Predictive analytics tools are making a difference in many sectors, and franchising is no exception. With all of the hype, it can be tough to differentiate between what’s real and what’s not.
In this blog post, we’ll explain what predictive analytics involves and explore a few common applications for franchises.
Defining Terms: Predictive Analytics Tools
Predictive analytics is the process of using data from past occurrences to predict a future outcome. The prediction is presented in the form of a specific performance metric – such as the expected temperature next Tuesday or the projected dollar value of annual sales at a new store location. Forecasts are derived from a predictive model that is designed to answer the specific question of interest.
Predictive analytics tools come in a variety of forms depending on their intended application. Brands that are looking for a DIY solution may consider investing in software that allows them to develop their own predictive models. This approach gives total control, but requires a big investment in datasets, technology, and expertise to develop the tool. Most brands prefer a hybrid solution that involves working with a consulting firm to develop the model, then deploying it to a user interface for on-demand access.
Common Applications of Predictive Analytics Tools for Franchises
While predictive analytics tools can be applied to many aspects of franchising, here are a few of the most common applications.
Application #1: Determining the Optimal Configuration of Franchise Territories
Determining how to configure franchise territories is an important question for any franchised business. If you draw the boundaries too big, then you are leaving franchise sales opportunities on the table. If you draw the boundaries too small, then your franchisees may fail and ultimately hurt your brand. Defining territories correctly is particularly critical for service-based businesses that travel to the customer’s location, since service areas need to be a realistic size to meet customer service expectations.
Predictive analytics can be used to determine how many franchise territories the market can support, where territories should be placed, and what the boundaries of each territory should be. To do this, a model is developed based on factors that are observed to correlate with the current territory performance. Then an algorithm is programmed to use brand-specific territory rules (e.g. territories can’t cross state lines, territories can’t overlap, a franchisee must be able to arrive at any destination in the territory within 1 hour) in combination with the model to test and determine the best territory layout for the brand.
Application #2: Determining the Optimal Placement of Brick-and-Mortar Stores Within a Territory
Once you’ve defined where your franchise territories should be, you can use predictive analytics tools to optimize the placement of brick-and-mortar stores within each territory.
Predictive analytics can help you understand:
- How many units you can have in that territory
- Where each unit should be placed
- The sales forecast (or other performance metric) for each unit
Application #3: Improving Performance of Current Stores or Territories
Perhaps you opened some stores or territories without using much analysis, or maybe your markets and customers have shifted over time. Predictive analytics can be used to identify where your operations are solid and where you have opportunities to improve.
To do this, use a predictive analytics model for your brand to score each store or territory, then compare the forecasted performance to actual performance. Discrepancies between the two metrics reveal areas where you need to dig deeper to diagnose what’s going on and can help to prioritize additional investments, closures, or relocations.
The Bottom Line
Predictive analytics tools are good investments for franchises that want to grow and optimize their businesses intelligently. To determine which type of tool is right for you, consider the types of questions you want to answer and the level of internal resources you can invest in developing and supporting the solution.
If you are ready to get started, Buxton offers a wide range of predictive analytics tools for franchises. Explore our franchise solution overviews for more information.