Franchise pricing: distinguish advice from binding requirements

When you run company-owned outlets, you can generally set their customer prices centrally. When you develop the business into a franchise network, your approach needs to change: franchisees are independent business owners. Shared price lists, till systems and promotions can otherwise lead to unlawful price controls. Here is a practical route to a pricing model that supports a clear customer offer without turning recommendations into binding requirements.

1. Map out how you actually control prices

Start by tracing a price from head office’s calculations through to the customer’s receipt. Who proposes the amount, who enters it into the system and who can change it? Also examine what happens if a local business owner wants to charge a different price.

In a company-owned business, it is easy to confuse the concept’s quality standards with a requirement to charge the same price everywhere. In a franchise network, these issues need to be kept separate. Shared requirements for what a service includes, for example, do not automatically entitle the franchisor to set the franchisee’s selling price.

Draw up a simple inventory of:

• central price lists and costing templates,
• settings and access permissions in the till system,
• promotional materials, booking processes and websites,
• bonuses or other benefits linked to compliance with pricing guidance,
• verbal instructions given by advisers and regional managers.

Actual working practices matter just as much as the wording of the agreement. A price list does not become optional simply because it is headed ‘recommended prices’ if departures from it lead to pressure or financial disadvantages.

Document both the stated rule and the behaviour that your systems and staff encourage.

2. Understand which Swedish rules apply

Sweden has no comprehensive franchise law. It does, however, have the Act on the Duty of Franchisors to Provide Information (2006:484). This requires franchisors to provide clear, understandable written information about the implications of the agreement and other relevant matters well before the franchise agreement is signed. Any planned pricing and promotional arrangements should be described clearly where they affect the working relationship and the franchisee’s financial position.

However, this disclosure legislation does not make an anti-competitive contractual term lawful. The Swedish Competition Act (2008:579) is particularly relevant to pricing. EU competition rules may also apply where trade between Member States may be affected.

The starting point is that a franchisor must not impose fixed or minimum resale prices. Indirect methods can also be problematic, such as limiting the discounts franchisees can offer or threatening less favourable terms when a franchisee lowers its price.

Recommended prices and maximum prices may be permitted, but pressure or incentives must not turn them into fixed or minimum prices in practice. The assessment depends on the circumstances and the applicable competition rules; a maximum price is therefore not a blanket exemption.

Have a lawyer with competition law expertise review the model before launch. The review should cover agreements, technical settings and internal instructions, not just the price list itself. Acceptance by all franchisees does not remove a competition law risk.

3. Design promotions that work for independent business owners

Joint marketing can be valuable for a franchise network, but promotional planning must distinguish between what the offer includes, the customer price and who actually sells to the customer.

Suppose your existing business usually advertises a service package at a single nationwide price. Before franchisees use the same approach, you need to decide how local participation, pricing choices and customer information will work. Do not assume that a short-term promotion automatically permits binding prices.

Prepare a promotional brief that answers the following:

• Which outlets are taking part, and how is participation confirmed?
• Is the price a recommendation or a maximum price that has undergone legal review?
• How are local price differences handled in advertising and booking systems?
• Who funds the discount and pays the marketing costs?
• How will customers know which business the offer is available from?

Also review the Swedish Marketing Act and Price Information Act where applicable. Central advertising must not give a misleading impression of the prices or terms available locally. Advertised price reductions may trigger specific requirements to provide information about the previous price.

If head office takes payment online, the roles need particular scrutiny. Establish which business is the customer’s contracting party before deciding who should control pricing, refunds and complaints. A centralised payment process does not, on its own, determine the legal role.

4. Make pricing freedom a reality in day-to-day operations

Turn the reviewed model into practical procedures. The till system should support the local pricing decisions envisaged by the model. The franchisee responsible should understand how to make changes and how these are reflected in the customer’s order.

At the same time, train those who provide support. They can explain costings, cost trends and customer value, but must not pressure franchisees to follow recommended prices. Avoid joint meetings where franchisees agree on future customer prices or discounts. Coordination between independent franchisees can also breach competition rules.

Then test a practical scenario: a franchisee wants to depart from the recommended price. Can the change be made without arbitrary approval requirements, penalties or misleading customer information? If not, the process needs reviewing.

Practical takeaway: Map out your pricing controls before bringing your first franchisee on board. Make sure your legal framework, till system and promotional procedures all support the same clear allocation of responsibilities.