Digital Franchises: New Spin on an Old Business Model
BY Minda Zetlin
Brick-and-mortar businesses using franchising to scale. Why shouldn't websites? The founder of OrderUp explains how it's done.
What's a digital franchise? No one had ever heard of one before OrderUp, the online restaurant ordering company created this new model. Here's how it happened.
Back in 2003, when Chris Jeffery was in college, he noticed that few restaurants had their menus posted online. And for those that offered takeout or delivery, it wasn't possible to order online. He suspected there was an opportunity there for starting a successful business. "I talked to a couple of restaurant owners in advance who loved the idea of having someone set up the tech side of things," he said.
Jeffery's concept was simple: become the Expedia of restaurant ordering. Hungry customers can use OrderUp to find their favorite restaurants, or search for, say, the nearest Thai place. They place their orders directly online and either pick them up at the restaurant or have them delivered. OrderUp collects the money, conveys the order to the restaurant, deals with any snags, and keeps a cut of the total bill.
Scaling the Business
After college, Jeffery slowly built his company, first by licensing the ordering software, next with a simpler version, before finally settling on the OrderUp model. Once it proved successful, he wanted to expand, and he went to Silicon Valley looking for funding. The offers he got were the traditional funding offers where he would have traded capital investment for some equity in the company. "The VCs wanted to take the traditional route and I said, 'I don't want to wind up at the bottom of the barrel, or forced out of the company.'"
Jeffery had a better idea, he could create a franchise. The VCs weren't interested: No one they knew of had ever franchised a purely online company before. Jeffery returned home without funding, but convinced that franchising could work.
How It Works
He began offering a tempting proposition: A franchisee can get started with OrderUp for $42,000, which includes the cost of the management software, training, and territorial rights. In return, the franchisee gets exclusive rights to sell the service within a local area, and OrderUp handles the order processing and provides telephone or chat support in case customers encounter any problems. OrderUp pays the restaurants directly, after subtracting a portion for itself and the franchisee.
It's important, Jeffery says, to keep as much of the back-office operation as possible at the franchisor level, leaving franchisees free to focus on selling the service to local restaurants. "Set it up to really enable your local franchisee to focus on things that will return them the most--which has to do with the local community. If something can be done from behind a desk, try to do it at headquarters."
That philosophy's worked well for Nick Moore, who has an OrderUp franchise in Lafayette, Indiana, where Purdue University is located. "I got a list of five adjacent area codes in the West Lafayette area," he says. "They maintain customer service and quality controls, and they gave me a content management system so I could start uploading menus. I'm the local pulse--my job is to stay in tune with what's going on so I can take advantage of marketing opportunities in a timely manner."
It's working: Moore reports that he anticipates earning 10 to 14 percent on orders totaling $2.8 million this year. Overall, Jeffery says, OrderUp's 20 franchisees generate just under $30 million in food sales annually. OrderUp keeps 5 percent of each order, and franchisees get an additional 5 to 10 percent.
Among his other good decisions, Jeffery's glad he created OrderUp from the start with the capacity to expand quickly and seamlessly as the company grew, and he advises other digital franchisors to do the same. "Make sure you really spend the time and money on technology and integrated applications that bring together your email marketing, your CRM tool, your social media and so on," he says. "All those components need to be integrated with your core product--don't just focus on building it, but also the applications around it that will support it from an operational perspective. You'll be successful depending on how scalable you are. Not being able to scale will kill you."