Franchise Pricing Strategy

✓ Paper Type: Free Assignment	✓ Study Level: University / Undergraduate
✓ Wordcount: 3459 words	✓ Published: 12th Oct 2020

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Pinot’s Palette is one of the best franchises for those looking for a rewarding experience and financial independence. Pinot Palette opened up their first international location in Toronto, Canada in 2016. It is the consensus of the owners to now expand into other international countries. Pinot’s Palette first studio in Italy will be located in Rome, Italy within a 10-mile radius of their competitor, Vineyarts, one of Europe’s premier Art & Wine Studios.

It is common for local, municipal, and country regulations to vary on the licenses and permits that will be needed to operate a Pinot’s Palette Studio. It is important to pay these fees to governmental authorities before starting business. Starting up an Italian business can be very attractive to business owners for many reasons such as friendlier tax rates and access to overseas customers. The most popular and common Italian corporation for a small to medium size business is the “SrL” which is a limited liability corporation that has virtually no restrictions on foreign shareholders.

The initial franchise fee is $27,500 for a or a Two Room Studio. There is an artist training fee ($500 per day) which varies plus its actual costs of lodging, food, and travel arrangements for an artist trainer who will conduct on-site initial artist training to all artists hired to perform classes. Pinot Palette requires payment for a Royalty Fee (6% of Sales) and a Marketing Obligation fee (2% of Sales). In addition, the franchise must spend an additional $1,500 per month on local advertising.

The funding will be used to finance the start-up costs associated with a new Pinot’s Palette franchise. The costs are dependent upon local conditions, but the basic costs are outlined in Table 1.

Table 1: Start-up Budget

Pinot’s Palette
*Sources of Capital*

Owners' Investment (name and percent ownership)
Owner 1 (20%)		$100,500
Owner 2 (20%)		$100,500
Owner 3 (20%)		$100,500
Owner 4 (20%)		$100,500
Owner 5 (20%)		$100,500
Total Investment		$ 502,500

Bank Loans
Bank 1 (SBA loan)		$ 500,000
Bank 2 (conventional loan)		300,000
Total Bank Loans		$ 800,000

*Startup Expenses*

Buildings/Real Estate
Purchase (land)		$ 160,000
Construction (new building)		500,000
Remodeling		80,000
Total Buildings/Real Estate		$ 740,000

Leasehold Improvements
Item 1 (outdoor patio)		$ 20,000
Item 2 (landscape and parking)		38,000
Total Leasehold Improvements		$ 58,000

Capital Equipment List
Furniture		$ 35,400
Equipment		50,000
Fixtures		34,000
Machinery		47,000
Total Capital Equipment		$ 166,400

Location and Admin Expenses
Rent & Related Costs		$ 10,000
Utility deposits		1,250
Legal and accounting fees		3,500
Prepaid insurance		1,500
Customer Service Center Fee (per year)		2,750
Electronic Mail Fee (per year)		700
Technology Fee (per year)		1,500
Artisit Training Fee (5 days)		2,500
Franchise Fee		27,500
Total Location and Admin Expenses		$ 51,200

Opening Inventory
Category 1 (Wine)		$ 15,500
Category 2 (Imported Beer)		8,800
Category 3 (Domestic Beer)		5,100
Category 4 (Liquor)		7,300
Category 5 (Non Alcoholic)		3,600
Total Inventory		$ 40,300

Advertising and Promotional Expenses
Advertising		$ 30,000
Signage		11,500
Printing		3,500
Total Advertising/Promotional Expenses		$ 45,000

*Summary Statement*

Sources of Capital
Owners' and other investments		$ 502,500
Bank loans		800,000
Total Source of Funds		$ 1,302,500

Startup Expenses
Buildings/real estate		$ 740,000
Leasehold improvements		58,000
Capital equipment		166,400
Location/administration expenses		51,200
Opening inventory		40,300
Advertising/promotional expenses		45,000
Total Startup Expenses		$ 1,100,900

Projected Profit and Loss

According to export.gov, “Franchising is widespread throughout Italy and is dramatically growing. With a turnover of approximately $28.5 billion in 2018 (+2% compared to 2017), Italy is the fourth largest market for franchises in Europe, after France, Germany, and Spain. In 2018, the number of Italian franchises reached more than 53,800. In 2018, the Italian market experienced a growth rate of 3.4% in terms of active franchising networks.” ("Italy - Market Overview | export.gov", 2019).

