Franchising: a signaling perspective

This paper aims to outline different signals that franchisors can use to communicate their value proposition to prospective franchisees. It also tests whether these signals can enable franchisors to charge a premium from their franchisees.

This paper uses a mixed-methods approach to arrive at the findings. It uses a combination of open-ended survey and archival data to arrive at the findings.

Franchisees consider franchisor’s characteristics such as its “capability,” “support offered” and “franchisee membership criteria” significant while buying into their franchises. The results suggest that franchisors can leverage some of their capability signals to obtain a higher franchise fee if they use the right signals as desired by franchisees.

Signals identified in this study are specific to this study. The relationship between the signals and franchise fee is applicable for high-performing franchises operating in the American context only. Future research can address this limitation by collecting more data, testing additional signals and using alternative methods to verify the findings.

Franchisors can take cues from the evaluative criteria used by franchisees to design their signaling strategies. Franchisors can leverage some of their capabilities to extract higher fees from their franchisees. Prospective franchisees should engage in due diligence before purchasing a franchise unit and avoid franchises with higher support fees and loose franchisee recruitment criteria.

This study contributes to research on the evaluative criteria used by franchisees. It contributes to the signaling theory by offering insights into the performance outcomes of signals in the franchising context. It also contributes to our understanding of franchising by adopting a mixed-methods approach that includes information about franchisors and franchisees.