Buying a Franchise in India: Check Who Controls Prices and Discounts

When buying a franchise, it is easy to focus on the brand’s popularity and overlook how much you will be allowed to charge customers. Even with the same level of sales, compulsory discounts can reduce what you retain. Before joining a franchise network, clarify who has the authority to set prices, agree to promotional offers and allocate discount costs. A promise of higher sales is not enough.

1. Distinguish recommended prices from compulsory prices

Do not assume that a brand’s price list either allows changes or prohibits them entirely. Read the agreement, operations manual and promotional policy together. One document may describe a price as ‘recommended’, while another imposes a penalty for departing from it. You can only assess your actual freedom by considering all the documents together.

Before signing, get written answers to these questions:

• Can you adjust prices to reflect local rent, costs and competition?
• Does the brand set a maximum price, a minimum price or a fixed selling price?
• Do you need permission to offer your own discounts? How quickly will you receive a response?
• Can you charge different prices for in-store, home delivery and online sales?
• What happens if you do not follow a price list?

For packaged goods, the maximum retail price (MRP) is a ceiling, not a compulsory selling price. Where the applicable legal metrology rules apply, goods cannot be sold above that price. Check separately whether your contract allows you to sell below it. Do not treat a service price list as equivalent to the MRP on packaged goods.

2. What does India’s legal framework say?

India has no dedicated franchising law or general system of compulsory franchise registration or prescribed pre-sale disclosure documents. As a result, pricing and promotional rights are largely determined by the agreement. The Indian Contract Act, 1872 provides the main framework for contract formation, free consent, performance, breach and remedies. Rules on fraud and misrepresentation also apply.

However, putting a pricing restriction in writing does not automatically make it lawful. Resale price maintenance arrangements may come under scrutiny under the Competition Act, 2002. For example, preventing an independent reseller from selling below a specified price may raise this issue. If a brand backs its ‘recommended price’ with penalties or pressure, the label alone will not be decisive.

Nor is every such clause automatically unlawful. The nature of the arrangement and its effect on competition matter; the Competition Commission of India may investigate relevant cases. If the agreement imposes minimum prices, restricts discounts or sets penalties for non-compliance, have it reviewed by a lawyer familiar with competition law. The Legal Metrology Act, 2009 and the applicable rules are also relevant to packaged goods.

3. Work out the true cost of discounts

‘The brand will run nationwide promotions’ may sound attractive, but it does not tell you who will fund the discount customers receive. The costs of national campaigns, membership benefits, coupons and combined offers may fall on different parties. Ask for a sample settlement statement for each arrangement.

Take a hypothetical customer bill and list, in order: the normal selling price, the customer’s discount, the amount paid by the customer, the brand’s contribution and the deduction charged to you. Then subtract the direct cost of the goods or services and the related selling expenses. Ask your accountant to check the tax and invoicing treatment.

In particular, ask:

• Will the brand’s contribution be paid immediately or claimed later?
• What supporting evidence and deadlines apply to payment?
• Can several discounts be combined on the same purchase?
• If a customer returns an item, how will the discount and the brand’s contribution be adjusted?

Even if sales increase, the amount you retain from each additional transaction may fall. Look beyond the campaign’s total turnover to the amount you retain after discounts.

4. Agree safeguards in writing before a campaign starts

Propose a clause requiring written details of any compulsory campaign in advance, including its duration, eligible products, cost allocation and settlement process. The agreement should also identify who can authorise local promotions and how approval is obtained. Do not launch a campaign at your own expense on the strength of verbal consent.

Where possible, negotiate a cap on your contribution and the right to discuss campaigns involving unusually high costs. If the brand promises to reimburse a discount, put the payment deadline and the procedure for resolving disagreements in writing. These are matters for negotiation, not statutory rights you receive automatically.

Practical takeaway: Before buying, review the pricing policy alongside a sample promotional proposal and its settlement statement. Only build your sales plan once you understand both how much control you have over prices and how much of the discount cost you must bear.