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The franchise fee payments will be completed by Quarter 4 of the first year. Although the first two quarters of operations will not result in a profit, the losses are projected to be less than $4k for the first year. The second year of operations is expected to see a small profit based on the results of Quarter 4 in Year 1. The breakdown of projected revenue and expenses for year 1 is detailed in Table 2:

Table 2: Projected Profit & Loss – Year 1

Projected Profit & Loss – Year 1	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Public Painting Revenue	$ 24,398	$ 26,280	$ 27,970	$ 31,420
Private Party Revenue	$ 3,400	$ 5,200	$ 6,788	$ 8,230
Bar Revenue	$ 370	$ 469	$ 490	$ 510
Total Revenue	$ 28,168	$ 31,949	$ 35,248	$ 40,160

Rent	$ 14,000	$ 14,000	$ 14,000	$ 14,000
Payroll	$ 1,500	$ 1,900	$ 2,180	$ 2,500
Utilities	$ 560	$ 560	$ 560	$ 560
Marketing	$ 3,000	$ 3,000	$ 3,000	$ 3,000
Insurance	$ 3,000	$ 3,000	$ 3,000	$ 3,000
Franchise Fee Payment	$ 7,000	$ 7,000	$ 7,000	$ 7,000
Other Admin	$ 450	$ 450	$ 450	$ 450
Marketing Fees	$ 486	$ 653	$ 782	$ 758
Royalty Fees	$ 1,263	$ 1,991	$ 2,674	$ 3,400
Total Expenses	$ 31,259	$ 32,554	$ 33,646	$ 34,668
Total	$ (3,091)	$ (605)	$ 1,602	$ 5,492

**Note: The value of the US Dollar compared to the Euro will very daily**

International Pricing Strategy

When deciding which pricing strategy Pinot Palette should use, it is always important to analyze and consider the economic environmental factors such as inflation, unemployment, disposable income, GDP, and GDP per capita (PPP). Also, internationally there are different taxes and tariffs, and freight charges to consider. Allie Decker states, “Pricing strategies take into account many of your business factors, like revenue goals, marketing objectives, target audience, brand positioning, and product attributes. They’re also influenced by external factors like consumer demand, competitor pricing, and overall market and economic trends.” (Decker, 2019).

Examples of pricing strategies are cost-based, customer-value based, and competition based. Cost-based is most popular for the customer because the pricing is based on time and materials used to complete the project, however, it can be a disadvantage because your income is directly linked to time. Next is customer-value based pricing in which the pricing is based on the value of your service not necessarily on the time and materials being used. This can be tricky because the price is given upfront, so you have to be sure the pricing will mirror the actual amount of time involved. Lastly, competitive pricing is when the seller uses prices of competing products as a benchmark instead of considering own costs or the customer demand. Abdullahi Muhammed, a contributor for Forbes magazine states, “You want to offer clients the value they deserve but you also want to help your business grow and charge rates that let you fully enjoy doing it.” (Muhammed,2017).

The pricing strategy used for the Pinot Palette in Italy will be competitive pricing. Competitive pricing focuses on the existing market rate for a company’s product or service; using the competitors’ prices (Vineyarts) as a benchmark. The product mix offering will include both private and public paint offerings. The pricing will be based on the time/complexity of the painting, which will result in three standard price points: $45 for an hour session, $55 for two-hour painting session, and $65 for three-hour painting session. In addition to the painting, there will be a bar offering wine, beer, and soda for purchase during the painting session.

Channels of Distribution

The channels of distribution in Italy can differ slightly from those in the United States, but most will be the same. Most logistics companies will offer a range of shipping options for international delivery at various price points to meet customer needs.