The Hidden Factor That Can Make (or Break!) Your Franchise

In the franchise world, as in the broader business landscape, labor is often the single largest operating expense. But while labor costs are universally significant, they're also highly variable across franchise models, ranging anywhere from 25 to 50 percent of a business's budget.

There is also variability in how many employees are revenue producing. Some models need particular roles, like an admin, who do not directly produce revenue, but are critical to the model. Other employees are directly responsible for revenue like sales and production.  

This means that understanding and controlling labor costs is a critical skill for any franchisee - and one that should start before you even choose a franchise.

Revenue Producing and Non-Revenue Producing

Ideally, you want a model where more employees are revenue producing. The greater the percentage of these types of employees, the greater the margin is for profit. Roles such as sales, marketing, and production all drive revenue and keep the business going. Customer acquisition and retention are crucial to any successful business.

In the real world, there are usually a key number of employees that are not direct revenue producers. Roles such as an administrative assistant, bookkeeper, and IT are examples. While these roles do not produce revenue, they are critical to the functioning of the business, support the revenue generators, ensure a smooth operation, and “power” the business. These roles introduce stability, efficiency, and scalability.

Unskilled, Semi-skilled, and Skilled Labor

When assessing franchise labor costs, it's helpful to think in terms of three broad categories of labor: unskilled, semiskilled, and skilled. These designations, used by the Social Security Administration, relate closely to key cost drivers like wages, benefits, and training.

Unskilled labor refers to roles that require minimal education and can be learned quickly on the job, like dishwashing, shelf stocking, etc. 

Semi Skilled labor needs a bit more knowledge and experience, usually a high school diploma plus a few months of training, and may involve some independent judgment. Retail sales, admin work, and driving jobs often fall into this category. 

Skilled labor demands significant expertise, often a college degree or trade certification. These roles, like massage therapists, electricians, or accountants, require a high level of autonomy and problem-solving. While skilled jobs are fewer in number, they span a wide range of industries.

Pros and Cons of Different Labor Pools

Each type of labor comes with its own set of advantages and challenges for franchise owners. 

Unskilled labor is abundant and less expensive, with minimal training required - but it also tends to have high turnover and support only low-margin products or services. This means more time and money spent on recruiting and onboarding, and a need for high sales volume to turn a profit.

Semi-skilled labor can hit a sweet spot for many franchises. Wages and turnover are lower than skilled positions, but workers bring some relevant experience and can be productive relatively quickly. Franchises relying on semi-skilled labor, like handyman or home health aide services, may have more regulatory hurdles but can also charge higher prices.

Skilled labor brings the highest labor costs but also the lowest turnover and training needs. Workers are highly autonomous and productive from day one. Franchises built on skilled labor, like tutoring or specialized trades, have the highest revenue potential per transaction but a smaller labor pool to draw from.

Controlling Labor Costs in Your Franchise

As a franchisee, you have more power than you might realize to control labor costs and maximize profitability. Regardless of the type of labor your franchise relies on, these strategies can help:

Cultivate a positive work culture. Treating employees fairly and in a kind manner is simply the right thing to do - but it's also good for your bottom line. A strong culture can significantly reduce costly turnover and boost productivity. We highly suggest you work on this and continue to work on this no matter what your business does.It is a key component that the culture is set from the top down with everyone exemplifying the set culture, otherwise you will not have buy-in.

Consider total costs, not just wages. Higher pay and better benefits may actually lower your overall labor costs by reducing turnover, increasing productivity as well as reducing the associated expenses of recruiting, onboarding, and lost productivity. Run the numbers to find the optimal balance.

Promote from within. Developing entry-level workers into higher-skilled roles can be far more cost-effective than constantly hiring from outside. People who already fit into your organization in terms of chemistry, competency, character, and culture are worth promoting and keeping in the organization. If you can't directly fund employee education, consider offering schedule flexibility or job security to help them advance.

Use temporary labor strategically. For seasonal businesses or roles with fluctuating demand, temporary workers can provide much-needed flexibility at a lower cost than permanent staff. They can also be a great candidate pool for permanent hires.

Final Thoughts

Labor costs are a critical but often overlooked factor in franchise success. By understanding the pros and cons of different labor pools and implementing smart management strategies, you can keep your largest operating expense under control while still achieving your growth goals.

As you evaluate franchise opportunities, look beyond the obvious factors and carefully consider the implications of each model's labor needs. With the right approach to staffing and development, you can turn your labor force from a cost center into a key driver of profitability and long-term success.

Ready To Explore Franchising? Let’s Talk!

Mack and Sharon Strange are on a mission as Franchise Consultants to help others go from “Start” to “Success” when it comes to franchise ownership.

If you’re curious about exploring franchising as a career pivot, investment vehicle or lucrative side hustle, let’s talk!

Frequently asked questions (FAQs)

Q: How do I book a call?

A: You can book a free, no obligation call with Mack here and/or a free call with Sharon here.

Q: How much do your services cost? 

A: As Franchise Consultants, there’s no fee for our services. We’re compensated by franchisors only if and when you decide to move forward with (and are approved for) franchise ownership.

Q: What do you do? 

A:  Our role is to serve as a trusted guide and educational resource.

Q: Where can I learn more? 

A: You can learn more about our story and how YOU can follow in our footsteps via the Franchise Together Podcast.

We look forward to connecting with you soon!