The Franchise: An Archetype for Vertical SaaS

Three years ago, we profiled Slice as an example of the Unbundling of the Franchise. “Be independent, but not alone!” was the tagline.  Since then, we have studied this archetype in more and more end markets. We believe the franchise represents the archetype of what a Vertical SaaS Vendor (VSV) can do for its small business merchants. 

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It also represents an enormous opportunity for the VSV. Most Vertical SaaS companies get to 1% of GMV take rate, with the occasional high flyers getting to 3%. At Tidemark, we believe the industry has set its aims far too low. The ambitious founder can earn a much, much higher take rate.

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For multiple years now, we have argued that extending through the value chain is the best long-term strategy for a Vertical SaaS company. But before you get there, what is a VSV's full potential? We suggest a VSV emulate the supposedly lowly franchise. 

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A franchise is a company that sells “business-in-a-box” opportunities to entrepreneurs. In the typical franchise business model, the franchisor takes a revenue royalty in return for helping with aspects of the business. A 2018 report from FRANdata pegged the average revenue take rate to be 6% for franchisors across 29 industries, from pizzas to tax prep. (We actually think this number may underestimate a franchisor’s overall charges by leaving out payments, wholesale discounts on goods, etc.)

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You’ll note that this fee is far higher than that of the average VSV. But we think a VSV can offer far more to its customers than what the typical franchisor can offer.

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What Franchisors Offer (And How Software Can Match It)

To justify this take rate, each franchisor offers a bundle of services:

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1. Marketing support: National offices will run campaigns promoting products sold at franchisee locations. There are other variations where franchisees will get preferred rates from other sources of demand generation.
2. In-network demand generation: Companies with owned digital real estate, such as an app, can funnel demand via those properties. For example, the Domino’s app automatically connects users with the closest pizza shop. 
3. Supply chain: Franchisees will get their preferred rates on supplies, allowing them to purchase goods like cups at a cheaper price than they could buy on the open market.
4. Operations playbook: Running a business is hard! A good franchisor will offer ongoing training and support so franchisees can maximize their business. 
5. Financing: Some franchisors offer franchisees preferred rates on loans or directly provide capital from their own balance sheets to help them get started.
6. Intellectual property: This is purchasable goodwill. A franchisee can be off to a running start just by being allowed to use the franchisor’s logo over their door. 

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A VSV’s first product often provides just one of the above services, but over time, we think the VSV can rebundle the majority of these offerings. We are already seeing innovative VSVs emulating these offerings from franchisors:

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1. In-network demand generation: Substack has a 10% revenue take rate from the creators on its platform. It justifies this by allowing writers to cross-promote each other to readers on the platform.
2. Call Center: Wonders has a call center to take orders during peak lunchtime hours for Chinese restaurants. The rumor is they can get close to 10% just for that service. 
3. Supply chain. Slice generates in-network demand, but it can also place bulk orders for pizza boxes and other supplies for the pizzerias it serves. 
4. Grow your audience: This is the most important and valuable thing a VSV can do. For example, we’ve heard of all-in-one platforms with a proven outbound sales center generating 30-60% take rates! We won't say who, but we know it's possible. 

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We’re also starting to see some VSVs go out and buy or become merchants themselves. This is an unusual path with a very different capital intensity (and skeptics would argue return on equity), but it’s starting to happen in insurance brokerage, parking lots, accounting, etc. (see our discussion of tech-enabled rollups for additional commentary on a variation of this idea).

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Conclusion

The franchise as an archetype is only the beginning. Next, we’ll explore a control point pattern—Formation and Access—that takes the franchise concept one step further. This is a special pattern that allows a VSV to even the playing field even further for SMBs and allows a VSV to 10x its take rate. More to come soon.

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