The Management Service Fee, also referred to as Royalties, is an ongoing payment, usually monthly, from the franchisee to the franchisor, for ongoing training, support, product development, new strategies etc. from the franchisor. There are different ways that the Management Service Fee may be calculated but the most common is a percentage of the franchisee’s monthly turnover (sales).
If this is the method of calculating the Management Service Fee, it may create conflict between franchisors and franchisees. An example of this is where the franchisor discounts a product in order to generate more sales (turnover) thereby earning a higher Management Service Fee but this cuts the margins and the franchisees are earning less, thereby diminishing their profit.
Franchisors are mainly concerned about increasing franchisees’ turnover as their Management Service Fee is based on turnover and not profit. Franchisees are mainly concerned about their bottom line or profit and may claim that the franchisor’s actions may be at their expense.
An opinion could be that with the discounted product, new and more customers will be attracted, who will purchase additional products as well. This will result in higher turnovers and that overall, both sides will make more money. More importantly, the customer wins by getting the product at a discounted price.
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