This blog has moved!

I finally bit the bullet and migrated Notorious R.O.B. to a self-hosted WordPress blog.  This blog, hosted on WordPress.com, will no longer be updated.

Please visit www.notorious-rob.com and modify your bookmarks, permalinks, and blogrolls.

Thanks!

-rsh

Just a heads-up admin note: I’m in the process of migrating this blog over to a self-hosted platform.

Blogging will be light until that is completed.

So now is a good time to go get caught up on some of those 2,500 word monstrosities

-rsh

Brian Boero of 1000watt recounts a dinner conversation and throws down some challenging questions and assertions:

This particular debate centered on the following question:

“Have we reached the end of the real estate story now that FSBOs and discounting have lost their menace?”

As Brian puts it, there were two camps, comprised of him in one camp and everyone else in the other camp:

Methods have changed. Markets have changed. The balance of power between brokers and agents has shifted. Consumers have access to enough data to choke a horse.

But the basic structure of this business remains remarkably intact.

There are two possible conclusions to be taken from this:

A. Real estate is exceptional. The complexities and emotions that characterize the real estate transaction will forever shield it from structural change. Bill Gates, Barry Diller and about a billion dollars in VC have been thrown against the barricade with no transformative impact. The story is over.

B. We’re due for a cataclysm. The forces of change, of technological innovation, of inchoate consumer frustration, are stacked high against the dam of Real Estate As We Know It. It will not – it cannot – hold. The story is far from over.

My dinner pals were in the “A” camp. I argued for “B.”

Given that the whole thrust here is theoretical and futuristic, I can’t help but charge in foolishly where wiser men fear to trod.Basic Structures of the Business

If we’re going to talk about changes to the basic structures of the real estate business, then we must talk a bit about basic structures as they are today.

In my uneducated, and quite possibly ignorant view, there are four key factors.

1. Compensation & Control of Customer Relationship
2. Intermediary Services
3. Non-Commodity Goods
4. Purchase Cycle

Any discussion of “changes to the basic structure” must include changes to one or more of the above four.  Everything else is just cosmetic, incremental changes.

Compensation & Customer Relationship

Compensation today is governed by the 1099 independent contractor status of most agents, coupled to the post-RE/MAX revolution in the relative power between brokers and agents.

According to Jeff Wheeler, COO of Coldwell Banker United, whom I have referenced before, there was a time when consumers worked with the broker, who then farmed out the actual execution to contractors, aka, agents.  Business development and customer relationship management were responsibilities of the broker whose name is on the paperwork.  Compensation, accordingly, was tilted heavily towards the broker, with the agent receiving a smaller percentage of the commission, and perhaps a bonus for bringing in a customer.

After RE/MAX, consumers work with an agent — who is encouraged to develop a book of business and actively market her services to her ’sphere of influence’.  Business development and customer relationship management responsibilities shifted to the agent, and compensation accordingly followed suit.  Splits unheard of in the Broker-centric era became commonplace.

Companies like Keller Williams have taken the model to an extreme: 100% agent splits after a fixed amount (“Cap”).  And even further refinements on the agent-centric model are in development.

I consider this to be a fundamental basic structure of the industry, because the implications are legion.

First, the broker’s business essentially transforms from providing services to buyers/sellers of real estate (aka, brokerage) to providing services to agents.  The oft-maligned “body shop” or “churn and burn” brokerage models of today result directly from the basic compensation/CRM model.  When the broker’s margins from each transaction is tiny, the only way for the broker to make money is to make it up in volume, especially in the high-margin volume of low-performing, high-splits agents.

Consider that a new, part-time agent on a 50/50 split who manages to list her sister’s $300K house will generate $18K in commissions, and $9K for her side.  The broker will take $4,500 from that single transaction.  A high-performing superagent on a 90/10 split will need to do $1.5M in sales to generate $45K in commisions for her side for the broker to generate the same $4,500 in revenues.

Second, with such lower margins, the broker has less and less incentive to reinvest in support costs, such as brand marketing, property marketing, new technology, and the like.  The key question will not be whether such support will result in better brokerage services, but whether such support will result in attracting more agents to the brokerage.  Anything that is unlikely to impact recruiting and retention will be pushed off to the agent, who is now taking home the lion’s share of the brokerage commission.

