Franchising an Existing Business: A Guide to Pricing and Discount Authority

When you turn an existing business into a franchise, the assumption that every outlet charges the same price becomes a challenge. Franchisees are independent businesses, not branches of the franchisor. How can you protect trust in the brand while accommodating local costs and customer profiles? Before recruiting franchisees, clarify who has the authority to set prices and offer discounts, laying the foundations for a healthy franchise community.

1. Do not carry over company-owned outlets’ pricing controls

In company-owned outlets, head office typically sets prices and promotions, and outlet managers implement them. In a franchise, however, franchisees bear their own rent, staffing costs, competitive pressures and losses from discarded stock. If the franchisor fixes prices across the network, this creates an imbalance between business responsibility and decision-making authority.

Start by breaking down your current pricing decisions into the following categories:

• Standard selling prices for products and services
• Limited-time prices, such as opening offers and seasonal promotions
• Markdowns on products approaching their use-by date
• The application of network-wide vouchers, loyalty points and membership benefits
• Prices by sales channel, such as delivery, booking platforms and in-store sales

For each category, list who makes the decision, what franchisees can change, how prices are displayed to customers and who bears the cost. Rather than covering everything with a single statement that “the franchisor sets prices”, start by distinguishing consistency in trade mark use and customer service from uniform selling prices.

For example, you could maintain common standards for portion sizes and quality while allowing franchisees to set selling prices with reference to the franchisor’s recommendations. Consider individually which conditions genuinely need to be standardised to protect the brand.

2. Understand how Japan’s Antimonopoly Act applies to pricing restrictions

Japan has no single comprehensive law governing all franchise agreements. However, the Antimonopoly Act, the Civil Code and other legislation apply, and certain businesses are also subject to the Act on the Promotion of Small and Medium-sized Retail Business. The absence of a dedicated, comprehensive franchise law does not mean that franchisors are free to dictate prices.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act address the trading relationship between franchisor and franchisee on the basis that they are independent businesses. Where a franchisor supplies goods to franchisees and restricts their resale prices, this generally raises issues under the Antimonopoly Act. Communicating a recommended price is different from effectively requiring franchisees to sell at that price.

Nor should you assume that prices for services, or for goods not supplied directly by the franchisor, can be imposed without restriction. The actual trading arrangements need to be assessed for issues such as trading on restrictive terms or abuse of a superior bargaining position. Particular care is needed where restrictions on markdowns increase franchisees’ losses from discarded stock.

Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business also requires franchisors that qualify as operators of a “specified chain business” under the Act to provide written pre-contractual disclosures and explanations. Whether a business qualifies depends not simply on whether it is described as retail or food service, but on criteria including the ongoing supply of goods or arrangements for their supply, management guidance, use of trade marks and similar identifiers, and payments collected on joining. Check how sales terms and obligations to participate in promotions relate to the applicable statutory disclosure requirements, and present them in a way that enables prospective franchisees to understand the burden involved.

A franchisee’s agreement to contractual terms does not, by itself, resolve any issues under the Antimonopoly Act. Before recruitment begins, obtain specialist advice covering both the pricing framework and how it will work in practice.

3. Make recommended prices genuinely adjustable

An agreement may describe prices as “recommended”, yet the sales system may prevent franchisees from changing them. In that situation, the freedom offered on paper does not match the reality.

If you use recommended prices, explain how they are calculated. Set out factors such as standard purchasing costs, labour time, packaging costs and the anticipated value to customers. Also make clear that these prices do not guarantee profitability for individual outlets. They should serve as guidance to help franchisees make decisions that reflect local circumstances.

Check the following operational points:

• Can franchisees change prices in the point-of-sale system?
• Are price changes correctly reflected on in-store displays, booking screens and at checkout?
• Are franchisees free from adverse treatment if they choose not to adopt recommended prices?
• Are field support staff putting undue pressure on franchisees to revert to recommended prices?

If you require notification of price changes, limit its purpose to updating displays and customer information, and check that it does not become an approval process in practice. In meetings with franchisees, the appropriate question is not “Did you stick to the recommended price?” but “How did you analyse gross profit and customer responses?”

Reflect this approach in the franchisor’s assessment forms and staff guidance materials. Contract staff, outlet support teams and systems staff all need to share the same understanding.

4. Separate discount funding from participation terms for network-wide vouchers

Nationwide promotions can easily blur responsibility for pricing decisions. If the franchisor asks franchisees to offer a discount after advertising has already been published, it becomes difficult for them to decline. Finalise participation terms and settlement arrangements before releasing any advertising.

The promotion plan should specify the eligible products, campaign period, participation arrangements, who funds the discount, settlement timing, whether the offer can be combined with other benefits, and how returns will be handled. Even where the franchisor reimburses the discount, you still need to consider franchisees’ administrative workload and cash flow until payment arrives. Reimbursement does not automatically remove concerns about pricing restrictions.

For example, if a franchisor-issued voucher can be used only at participating outlets, confirm participation first and clearly identify those outlets in advertising and on the relevant customer screens. Prepare an explanation for customers who visit a non-participating outlet. Do not rely solely on wording such as “excluding some outlets”; give customers an easy way to check eligible locations before attempting to use the offer.

Even where the agreement includes a clause requiring participation in network-wide promotions, avoid giving the franchisor unlimited discretion over costs or discount levels. Consider the impact on franchisees, the need for the campaign and opportunities for consultation. Do not make a habit of notifying franchisees of additional costs only after each campaign has been put into effect.

5. Test price-change procedures before recruiting franchisees

Once the framework is in place, test the administrative procedures for changing prices at company-owned outlets or other suitable locations. This does not establish whether restrictions on franchisees’ pricing are lawful; it checks whether systems and customer-facing processes work as intended.

A useful starting point is to test four scenarios: changes to standard prices, markdowns on products nearing their use-by date, use of network-wide vouchers, and returns. Record any discrepancies between displayed and checkout prices, failures to update delivery screens, and missed voucher reimbursement settlements.

Use the findings to set out pricing authority and the basic conditions for promotional participation in the franchise agreement, and include change procedures and contact details in operational guidance. Do not introduce significant new powers or financial burdens later through operational guidance alone. Also decide who will handle pricing queries and contractual complaints, and when they will respond.

Practical takeaway: Before recruiting franchisees, prepare a one-page summary answering three questions: “Who sets prices?”, “Who bears the cost of discounts?” and “How are changes communicated to customers?” A framework that gives franchisees decision-making authority commensurate with their business responsibilities is the foundation of a sustainable franchise community.