It’s often challenging for franchise owners to ensure their franchisees pay royalty fees. However, there is an actual method that uses a human phenomenon discovered in the late 1920s that can increase royalties by over 10 percent, and it’s as simple as a letter.
The Hawthorne Effect
In the late 1920s and early 1930s, the National Research Council was investigating the effects of floor lighting on productivity. During the experiments on lighting and other factors, it seemed like they could not lose. In other words, every change they made created a positive increase in productivity.
Fortunately, or unfortunately, researcher Henry Landsberger discovered what was really at play. Named the Hawthorne Effect, it is an unavoidable aspect of human psychology. It’s a phenomenon that occurs when we know we are being evaluated, our performance improves to meet the expectations. It’s a difficult situation for behavioral researchers, but an aspect of human psych that businesses can use ethically for their advantage.
The reporting of sales and the subsequent calculation of royalties is dependent on honesty. While the majority of franchise owners report accurately, there are those who do not.
At HS Brands, we regularly see the Hawthorne Effect when we partner with a new client for franchise and royalty assurance. The simple act of sending all franchises a letter stating that we’ve been contracted to review royalty reporting and compliance results in a significant and immediate increase in revenue reporting.
Significant as in 10 to 20 percent increases.
That increase isn’t just dishonest people behaving better. In fact, a few of the worst players aren’t impacted by the letter at all. But some do, and in general, all owners get a little more attentive to proper revenue reporting—the Hawthorne Effect.
For our clients, it not only provides an immediate return on their audit investment but can also serve as a wake-up-call to past profit losses. Many are shocked at how long they’ve been short-changed by franchisees not paying royalty fees. Imagine adding 10 or 20 percent to last month’s revenue reports and multiply by royalty share. While you’re at it, multiply that by 12 months. That’s how much of your profits you might be missing.
Of course, the letter will work to varying degrees, but the effects will only be long-lasting if you follow through on the actual audits.
For real and long-lasting benefits, you need to not only follow through on the audits, but also maintain a consistent and regular presence in your royalty auditing program. Otherwise, just like they later discovered in the Hawthorne studies, once the researchers are gone, behavior pretty much returns to its original cadence, regardless of the fancy lighting left behind.