That in turn, reduces the bond between broker and agent to a point that retention becomes a straightforward comparison between lowest-cost providers as far as the productive agent is concerned.  After all, the broker isn’t exactly providing a whole lot of services to her; why should she stay with that brokerage if the competitor is offering slightly higher splits, or throws in some goodies, or whatever.

Third, as far as the consumer is concerned, his relationship is with the real estate agent, not the brokerage.  Many consumers can’t remember the name of the brokerage to which the agent listing their house belongs.  Nor have they really bothered to learn, because brokerage affiliation has no meaning to them.  The consumers are customers of the agent, not the broker, and if an agent moves or goes independent, she may be assured of taking her book of business with her.

This is the fundamental reality of today’s brokerage industry.

Intermediary Services

Another fundamental fact is that real estate brokerage is about being an intermediary between principals — hence, “brokerage”.  The broker or agent doesn’t own any product, doesn’t produce any product, and actually makes very few decisions regarding purchase or sale of any product.  While real estate agents are fond of talking about “inventory”, it isn’t the same thing as inventory in other industries.

Everyone knows this in their hearts, but few people really apply what this means for marketing, for operations, and for structure.

For example, the Marketing people inside most brokerages concern themselves with marketing properites for sale.  Newspaper ads, online ads, listings syndication, company website, agent websites, etc. are all promoting homes for sale — as if the realtor is a retailer of homes.  She is not.  She is an intermediary providing services to principals.

Closer to home, too many realtors are approaching the Internet, social media, and other such channels using templates from e-commerce, consumer packaged goods, and retail without thinking about whether those templates are valid for intermediaries.  The classic example is the agent whose blog is filled with posts about some listing or another she’s trying to sell.  That might work for a company that makes products — like Apple or BMW — or for retailers who have 3,000 copies of a DVD in stock, but how those posts help market her actual business is unclear.

Non-Commodity Goods

Furthermore, even amongst intermediaries, realtors are unique in that they act as middlemen for non-commodity (and in some respect, un-commoditizable) goods: real estate.

Stockbrokers are intermediaries, but at least they are peddling stocks and bonds, which are easily interchangeable, can be priced as a group, etc.  Creating data on commodity goods is much, much easier — prices on the NASDAQ don’t distinguish between one particular share of MSFT stock vs. another particular share of MSFT stock.

One implication of trading in non-commodity goods is that providing decision support to the client is one of the most important services an intermediary can provide.  Other service elements — such as responsiveness, friendliness, and the like — are all important, but pale in comparison to knowledge.

For example, investment bankers who do M&A work are also dealing in non-commodity goods: companies that are for sale.  And the single biggest service that they provide clients is a pricing opinion.  What do the experts at Goldman Sachs think is the fair value for Acme, Inc.? and does the post-transaction experience bear them out or not? become the key questions to be answered.

From a basic structure standpoint, then, the key ability for a real estate professional to possess is the ability to provide pricing and to back up that opinion.  Whether the majority of realtors actually have that ability is an open question.  Whether brokers and other organizations train real estate agents to provide valuation services, and the degree to which that training is stressed, and to efficacy of such training are all open questions.

Purchase Cycle

The final basic factor — for my current thinking, anyhow, although it’s not only possible but near-certain that I’ve missed a basic factor or two — is the consumer purchase cycle.

The average consumer spends seven years in between real estate transactions.  A newlywed couple who buys their first starter home in 2009 won’t be back in the market until 2016, on average.

This has enormous implications for customer relationship management, for marketing, for branding, and for operations.

For CRM, given the seven year cycle, it’s extremely difficult to establish concepts such as “Best Customer” or “Frequent Flyer” type of approaches that dominate traditional CRM.  Traditional CRM, after all, is concerned mostly with getting customers to be repeat customers — creating brand loyalty and repeat business.  Unless you are dealing with an investor client who is frequently (and always) in the market to acquire and dispose of properties, no matter how good your effort, you have a seven year purchase cycle to work through.

