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How Paretoís Principle Plays a Role in Franchising

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Weíve often heard of the 80-20 rule but probably donít apply it to franchising. Learn why we should analyze a franchise network using the 80-20 rule in reverse.

The so called 80-20 rule was established by Italian economist Vilfredo Pareto in 1906. Pareto described the unequal distribution of wealth in Italy, based upon twenty percent of the people owning eighty percent of the wealth. Known by many as Paretoís Law the principle is often used to describe various outcomes whether its productivity or income distribution.

Itís my opinion that Paretoís Principle exists in franchise organizations, but in reverse. Rather than applying the 80-20 rule whereby 20% of franchisees generate  80% of franchisee revenues, etc. I would apply it to the behavior and focus that franchisees exhibit in running their business. I acknowledge that this position is not the result of comprehensive studies or statistical analysis but rather is based upon my experience and various anecdotal information. However, it does make for an interesting proposition and discussion point.

When I apply the 80-20 rule to a franchise organization in reverse the result is that 80% of the franchisees are focused on running their business, are reasonably successful and direct their energy to achieving their objectives. It is this 80% that generates the bulk of revenues and royalties for the franchisor. The remaining 20% are not realizing the same results as the 80%. I would attribute this performance gap to various reasons:

  • The franchisee lacks the necessary business skills required to successfully operate the franchise. In other words itís a bad fit.
  • The franchisee launched their franchise without the required capital or access to additional capital and has encountered problems.
  • There are serious issues between the franchisee and franchisor staff which has led the franchisee to focus more on these issues rather than their franchise operation.
  • Personal factors have prevented the franchisee from being able to effectively operate their franchise.

Obviously there will be differences among franchise companies however, assuming the franchise is not a start-up and it has for argument sake a minimum of 40 franchisees some aspect of the 80-20 rule in reverse should apply. If a franchise system has reasonable growth accept the fact that there may always be the 80-20 rule or a variation thereof.

Knowing that this situation may exist, here are some suggestions for how franchisors can deal with it:

  • Identify if the 80-20 rule does apply
  • Focus on the 20% and identify why they are not in the 80%
  •  Is there a way to improve the performance of the 20% so that they can improve their performance?
  • Should some in the 20% be out of the system? Better to be proactive rather than allowing a situation to deteriorate.
  • Look upon your franchisee network as you would your employees since the 80-20 rule should also apply. Some employees require more direction and guidance than others.

Itís my position that Paretoís Principle applies in franchise organizations only in reverse. Franchisors should identify those franchisees that fall in the 20% category and identify what steps could be taken to elevate their performance. Absent the ability and willingness of a franchisee to improve, consideration should be given to removing them from the system.

© 2012 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

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