The relationship between initial and ongoing fees in franchising: a meta-analysis

Mechanisms and rationales for revenue sharing have been the subject of many theoretical and empirical studies on contracting. Franchisors typically derive economic profits (for the rights they grant to franchisees) through revenue sharing contracts. Franchising is a popular form of retailing in a wide range of product and service markets, plays a significant role in many developed economies and is a rapidly growing form of retailing in a number of emerging markets – therefore it is a suitable context for research on revenue sharing contracts. There is an extensive body of research that examines factors influencing the fee structure of franchise contracts and the relationship between the different components (fixed initial fees and ongoing fees that are typically expressed as a percentage of franchisee revenues) of this fee structure. There are two competing perspectives on the latter – one school of thought views the fixed and ongoing fees as being negatively related, since they are considered as twin parts of a mechanism deployed by a franchisor to share risk and extract franchisee profits, ensuring that franchisees just receive a normal profit on their investment; the other school of thought (based on arguments drawn from property rights theory, a combination of signalling, screening and transaction cost theory, brand effects rationales, allocation of channel functions and the implementation of the equity principle, and the existence of positive franchisee rents) posits that the two components are not related or positively related. The divergence in these perspectives calls for a comprehensive empirical examination of the relationship between initial and ongoing fees in franchise contracts. However, there appears to be no integrative quantitative review or meta-analysis on this topic. Therefore, the chapter contains a meta-analysis to aggregate results from empirical studies, synthesize insights from prior research and test its hypotheses. Results from the meta-analysis (based on 26 studies with different samples and a total sample size of 22,676) reveal a small but significant positive correlation between royalty rates and franchise fees.