Franchising an Existing Business: Recommended Prices and Franchisees’ Pricing Freedom

When turning an existing business into a franchise, it is easy to make the price list used by company-owned outlets compulsory for franchisees. However, franchisees are independent businesses, separate from the franchisor. Building a healthy franchise network means distinguishing between the prices the brand recommends and the selling prices franchisees choose for themselves. That distinction must be reflected not only in contracts, but also in day-to-day operations.

1. Check the legal position before assuming prices must be uniform

Japan has no single law that comprehensively regulates franchising. The Civil Code governs the basic contractual relationship, while transactions between franchisors and franchisees are subject to the Antimonopoly Act. Article 11 of the Small and Medium-sized Retail Business Promotion Act also requires franchisors whose operations qualify as a specified chain business under that Act to provide written disclosures and explanations before a contract is signed.

Particularly important when designing pricing rules are the Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act. These are not legislation in themselves, but explain how the Act applies to franchise recruitment and dealings after a contract has been signed.

Depending on the nature of the transaction, restricting franchisees’ selling prices may constitute resale price maintenance under Article 2, paragraph 9, item 4 of the Antimonopoly Act, or dealing on restrictive terms under paragraph 12 of the General Designation of Unfair Trade Practices. Using a superior bargaining position to impose an unjust disadvantage may also raise concerns about abuse of a superior bargaining position.

Avoid reasoning that ‘the same brand naturally means the same prices’ or ‘there is no problem because the franchisee signed the contract’. The issues to consider vary with the substance of the transaction, including whether it involves the resale of goods or items prepared and served by the franchisee. If you intend to introduce mandatory pricing conditions, consult a lawyer familiar with competition law before adopting them.

2. Break down pricing tasks at company-owned outlets and clarify what franchisees decide

Start by listing the pricing decisions made in your existing business. Include not only standard prices, but also time-specific discounts, bundles, member discounts and limited-time promotions. Tasks that can be handled through head-office instructions at company-owned outlets cannot necessarily be directed in the same way at franchised outlets.

For each type of price, clarify the following to identify the boundary between contractual terms and operational procedures.

• Information supplied by the franchisor: recommended prices, cost-calculation assumptions and sales results from company-owned outlets.
• Decisions made by the franchisee: actual selling prices, whether to offer discounts and adjustments to reflect local circumstances.
• Responsibility for updating displayed prices: who changes in-store menus, point-of-sale systems, booking screens and other displays.
• Matters requiring consultation: discrepancies between advertised and displayed prices, or how to configure prices in the system.

Explain the reasoning and assumptions behind recommended prices. For example, if a price is based on rent and staffing costs at company-owned outlets, make clear that those assumptions may not apply directly to franchisees. Treat recommended prices as information to support decisions, not as a guarantee of profit.

Also distinguish between ‘notification’ and ‘approval’ of price changes. Check that a notification procedure intended to keep displayed prices up to date does not, in practice, prevent franchisees from changing prices without head-office approval. Simply stating in writing that franchisees are ‘free’ to set prices does not remove restrictions that exist in practice.

3. Remove practices that turn recommendations into requirements

Practical arrangements can have more influence over pricing freedom than the wording of a contract. A sales system that prevents franchisees from changing prices, repeated requests from head-office staff to restore recommended prices, or withdrawal of support only from outlets that depart from those prices may all amount to effective restrictions.

Before recruiting franchisees, use the equipment at an existing outlet to test a price change from a franchisee’s perspective. Do not just check whether a price-change function exists. Find out who makes the decision after a request is submitted, whether any delay in applying the change disrupts trading, and whether online and in-store prices can be kept consistent.

Include at least the following principles in manuals and staff guidance.

• Do not treat a departure from recommended prices alone as a breach of contract.
• When discussing prices, provide supporting information and respect the franchisee’s judgement.
• Record price-change histories for purposes such as managing displayed prices, not to rank outlets by compliance with recommended prices.
• If another outlet complains about discounting, do not immediately demand that the discounting outlet raise its prices.

Agreements between franchisees on future prices or discount policies also carry competition-law risks. If head office collects outlet-level pricing information, it should define how that information will be used and take care not to turn franchisee meetings into forums for agreeing uniform prices.

4. Preserve pricing choices in promotions and recruitment disclosures

Design limited-time promotions separately from standard pricing. Producing advertising that promises ‘the same price nationwide’ before making participation arrangements may create pressure on franchisees to join later. For any promotion involving a particular price, clarify participation arrangements and cost allocation before producing the advertising.

In practice, it is useful to set out the eligible products, promotional period, proposed price, how franchisees choose whether to participate, who funds the discount and who updates displayed prices in a single proposal. Clarify how non-participating outlets will be treated. If the offer is available only at selected outlets, make that limitation clear to consumers. Bear in mind that making participation voluntary does not, by itself, eliminate every competition-law concern.

During franchise recruitment, explain who decides standard and promotional prices, and what practical steps are involved in changing them. If the business qualifies as a specified chain business, check how these explanations relate to the statutory disclosure requirements. Even where it does not qualify, pricing conditions that affect business decisions should be provided in writing in advance.

Finally, check that the contract wording, system settings and explanations given by head-office staff are consistent. A framework is not sound if the documents say ‘recommended’ but recruitment staff describe the price as ‘mandatory’.

Practical takeaway: Before recruiting franchisees, test a scenario in which a franchisee chooses a price different from the recommended price for one product. Check that the contract, system controls, advertising and head-office response all work together smoothly. This is the first step towards protecting franchisees’ pricing freedom in practice.