Why is Defining Territories so Brutal?

Building territories is an undertaking that is part science, part art, and mostly psychology. It's typically a collaboration between two parties whose interests are not necessarily aligned to the same goal, but they have to meet in the middle. Defining territories is similar to signing a prenuptial agreement because it involves a lot of passion and stress, yet requires a delicate balance to place the right restrictions on the one you love. Both parties pursue their own interests, but ultimately they want the relationship to work out and last a long time.

Let's look at the issues around a franchisor-to-franchisee relationship.

The franchisor wants to create the smallest territory possible for the franchisee. If the territory is too large, the franchisor may lose lots of potential customers, lots of potential revenue, and open the doors to a competitor capitalizing on what the franchisee can't fulfill, especially when contracts can last a decade. If the franchisor makes the territory too small, they can pinch a franchisee's potential income, or worse, put them out of business. When a franchisee can't make a decent living it's bad PR, looks bad on the franchisor's books, and makes it harder to entice more potential franchisees to join the company.

The franchisee, on the other hand, usually wants the largest territory possible because they truly believe they can sell to and support a customer base of that size. If the franchisee gets too much, they may potentially take on too many customers and fail to take care of the ones they have. Or, the franchisee might have to pass on new customers leaving the market ripe for a competitor takeover. Failure by success, so to speak. If the franchisee gets too little, they may go broke and may need to extend their boundaries. The franchisee may be angry with the franchisor for misleading them or they might feel cheated. None of these situations are good.

Take these four steps to lessen the difficulties associated with defining territories.There are several key issues to consider when defining territories. We'll give a quick summary and go into more detail on each item in separate posts.

1. Understand the demographic and trade area needs of your business model.

Each business has a unique demographic profile for their existing customer base. Doing a simple exit survey can put a physical location to a customer as well as provide insights into customer characteristic (e.g., gender, age, race) without being intrusive in the process. Even an online business has great location data. Match this data to the demographics that the customers live in and search for correlations against sales. It sounds complicated, but it's easier than you think and highly beneficial for finding out who your customers really are. This step also serves up a huge bonus for defining your territory.

2. Determine the minimum performance requirements relevant to the business.

Based on pro-formas, gut feelings, analogous stores, each business has a minimum performance requirement that must be met.

3. Decide on what rights, if any, a franchisee has for marketing and providing services outside their territory.

This can include a temporary territory assignment agreement. It is especially useful for allowing a franchisee the ability to cover a new market while the franchisor brings on new franchisees to the area.

Keep the territory structure simple.

It is easy to slip and overcomplicate the territory structure, which may lead to confusion by both parties, lost prospects, or drawn out negotiations while competition blankets the market place.

Defining territories is brutal, but with a little forethought and planning, both parties can be transparent and negotiate their "prenuptial" agreement in a calm and loving manner.

What examples do you have about creating territories?

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