Plus, for such a long-range CRM plan, the materials used have to fit the purchase cycle.  Sending postcards or emails about the Just Sold house down the block, or New Listings This Week, to a couple who bought a new house a year ago isn’t exactly cost-effective.  In fact, it’s likely to get a bunch of “Unsubscribe” notices.

However real estate agents and brokers deal with the changes in consumer behavior, one of the fundamentals they have to consider is the Seven Year Cycle and what that means.

The Next Chapter

When Brian states that the real estate industry is due for a cataclysm, and he points to “forces of change, of technological innovation, of inchoate consumer frustration,” I can’t help but be sympathetic.  There are enough inefficiencies and oxymoronic practices in the industry that the reasonable mind thinks, “Surely, this can’t last….”

At the same time, technological innovation of itself won’t bring about cataclysmic change.  Nor will inchoate consumer rage.  If those types of motivations do not lead to actions which impact one of the fundamental realities of the industry, then we’re looking at cosmetic changes instead.  Realtor.com brought about change, but I would argue that it wasn’t a “fundamental change” because none of the four factors listed (or another one I’ve overlooked) are impacted.  Realtor.com doesn’t change compensation or customer ownership; it doesn’t change real estate agents into retailers or manufacturers; it doesn’t make housing commoditizable; and it doesn’t change the consumer purchase lifecycle.

Looking at it that way, I think only one of the four factors I’ve described is within the control of agents and brokers: compensation and customer ownership.  None of the other three could possibly be changed by technology or consumer rage or changes in the economy or whatever.

In that context, I find this post on ActiveRain interesting (h/t: Pam O’Connor for tweeting it):

It will be exactly what the book Blue Ocean talks about. The change will be the opposite of what is happening in the industry. If every brokerage is focusing on recruiting agents, the new brokerage will focus on quality of agents. The new brokerage will be as the Red Shirt Warriors. Elite agents will be chosen to be part of the brokerage because of their abilities. Not simply because they have a pulse. There will be a subconscious pressure for people to perform the best they can in order to be a part of the elite group.   The change will be 3 fold. 1rst: the brokerage will only focus on quality of agents. 2nd: the structure of how an agent works will change. 3rd: the service given to the consumer will be instant results, knowledge, and services. The consumer will also see the value of this New Brokerage because there won’t be inexperienced agents charging the same commission as the experienced agents. Regarding the change in structure, I’m talking about how agents’ work will change. If you read the E-myth you will read why businesses fail. The New Brokerage which focused on quality agents will have a new structure. Today’s model of an agent’s business fails 90% of the time. The structure will meet the other 10%. What about the service given to clients? 80% of clients browse the internet to look for a home. 70% of those, don’t call their brother or cousin to go look, they drive by the house on their own. The new brokerage model will give these people what they want. The new business model will get these people in the homes that instant, when they want to see it. How do I know? Because I know why people are calling me to help them buy a home instead of calling their brother. I know why other real estate agents are calling me to sell their own homes or to help their clients. I am seeing the change firsthand. People want a higher level of service.[Emphasis added.]

What I can’t quite understand is why “higher quality of agents” leads to a “New Brokerage” structure and model.  If you take the current model, and stock it chock full of “elite agents”, unless there is a change in the compensation structure or the customer ownership, I don’t see how that’s different from your standard model.

Perhaps Utah Dave, the author of the post above, could explain the New Brokerage structure and model.  Perhaps others would provide greater insight, or correct my analysis of the situation.

But until then, the next chapter of the real estate story remains to be written.  When that chapter is written, my bet is on a major shift in compensation and customer ownership.  Everything else is just cosmetics.

-rsh

A really fun discussion on Twitter with Robin Greenbaum (@cobrokenation) led me to just do a very quick, very back-of-napkin, and likely very inaccurate comparison between two rental units.  As Robin pointed out, since comparisons are very difficult, depends on many factors, and the like, no matter what I come up with, this is likely to be wrong.

Nonetheless, I’m curious to see if we might see any interesting bits of data.

