As a franchise owner, you can feel price pressure on both ends. Not only can rising prices make it more difficult to make ends meet, but you can also face resistance from customers (or would-be customers) who think you are charging more than you should.
What if you agree?
One fact of franchise ownership that comes as a surprise to many new franchisees is that their franchisors can control their prices. While there are limits on how much control franchisors can assert over pricing at the unit level, generally speaking, establishing minimum prices (or “minimum retail price maintenance”) is legal as long as it doesn’t restrict intra-brand competition. With this in mind, what can you do if you think your franchisor’s prices are too high? Here are some insights from franchise lawyer Jeffrey M. Goldstein:
What Franchisees Need to Know About Minimum Retail Price Maintenance in 2024
If your franchisor establishes the minimum prices at which you can sell your franchise’s products or services, you are not alone. Minimum retail price maintenance is common in franchising. Why? Because it provides franchisors with another means of control. Franchisors rely on standardization to manage their systems efficiently, and strictly enforcing their standards also provides a way for franchisors to get “problem franchisees” out of their systems when necessary.
Some franchisors also use minimum retail price maintenance as a way to position themselves (and their franchisees) in the marketplace. If a franchisor wants consumers to think of its brand as “high end” or doesn’t want to become known as a discount or budget brand, it can use pricing restrictions to serve this purpose. Of course, if franchisees want to lower their prices, there is usually a good reason why—and uniform pricing restrictions can lead to financial problems for franchisees in many cases.
So, with all of this in mind, what can (and should) you do if your franchisor’s minimum pricing restrictions are harming your franchise?
The short answer is, “It depends.” Oftentimes, franchisees have little choice but to comply with their franchisor’s minimum pricing restrictions—even if it means that their franchises suffer as a result. When franchisors reserve the right to impose price restraints in their franchise agreements, they can generally do so at their discretion. Additionally, as other franchisees may prefer to keep systemwide prices above a certain level in order to maintain the brand’s overall status and reputation, franchisors will often be unwilling to grant concessions that benefit individual (or small numbers of) franchisees.
With that said, there are exceptions. For example, in smaller franchise systems, franchisors may be more willing to listen. Or, if your franchise isn’t the only one that is struggling, then coming together with other similarly situated franchisees as a group could provide additional leverage for negotiations.
Regardless of your specific circumstances, you will want to take action as proactively as possible. You should not simply start charging less than your franchisor authorizes, and you do not want to fall behind on your royalty payments to your franchisor. Not only can both of these compromise any leverage that you may have, but they can also put you at risk for default and termination.
Another Pricing Issue: Mandatory Purchases from the Franchisor (or Its Designated Suppliers)
Another pricing issue that can lead to financial problems for franchisees has to do with mandatory purchases from their franchisor or its designated suppliers. If your franchisor’s prices are untenable (or if its designated suppliers’ prices are untenable), this can also make it difficult—if not impossible—to operate a profitable business.
We’ve discussed the “hidden costs” of buying products from a franchisor or its designated suppliers previously. As we said then, these products are often priced excessively to begin with—not taking into account the soaring inflation and increased markups we’ve seen in recent years. As a result, when these prices climb even further, this can be a very real problem for franchisees who don’t have the ability to shop around for competitive prices.
Unfortunately, here too, franchisees’ options are often limited. Franchisors can enforce their contractual right to require franchisees to purchase from themselves or their designated suppliers, and they can take action against franchisees that fail (or refuse) to comply. If you believe that your franchisor’s or a designated supplier’s markup is excessive, your best option may be to band together with other similarly situated franchisees.
Protecting Yourself When Your Franchisor’s Prices Are Too High
Given what we’ve discussed, if your franchise is struggling because your franchisor’s prices are too high, there are some steps you can (and should) take to protect yourself. These include:
- Stay in Compliance with Your Franchise Agreement – Staying in compliance with your franchise agreement needs to be a priority. If you breach your franchise agreement, whether by lowering your prices or purchasing from an unapproved supplier, you could put your franchise in jeopardy.
- Try to Find Out if Other Franchisees Share Your Concerns – It will be helpful to find out if other franchisees share your concerns. At this point, any discussions you have should be purely exploratory. You don’t need to discuss the severity of your franchise’s financial situation, and you shouldn’t cast blame or make other negative statements about your franchisor.
- Talk to a Franchise Lawyer About Your Options – An experienced franchise lawyer will be able to help you understand your options and make informed decisions about your next steps. Whether this means taking action on your own, banding together with other similarly situated franchisees, or looking for a way to exit the franchise system without undue consequences will depend on the specific circumstances involved.
Discuss Your Options with Franchise Lawyer Jeffrey M. Goldstein
If you would like to discuss your options with franchise lawyer Jeffrey M. Goldstein, we invite you to get in touch. To arrange a free and confidential consultation at Goldstein Law Firm, give us a call at 202-293-3947 or tell us how we can reach you online today.
