view damage the 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 in their area.
An exclusion zone may be set up 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. This may be much larger than the territory or exclusion zone and is more representative of where you 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 instance a new shop opens (makes it smaller), or if a shop closes (you may make it larger). A marketing area should be as a minimum of the exclusion zone, but allows franchisees to cover areas which may be vacant or not allocated at any point in the franchise roll out plans.
You could almost do without a marketing area if you want everyone to market all over the USA. It is to create a level of efficiency so one person (Franchisee A) covers one area, while Franchisee B covers another area, and they do not drop the same flyers into the same letterboxes, or cold call the same customers.
Summary
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 the process “Territory Planning”, so that each area in a Franchise System offers the franchisee similar potential for their business.
Territories refer to customers, and customer/lead allocation, where the normal franchisee opening a store is really only interested in the exclusion zone granted to him by the franchisor, to legally commit to not opening another store in the agreed exclusive area.
I hope this helps you to clarify your thinking, and introduces the suggested terminology for the future, to describe what you are granting as a franchisor, and what you are taking on as a franchisee.
Peter Buckingham is the Managing Director of Spectrum Analysis, a Geodemographic and statistical consultancy. Peter is the ‘Go To’ person for territory planning. Peter is both a Certified Franchise Executive (CFE) and a Certified Management Consultant (CMC). To contact Peter email peterb@spectrumanalysis.com.au or visit www.spectrumanalysis.com.au