Franchise pricing: distinguish recommendations from requirements

When turning an existing business into a franchise, it is easy to assume that your current price list will form part of the concept. But franchising is a network of independent businesses, not a collection of company-owned branches. You therefore need to distinguish between shared pricing recommendations and controls that restrict a franchisee’s ability to set their own selling prices. Review this before finalising contracts, till systems and promotional procedures.

Start by distinguishing company-owned outlets from franchises

At company-owned outlets, the business can normally decide what prices to charge customers. The situation is different when an independent franchisee sells to their customers. A shared brand does not, in itself, give the franchisor the right to set the franchisee’s fixed or minimum selling prices.

Identify every point at which your existing concept controls pricing. This goes beyond the price list. Menus, booking tools, online shops, quotation templates, discount codes and advertisements may all contain pricing decisions that were previously internal but now affect another business.

Create a simple checklist with three questions for each sales channel:

• Which business is selling to the customer?
• Who enters and changes the price?
• Can the franchisee actually choose a different price?

Pay particular attention to centralised ordering processes. If customers buy through a shared website, clarify who enters into the contract with the customer before deciding how pricing should work. Do not assume that a centralised technical solution automatically gives you centralised decision-making authority.

Understand the Swedish legal framework

Sweden has no comprehensive franchise law governing the entire relationship. It does, however, have the Act (2006:484) on Franchisors’ Duty to Disclose Information. This requires franchisors to provide clear, comprehensible written information about the implications of the agreement and relevant circumstances well before it is signed. The minimum disclosure requirements include fees and other financial terms. Describe the pricing arrangements clearly in the contract documentation, particularly where they affect the franchisee’s financial flexibility.

Pricing controls must also be assessed under the Swedish Competition Act (2008:579) and, where trade between EU countries may be affected, EU competition rules. General contract law also applies. A term does not become lawful simply because both parties have accepted it.

The starting point is that agreements on fixed or minimum resale prices are normally prohibited. Recommended and maximum prices may be permitted, but must not operate as fixed or minimum prices through pressure or financial incentives. A minimum advertised price requirement may also constitute unlawful pricing control.

The competition law assessment depends on the arrangements and circumstances. Have a lawyer with competition law expertise review both the agreement and how it will work in practice. Clear pre-contractual disclosure is no substitute for that review.

Make recommendations genuinely optional in practice

Writing ‘recommended price’ at the top of a list is not enough. Franchisees must retain a genuine ability to depart from it, both in the systems they use and in their dealings with head office.

If a franchisee receives less support, is threatened with termination or loses a benefit because they charge a lower price, the recommendation may effectively become a requirement. The same applies if staff regularly call and demand that a lower price be increased.

Put the following practices in place before expanding:

• Clear labelling: distinguish recommended customer prices from purchase prices and other amounts.
• Effective access permissions: allow the franchisee’s authorised staff to change customer prices where the franchisee is the seller, without an approval process that locks the price in place.
• Consistent communication: train support staff to handle pricing questions without exerting pressure.
• Controlled updates: ensure that central system updates do not inadvertently overwrite local pricing choices.

You can still explain how a recommendation has been calculated, for example by reference to costs and customer value. Present it as information to support a decision, not as a promise of a particular margin or a requirement to charge a particular selling price. Avoid using network meetings to co-ordinate future prices between independent franchisees.

Plan promotions before advertising them

A centrally produced promotion can cause problems if the advertisement promises a price that participating franchisees have not accepted. Do not resolve this by subsequently requiring everyone to honour the advertised price.

Instead, establish a process for checking proposed promotions, participation, financial arrangements and customer communications before publication. Voluntary participation does not automatically make every pricing term lawful, however; the design of the promotion also needs a competition law review.

State clearly which outlets and channels the offer applies to, and ensure that customer information is not misleading. Also test what happens when an outlet does not participate: does the booking system show the correct price, does the discount code work correctly, and does the customer receive the right information before buying?

Practical takeaway: trace a recommended price list all the way from the agreement to the till. If the franchisee cannot depart from it without technical obstacles, pressure or adverse consequences, the arrangements need to be reviewed before you expand.