A behavioural economics trial is being developed to help potential franchisees make a more informed decision before entering into a franchise agreement.
Franchises provide opportunities for individuals and families to begin a business with the support of the franchisor’s brand, know-how and systems. Data indicates that franchises are more likely to be successful than stand-alone start-ups.
The franchising sector has come under scrutiny recently with the Parliamentary Inquiry into the Operation and Effectiveness of the Franchising Code of Conduct examining the franchising sector in detail, including the adequacy of existing regulation.
To complement the work of the Inquiry, the Department of Jobs and Small Business is seeking to address concerns that some franchisees are entering into contracts without fully considering all relevant factors and the potential risks. The department has initiated research to seek a non-regulatory approach to support potential franchisees, which would complement appropriate regulation.
To understand the factors at play when someone is considering entering a franchise agreement, the department conducted research with franchisees, franchisors, peak bodies and other stakeholders. The research methods included a literature review, 26 in-depth interviews, workshops with 49 participants and quantitative surveys of 157 people.
Participants came from Queensland, New South Wales, Victoria and Western Australia.
The research focused on understanding the attitudes, motivations, capabilities and behaviours of franchisees and franchisors in the lead up to entering into a franchising agreement.
Key findings included:
- Franchisees say they undertake research and training prior to buying a franchise
- Many franchisees simply don’t fully understand what research they need to undertake, in other words ‘they don’t know what they don’t know’
- Previous work experience of franchisees matters—franchisees with previous experience working in a franchise or managing a small business were more successful in running a franchise
- Cognitive biases affected the decisions of some franchisees. For example, optimism and emotional attachments can cloud peoples’ judgement
- Franchisees’ expectations often did not line up with reality
- Perceptions of the franchise relationship differs between franchisees and franchisors
- The quality and usefulness of professional advice is mixed. Franchisees tend to find business advice most helpful.
Four distinct ‘personas’ of franchisees were identified.
During the workshops, participants proposed ideas that could help ‘Fatima’, ‘Sam’ and ‘Lee’ be better informed when weighing up a franchise agreement. The ideas addressed identified pain-points like improving access to and the clarity of information, establishing support networks, providing training, and assisting franchisors assess the suitability of prospective franchisees—and vice versa.
Using these ideas, the department will trial a ‘nudge’ approach to help potential franchisees make better informed decisions.
Behavioural economics helps the Department of Jobs and Small Business realise its objective of supporting Australians in finding and keeping employment in safe, fair and productive workplaces. A realistic understanding of the behaviours and decision-making of job seekers and employers is vital to our work.
Behavioural economics can help identify and address otherwise hidden psychological obstacles that might affect the choices of job seekers, employers, service providers and employees.