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Franchise Profitability - Buyer Density and Gross Earning Power

Franchisors and Franchisees alike need to be able to predict the future: when negotiating a price for a new location, both parties need to forecast how that location will perform. Outrageously profitable locations will command a higher price all the way around - buyers want to minimize costs, and sellers want to maximize margins, and both rely on the future performance of a site to make their case. 

But how do we assess the future performance of a site? 

Two critical metrics are buyer density and gross earning power. Buyer density refers to the concentration of buyers within a site catchment area, and gross earning power reflects the aggregate income of buyers within the same area. 

In plain language, we want to know:

  1. How many people will come to our new site, and 
  2. How much money will they spend.

There are some incredibly powerful statistical models that provide increasingly precise answers to these questions, but most franchise professionals can get well ahead of their competition using these two simple metrics.

Here is an example of how this might work. A franchisee is considering two potential sites.

Site 1 has a total of 205,000 residents, and an average median household income of $63,000 

Site 2 has a total of 119,000 residents, and an average median household income of $52,000 

Which site will perform better?

We’ll give you a hint: the site with more potential buyers, earning more money, has a better chance of profitability than a site with less. 

Want to use this information for your own sites? Your next step will be to define catchment areas or, as some call it, franchise territory management. Read this article for more. 

 

Interested in learning more about the franchise process? See these related articles: 

Want help putting together all of these pieces? Our world-class analysts will provide free consultation, no strings attached. File a request for support here.