Modeling the Cost of Franchise Payments

A correctly selected and developed franchisor strategy is an important component for building mutually beneficial relationships with franchisee, which can lead to the growth of a franchise chain. This concerns the establishment of the size of franchise payments that will satisfy both parties. Thus, we estimate two models (OLS regressions) in order to identify factors relevant to the Russian market that affect the amount of initial fee and royalty rate. The cross-sectional data of Russian franchisors for 2019 were used in the work since the experience of previous studies showed that the size of franchise payments does not change significantly over time. Even though Russia has its peculiarities of the franchise relations system, the study confirmed some patterns of establishing franchise payments that are characteristic of the global economy. As a result, it was revealed that large franchised networks have a reputation and credibility that contribute to the reliability of the franchisor in the eyes of potential franchisees and therefore allow franchisors to set higher initial fees and royalty rates. Moreover, we can conclude that the introduction of requirements for the provision of financial statements is a signal to the franchisee about the interest in promoting the activities and reliability of the company on the part of the franchisor. Consequently, franchisees are willing to pay a higher initial fee and royalty rate for using a franchised brand, which, in their opinion, will help them succeed. Nevertheless, it was found that the size of franchised payments decreases with an increase in the share of history in franchising and the age of the company does not have a significant effect on the formation of the size of payments since, despite the fact that franchisors can use certain elements to differentiate themselves, they cannot use it to charge extra from their franchisees. Keywords: franchising, initial fee, royalty rate