Franchising relies on human learning weaknesses

May 1, 2010

Visual information can be deceiving.

Dan Ariely suggests that humans are predictably bad in making financial decisions.

I believe that is true and explains much of franchising’s cash flow.

What we Expect influences (a lot) what we Observe and Believe

March 6, 2009

This glitch in how we learn is what gives power to this phrase:

“This franchise is the ‘McDonald’s of poop-removal'”, as an example.

If you consider this statement to be at all reasonable, you are comparing an almost certainly worthless investment opportunity with the single most successful franchise investment in history; one out of 10s of thousands over 40 years, maybe never to be repeated again.

What you think is reality (a similar success) is not really what you are observing, but that thought will influence how you view this cheap me-too product.

A self-fulfilling prophecy is:

a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself.

The “McDonald’s of …” is also an example of a cognitive bias called anchoring or focalism (acommon human tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions).

  • Whenever you hear this analogy, run away.

Dan Ariely explains how what we know, creates what our mind concludes using balsamic vinegar and placebos.

They think they’re Owners: Why franchisees delay in bailing

December 30, 2008

Franchisees stay in money-losing operations much too long because they make a fundamental error (own versus rent).

They see themselves as “owners” of their business, while in fact, they are conditional renters of trademarks and an operating system.

  • This makes them overvalue their investment and continue to invest much, much more of their own personal identity in the business.
  • This is particularly true because the new renter is much less likely to share in that inflated worth.

This mismatch makes a negotiated sale much less possible, without adding in all the self-interest and network issues that the franchisor can bring to the table.

This video from Dan Ariely (Predictably Irrational) shows some research that was done that tends to support my conclusion. Summary:

  1. owners (sellers) would sell at $1,400, while the
  2. buyers valued the tickets at only $170.

Those that thought they were an owner, inflated their value by 8.2 times the market value.

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