It’s not all doom and gloom. There are opportunities, and it’s not too late to execute a plan
In the book, Moneyball by Michael Lewis, the complete reinvention of a baseball team was chronicled. In the 16 years since the Oakland A’s leadership team looked to data to help make talent selection a science, virtually every sport at every level in America has been fundamentally changed. Winning games and making a profit while doing so turns out to be guided by more than chance regardless of which sport. As Paul DePodesta, who with Billy Beane, re-engineered the Oakland A’s, said at our Gathering of Eagles conference five years ago said, it starts with the Naïve Question—“If we weren’t doing things the way we are, how would we be doing them?”
A recent article in The Wall Street Journal commented on the billions (yes, billions) of dollars that the airline industry makes on their affinity group credit cards as well as on baggage fees. The article pointed out that without these additional revenue sources the airlines might not be profitable at all.
Several leaders of one of the nation’s leading real estate organizations where we were discussing how to deal with lower-cost new competitors were asked, “How does it feel to go from being the hunter to being hunted?”
A separate conversation with a group of brokerage leaders from a different national organization who were among the original low-cost competitors, who were discussing the myriad of new, even lower-cost competitors led to a statement (paraphrased), “Well, we started it 40 years ago—what did we think was going to happen?”
RE/MAX founder Dave Liniger, at the recent RE/MAX broker-owner conference, relayed what a senior level business executive from outside of the brokerage industry had to say, “in the environment today and in the future, you will either be unique or cheap.”
Courses of Action
REAL Trends has written that the future is for brokerage firms to either be a Walmart or a Nordstrom. It appears that that time is coming soon to do so. For brokerage firms, one must choose to be one or the other. The good news is that there are many opportunities and there’s time to make that choice and execute a strategy to get there. But leaders are going to have to make a decision.
When asked at a recent gathering of young future leaders what the future holds, we responded by saying the following:
First, if it were only about the money for all the agents, most brokerage firms would already be out of business. There are always lower-cost brokerage models available or firms offering higher splits. The fact is it is not only about the money all the time for all the agents.
Second, every firm should plan on more of an à la carte basis for their brokerage. Bundled offerings to a large group of agents are not working today as it did in the past as a strategy. A great example is while brokerage firms expend enormous amounts of time on technology, few see more than 30 to 40 percent adoption of their platform offerings.
Third, every firm should plan on how to operate its business at a Gross Margin of 11 to 12 percent within the next three years. That’s already the rough average of brokerage firms representing nearly one-half of all the agents on the REAL Trends 500.
Each firm must look inside to charge service fees for those services that agents do want individually. These may include service charges for risk management, marketing, technology, education and more. Secondarily, each firm must look to other related core services, such as mortgage, title, escrow, property casualty insurance, residential property management, among others, to increase the revenue and profit potential from each customer. This is no longer a nice thing to have; it may make a difference in your survival.
Technology is Not Just for Agents
As we pointed out in our article, “Where Value Resides,” about gross margins and teams one of the most significant opportunities may lie in how to build a lead generation capability and tie that to the recruitment and development of new agents. While our recent consumer study shows that 69 percent of buyers and sellers use a referral from a trusted source as the most important way they choose a real estate professional, that leaves over 30 percent who use some other method. This is not all about online lead generation. For instance, we’ve recommended that all employees develop personal databases and that companies should be engaging them in connecting these people with their agents. Ten employees each with 100 personal contacts with a 1.5 percent conversion rate would be 15 potential closings.
In recruiting both new and experienced agents, what criteria are you using to help you more effectively contact those who most closely align with you and your value offering? One brokerage firm we know has made a science out of identifying which group of agents has the most affinity with their offerings and who have the highest propensity to move from one brokerage or another. We know that two national firms are using big data approaches to identify and connect with recruits using this technique.
Lastly, it’s known that you can choose to be unique, but it probably means you will be smaller. Keep in mind that in the world of cell phones, Apple is far smaller in market share than those devices using Android technology. Apple is far more profitable (and for those who haven’t been watching just passed $1.1 trillion in market value). Cheap does not mean cheap services. It does mean low cost. How efficient can you be? Unique means developing an actual environment of customization targeted towards a small group of those willing to pay a premium for your services or products. It also means saying no quite a bit.
The brokerage business will survive and prosper in the years to come. And just like many of us wondered about that through the last 40 years given three housing recessions and numerous challenges from new lower-cost competition, so too, should we all pay attention to making the changes it will take to survive and prosper in the years ahead