One unit is a 1BR at 22 River Terrace, a luxury rental building constructed in 2001:

22 River Terrace

Detailed info can be found here, but the vitals of the unit are:

Floorplan, 22 River Terrace

725 sq. ft., monthly rent of $2,880, 23rd floor but facing east (aka, no river views).  I know the floorplan is hard as heck to see, but it’s pretty standard fare for NYC apartments.

The second unit is located at The Verdesian, a LEED Platinum certified building located right by 22 River Place.  See the map here.

LEED Platinum certified, The Verdesian

The Verdesian is a newer building, built in 2006, and LEED Platinum is not given to just about anybody with a solar panel or two.  There was quite a lot of thought and technology devoted to the building.

The unit here is a 1BR as well:

Floorplan of 1BR at Verdesian

The vitals here are:

750 sq. ft, $3,065 per month, and east-facing on the 13th floor.  Clearly, the little alcovey “Den” area means a smaller living room, but the floorplan might be better for some, worse for others.  Who can say?

On a straight $$/sq.ft. basis, however, the difference is only $0.12 between the newer, eco-friendly unit and the older, non-green unit: $3.97/sq. ft. for 22 River Terrace vs. $4.09/sq. ft. for The Verdesian.  If we hold the square footage equal at 725, that means a monthly rental difference of $87.00.

To my untrained, unpracticed, and non-realtor eyes, this seems rather insignificant and would tilt the decision towards the Verdesian.  According to GreenbuildingsNYC.com, the Verdesian’s advanced systems, EnergyStar appliances, and various other design & architectural choices, means a 40% savings on electric bills for residents.

According to ConEdison, the average NYC resident can expect to pay $104.97 per month in electric bills.  A 40% savings on electricity alone is $41.99 per month.  Nearly half of the “green premium” (if that’s what it is) is taken care of simply from savings in electric bills.

Now add in the fact that The Verdesian is five years newer, and offers “Fresh filtered air, continuously humidified or dehumidified, depending on climate conditions” to every unit, and it isn’t clear to me that the green premium starts to head towards zero.

Again, comparing different units, different buildings, with slightly different amenities and the like is hazarding error.  But it does seem significant to me that the actual cost difference may be as low as $45 or so per month — less than the cost of a cup of Starbucks latte per day.

If this is true, then the green premium at least in the NYC rental market is heading towards zero, and renters really have to ask why they would go to a non-green building vs. a green building.

I for one would love to see some real comparisons by real professionals — realtors, appraisers, I summon thee!

-rsh

PS: Note that I am a heretic when it comes to anthropogenic global warming hype, so this has nothing to do with religious views on carbon footprints and such nonsense.

This is NOT for a Thrift play...

In part 1, I started to talk about marketing in a consumer environment when the middle is disappearing.  My basic hyopthesis is that the American consumer today operates in one of two modes: Thrift and Aspiration.  Thrift mode means a focus on price above all; Aspiration means a focus on luxury, lifestyle, or something more than “mere product”.

To apply these thoughts to the marketing of real estate, I asked a few questions, of which the first one is the topic for this post:

• If the Middle is disappearing, and the two dominant modes of consumers are Thrift and Aspirational… have you considered how you are positioning properties not only to demographics, but also to psychographic profiles?

Let me attempt to tackle this question and explore what real estate marketing of a property in a post-middle era might look like.

Marketing Real Estate Property

Apart from the luxury market, real estate today is marketed as if each house were a bottle of shampoo.  Actually, I take that back.  Most shampoo advertising has more thought behind how it is positioned.

Look at this rather typical listing that I found at random:

Typical Real Estate Listing, Circa 2009

This is from an otherwise decent website, from an agent belonging to a major brokerage company, Allen Tate.  The number of photos at least is encouraging, which makes this listing far from the worst (or even the average) one might find on the Interwebs.

Nonetheless, here’s the “Description” of this $450,000 home:

MAGNIFICENT WIELAND HOME W/ELAB AMENITY PKG INCLUDES; NEW PLASMA TV, RIDING MOWER & BEAUT REFRIG! $175,000 BELOW RECENT SALE OF SAME PLAN! GORGEOUS GRANITE KIT, 2-STY GRT RM W/SOARING CEIL’GS, EXTENS HARDWOODS ON MAIN, MAIN LVL OFFICE & FULL BA, HUGE FIN 3RD FLR ALSO W/FULL BA, DESIGNER UPGR THRUOUT, SURROUND SOUND & BI SPKRS IN KEY RMS; LRG LOT OVERLKS SCENIC PARK & POND IN DESIRABLE GOLF CLUB!

