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Maintaining competition is crucial in business. Franchising involves franchisors setting standards to ensure their networks run cohesively and maintain a consistent brand identity. Franchisor price fixing raises several complex questions about franchise standards and anti-competitive practices. This article will explain price fixing, whether franchisors can set prices, and the legal implications of doing so.
Franchisor Standard-Setting
In franchising, franchisors seek to set standards and procedures for all aspects of their franchise businesses. These standards impact operations, customer service, product and service provisions, and more. Setting such standards can be essential to creating a cohesive brand identity.
If all franchises operate in the same manner and meet the same standards, your franchise network is consistent and equipped for the best chance of success.
Franchisors will often set rules for how much franchisees can charge customers. A franchisor might want their franchisees to sell their products and services at the same price across the network. However, franchisors should be especially aware of the implications of doing so.
Setting prices appears harmless, as it ensures customers can purchase products and services at the same price regardless of which franchise they use. However, a franchisor’s control over pricing across their network can amount to price fixing. Price fixing can be a restricted and anti-competitive business practice.
The Impacts of Pricing
Pricing is more than deciding on an arbitrary number and asking customers to pay it. Pricing can have far-reaching implications for your franchise, both explicit and implicit.
For example, if your franchise brand is known for its high value for money, you will probably feel compelled to ensure franchisees all offer the same good value. Prices are also a metric by which customers determine quality and can significantly impact profitability.
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Competition Law
UK law prevents anti-competitive practices, including agreements that may affect UK trade. Competition law explicitly prevents fixing purchase or sale prices. Franchisors must be careful to avoid price fixing within their franchise networks. This includes both direct and indirect methods of setting prices for franchisees. Engaging in price fixing is illegal and can result in both criminal and civil liabilities for the franchisor.
Competition law considers price fixing in a broad sense. A franchisor telling franchisees to charge a particular price for goods is an obvious example of price fixing. However, the law also prevents other more discreet and indirect methods of price fixing, including the following:
- printing recommended retail prices on goods;
- penalising franchisees for not selling at a particular price;
- setting minimum prices; and
- setting price ranges.
The size of your network does not matter. Whether you have a small or expansive franchise network, you can still be guilty of price fixing.
How to Avoid Price Fixing as a Franchisor
There are several points franchisors should keep in mind to avoid price fixing.
1. Leave It up to Your Franchisees
Pricing should ultimately be the franchisee’s choice. You should not ask them to sell at a particular price. Additionally, you should not provide incentives for selling at specific or above minimum prices.
This notion extends to discounts. Franchisees may voluntarily agree to participate in deals and promotions. However, you should not force them to sell at a discounted rate or join a promotional scheme.
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2. Only Recommend
As a franchisor, you may offer pricing guidance. However, it is vital to consider the legal implications of price recommendations when doing so. Engaging in any action that directly or indirectly distorts competition is illegal.
This article notes that printing recommended retail prices on goods can amount to indirect price fixing. However, you can provide franchisees with a comprehensive list of suggested retail prices. When giving them this list, it is essential to avoid the indirect effect of achieving a fixed or minimum price.
By offering flexibility within these recommendations, franchisees can make informed decisions. They can also maintain autonomy over their pricing. This approach helps mitigate the risk of inadvertently influencing prices.
Key Takeaways
Franchisors have a significant level of control over their franchise networks. They make sure their brands remain consistent. Additionally, franchisors ensure that the customer experience is the same regardless of their chosen franchise location. For this reason, franchisors might feel compelled to control pricing across their networks. However, this would amount to price fixing, an illegal practice that competition law prohibits.
Setting minimum prices, directly or indirectly, can result in civil and criminal liability. Price fixing can include the following practices:
- telling franchisees to sell at a particular price;
- penalising franchisees for not selling at a specific price;
- printing recommended retail prices on goods;
- setting minimum prices; and
- setting price ranges.
To avoid price fixing as a franchisor, leave pricing up to your franchisees. You might give them a price suggestion list, but the final choice is theirs.
If you are a franchisor who needs legal advice about pricing, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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