From: alexhormozi
The franchise model can significantly impact the profitability of individual franchisee operations, particularly in industries like frozen yogurt. While the concept of a franchise might initially seem appealing due to established brand recognition and systems, a closer look reveals how fees and operational structures influence a franchisee’s take-home pay [00:01:01].
Financial Realities of Frozen Yogurt Franchises
Frozen yogurt stores, on average, generate between 800,000 in annual revenue [00:00:41]. Despite this high top-line figure, the average store running at over 328 a day in owner pay [00:00:51]. Stores typically operate on margins between 10% and 15% [00:00:56]. For instance, the average Menchie’s owner takes home around $93,000 per year [00:01:01].
Costs and Overhead
Operating a frozen yogurt store involves various hard costs, including:
- Perishable goods like strawberries [00:01:04]
- Maintenance for machines [00:01:05]
- Cost of yogurt and toppings [00:01:09]
- Retail leases in prominent locations with good signage, foot traffic, and ample parking [00:01:10]
Royalty Fees and Profit Share
A significant factor impacting franchisee profit is the royalty fee structure. Most franchises charge roughly 6% of the top-line revenue [00:01:21]. If a store operates on a 10% margin, this 6% royalty fee represents 60% of the franchisee’s potential take-home profit [00:01:27].
Franchisors typically structure their fees to ensure franchisees earn “just enough” to sustain operations and potentially open additional locations, but not enough to become significantly wealthy [00:01:37]. Their primary objective is to optimize for a return on capital that comfortably beats the stock market, often aiming for 20-25% while squeezing profit from the top [00:01:48].
Bulk Purchasing and Upcharges
One theoretical advantage of a franchise model is the potential for cost savings through bulk purchasing [00:02:04]. Franchises buying for 200+ locations should be able to secure lower prices on hard costs such as yogurt, fruit, spoons, cups, and machines [00:02:06].
However, in practice, franchisors may upcharge franchisees on these supplies when they are first starting, as the franchisor is also seeking to make money [00:02:17]. This contrasts with independent operators who might acquire equipment more cheaply from business foreclosure sites like Rasmus.com [00:02:25]. Franchises often restrict franchisees from sourcing their own equipment to ensure they capture this revenue stream [00:02:41].
Frozen Yogurt Store Profitability and Cost Structure
The average cup size purchased is eight ounces [00:03:12]. The typical split is 25% toppings and 75% yogurt by weight [00:03:16]. It is more profitable for the store owner to sell more yogurt because toppings are significantly more expensive [00:03:21].
- Toppings: Cost between 0.40 per ounce, sold for 0.60 per ounce [00:03:26]. Some toppings, like fruit, can even lead to breaking even or losing money for the store [00:03:34].
- Yogurt: Costs about 0.50 to $0.60 per ounce [00:03:40]. This significant difference is where the majority of the business’s margin exists [00:03:45].
Business Improvement Opportunities
The frozen yogurt market is largely commoditized, with little perceived difference between brands like Menchie’s, Yogurtland, and Golden Spoon [00:04:11]. This indicates a “poorly competed Marketplace” driven by franchisors focused on selling locations rather than building strong brands [00:04:17]. There is no dominant “Chick-fil-A of the yogurt world” [00:04:25].
Opportunities for improvement and out-competition exist by focusing on:
- Better service [00:07:31]
- Cleaner stores [00:07:31]
- More selection [00:07:31]
- Word of mouth marketing [00:07:34]
Key Lessons from the Frozen Yogurt Model
The frozen yogurt industry offers several transferable lessons for other businesses, particularly regarding pricing strategies and profit maximization and customer acquisition:
1. Consumer Control Over Pricing by Usage
Allowing customers to choose how much they spend by usage, rather than fixed cup sizes, shifts accountability [00:05:11]. When a customer fills a cup and sees a high price, they often attribute the cost to their own overfilling rather than solely blaming the store [00:05:16].
2. The Power of the Default Option
Frozen yogurt stores like Yogurtland effectively increased sales by removing smaller cup options, leaving only medium and large sizes [00:05:40]. This encourages customers to fill larger cups, increasing the amount purchased because a small amount of yogurt in a “bucket-sized” cup looks unusual [00:06:21]. This strategy uses the psychological principle of the “power of the default option” [00:06:00].
3. Strategic Presentation of Items
The order in which items are presented in self-serve models (like buffets or frozen yogurt shops) is crucial [00:06:37]. Stores present the highest margin item (yogurt) first, followed by lower-margin dry toppings, and finally the most expensive perishable items (fresh fruit) [00:06:55]. This encourages customers to fill their cups primarily with the more profitable yogurt before adding smaller quantities of more costly toppings [00:07:06].
4. Acquiring Assets Cheaply
For new entrepreneurs, especially those not bound by franchise agreements, it’s possible to dramatically reduce startup costs by acquiring equipment from failed businesses through foreclosure sites like Rasmus.com [00:10:01]. This can allow the purchase of equipment for as little as 5 to 10 cents on the dollar [00:10:09].
5. Cost-Effective Customer Acquisition
For low-ticket consumer products, paid advertising can be unprofitable [00:10:40]. The most profitable customer acquisition strategies for maximizing business profits are:
- Word of Mouth / Referrals: Encouraging customers to share their positive experiences [00:10:53].
- Affiliate Marketing: Partnering with other businesses or groups (e.g., fraternities/sororities, companies) to drive traffic through promotions and competitions [00:08:52].
- Building a Direct List: Offering incentives (e.g., 50% off) for customers to join a text message list, creating a low-cost lead for future marketing [00:09:04].
These insights highlight that while the franchise model offers structure, understanding its financial implications and consumer psychology is key to maximizing revenue and profit calculations and overall business success.