How Market Saturation Affects Franchising Success

Market saturation is a concern that deeply affects the franchising community. It is something that should be understood not just by franchising organizations, but by those thinking about purchasing a franchise. The reason for this is that market saturation one of the few aspects of franchising where what is good for the franchisee is not necessarily what is good for the franchisor.

The Conflict of Interest

Market saturation constitutes a major schism between the aims of the parent company and its offshoots. Franchising organizations benefit most when their brand name completely saturates any given market. When the market is saturated then the brand name is reaching the maximum amount of potential customers and the brand is seeing the greatest possible returns through the franchising fees paid (usually as a percentage of profit) from their franchisees. However, market saturation actually hurts the individual franchise owners.

How Does Market Saturation Hurt Owners?

The reason that market saturation is bad for owners is that it creates a degree of inter-franchise competition within the areas of operation of the individual owners. Franchises have a difficult enough time competing against other brands for the limited amount of consumer dollars available in any given area. When they have to compete against their own as well, all of the competing franchises suffer.

How Does Hurting Franchisees Help Franchisors?

In almost all aspect of business what is good for the franchise owner is ultimately good for the franchisor. However, market saturation delineates the fine line that franchisors straddle. On one side is under-saturation which is good for the franchisee but bad for the franchisor. On the other side is over-saturation which is bad for both the franchisee and franchisor, because the franchises falter and the brand's loses appeal to investors.

Right in the middle of those two scenarios is an optimal number of franchises existing within a given location to maximize the parent company's profits. The parent company benefits because, even though the individual franchises are seeing slightly less business, every single possible customer is being served by the brand. The parent company, therefore, is getting a percentage of every possible sale available in an area, even though the individual franchises are getting less.

Being Aware of Saturation
It is important for investors to be aware of the brand saturation in an area before committing themselves to a franchise agreement. As mentioned, the franchising organization has good reason to want the market saturated, and little incentive to look out for the franchisee's best interest in that regard. Therefore it is up to the investor to protect him or herself and understand the marketplace that her or she intends to do business.
Of course, no amount of foresight can prevent a franchisor from saturating the market after a particular investor has established a franchise. it is simply one of the risks that is associated with franchising. The best bet for the investor is to set up shop in an area of very low brand saturation. The risk of reaching saturation can then be, at the least, postponed.