Yes, the all-caps was in the original description — an unfortunate holdover from the newspaper advertising days, and clear evidence that this realtor simply doesn’t understand the Internet at all.  (All caps implies shouting on the Internet.)  Not to mention the odd newspaper-classified style abbreviations: “ELAB AMENITY PKG”.  This is the WEB with unlimited space for cryin’ out loud.  Spell out the damn words.

/rant

What other marketing is deployed to promote this near-half-million-dollar home?  We get a list of “Features”:

.

Of course this information is important — at some point, a serious buyer is going to want to know these things and more.  But what sort of marketing is it to put this chart at the very top of a listing?  Who is this property aimed at?  What’s the main value proposition?

I submit that none of these questions have been asked.  The realtor has simply done data entry, as she has always done, as it has always been done since the days of paper MLS books, with no thought at all to actual marketing.

Post-Middle Marketing: Thrift

Let’s say for the sake of discussion that $450K for a single family house is inexpensive for the area.  The description of the listing above actually says, “$175,000 BELOW RECENT SALE OF SAME PLAN!”

This is for the down payment... you got time, right?

If the agent wanted to market this property to the Thrift minded shopper, the approach would be dictated by that strategic choice, and the listing would be positioned accordingly.

For example, the <title> tag on the page is: “14602 Hollow Wood Rd., Huntersville NC 28078 (Skybrook  Subdivision” blah blah blah.”  A Thrift-focused approach would perhaps dictate a <title> tag like: “Unbelievable Bargain!” or “Super deal in Huntersville, NC” or some such.

The Description might be something more like:

Don’t miss this incredible bargain in the Skybrook Subdivision!  Priced 30% below comparable floorplans, this fantastic 5 BR, 5BA home is an absolute steal at $450K.  Blah blah blah.

The point is to appeal directly to the Thrift mindset, which is mostly concerned with price above all.

Photos are important, but when aimed at a Thrift consumer, rather than a long list of Features, perhaps a simple side-by-side comparison showing that this property is actually far cheaper than comparable properties may be more effective.

One might include things like Rent vs. Buy analysis, using this property as an example, to show that because $450K is so cheap, it’s more cost effective to buy this house than to rent a similar house in the area.  (Assuming that’s true, of course.)

There are a dozen other strategies and tactics that can be considered — e.g., a mailing list comprised solely of ‘Bargain Hunters’, blog posts highlighting the “Best Deals of the Week”, data showing how the property is below-market price-wise, etc. — once the initial decision to market the property to the Thrift consumer is made.

I can think of no good reason to use this photo here. Except... why not?

Post-Middle Marketing: Aspirational

The more interesting and more difficult strategy, of course, is to convert the ho-hum no-thought marketing to an appeal to the Aspirational buyer.  Because now, you have to think quite a lot about lifestyle.

Who would aspire to this particular home?  Who can afford it?  What are they like?  What’s the median HH income for the area?  Is this for the thirtysomething couple with a new baby?  At 5BR, 5BA… I’m leaning towards No.  Is this an upgrade for the young couple that has seen some success?

Whatever the thinking, to do Aspirational marketing, it helps to do things like constructing a buyer profile.  I see no reason why real estate would be any different.

Here’s what a sample buyer profile might look like for a $450K 5BR/5BA house in the Charlotte region:

Mr. Smith is a 42 year old partner at a law firm in Charlotte, and Mrs. Smith is a 37 year old interior decorator.  They have two children, age 11 and 8.  They have been living in their starter home in Charlotte — a $200K 3BR/1.5BA ranch which they purchased for $150K in 2002 — for the past seven years.  With Mr. Smith’s continual success at his firm, the Smiths have decided that it is time for the family to move to a “real home” more appropriate for a young lawyer on the rise to entertain clients and contacts, with more space for the children, and with room for a home office for Mrs. Smith who would like to devote more time to her interior decorating business.

Their household income is $225K a year, and they have roughly $180K in assets, excluding their house.  Mr. Smith recently paid off his law school loans, and Mrs. Smith is starting to see her business pick up.  Even in a down economy, the Smiths feel pretty fortunate, and think this is a perfect buying opportunity.

While the children are most important to the Smiths, both children attend private school in Charlotte, and the Smiths are planning on continuing to send them to private schools, with an eye towards boarding school once the children are older.

The Smiths are ski enthusiasts, taking a weeklong family ski vacation to Vail every winter, and they enjoy fine dining.  One of their concerns is to be near good restaurants for their weekly “date night”.

Mr. Smith drives a late-model mid-range Mercedes, while Mrs. Smith drives the family car, a Range Rover SUV.  They selected the cars in part because of the image of professional success, without ostentatious wealth, which they convey.

Mr. Smith is a huge college football fan, having attended Auburn, and is an overall sports fan.  He regularly goes out with other sports-fan attorneys from his firm for SEC games, for baseball games, and enjoys going to Panthers games.  Mrs. Smith, a former Art History major, is very involved with the arts and drags her husband to gallery openings, art shows, and takes her children to art museums as often as possible.

Etc. etc. and so on and so forth.  Buyer profiles can get as long as you need to, as detailed as you like, with information on magazine subscriptions, TV programs watched, favorite movies, and the like.

Is this your buyer's profile? Do they love the possessed baby?

The point is to imagine what the consumer might be like.  Then to look at it and see if it makes any sense.  Properly done, the buyer profiles allow the marketer (or the realtor in this case) to check against facts and data to see if she’s making good or bad judgments about the Aspirational consumer.

For example, the median household income in Charlotte, NC is $52,690.  The median price of detached single family houses is $269,730.  Given that, one might ask a reasonable question whether a family making $225K a year is really the appropriate target for a $450K house.  The house price is not even double the median house price, but the family income is four times the median income.

Perhaps there are things about the house, the surrounding neighborhood, and other factors that make the Smiths the right buyer profile.  If not, the buyer profile has to be adjusted to a couple making about $105K a year, and cascade throughout the profile scenario.

Having identified the appropriate Aspirations, the marketing then must be shaped around those key points.  The price, while important, is never the most important factor to the Aspirational consumer: what the purchase means for their lifestyle, what image/message it sends, what the purchase says about the consumer are really more important.

So, for example, the Description for the property above might be something more like this:

Live the life you’ve always wanted in the tranquil prestigious Skybrook Community.  This grand 5 BR/5BA home is perfect for formal entertaining with a two-story great room with soaring ceilings and a restaurant-caliber professional kitchen.  Designed with the successful professional in mind, the floorplan includes an office suite on the ground floor fully wired for high-speed access.

Get away from the hub-bub of the city and take quiet evening walks on the scenic park next door with a landscaped pond. Etc.

I have no idea whether that copy is any good or not, but the point is to emphasize the significance of owning this home, emphasizing what it would be like to live there.

Aspirational marketing is far more difficult precisely because you never really know what it is that the consumer aspires to.  So multiple campaigns/messages may need to be crafted that appeals to different aspects of the Aspirational consumer.  And targeting becomes a real issue.

Moving on up, to the east side

Social media and social networking may be powerful tools in assisting in this aspirational marketing.  As long as you’re being honest, authentic, and truthful, if the home is in fact perfect for the up-and-coming middle aged couple, then making living in that home as part of the overall lifestyle package of the successful middle aged couple is not a problem.

The main thing is to know that in Aspirational marketing, you are selling a vision, not a product.  You are selling a dream, not a house.  You are selling a self-image, a lifestyle, an identity, not a bunch of bricks and wood.

Think Apple is selling an MP3 player with an iPod?  Think again.

Think Mercedes-Benz is selling a car?  Think again.

Think Ralph Lauren is selling shirts and pants?  Think again.

If you were selling a dream, a vision, how would the listing for 14602 Hollow Wood Rd. be different from the ho-hum, zero-thought approach of today?

Finally, the Significant Danger

Lastly, but not least, consider the danger of being in the middle, as the middle disappears.

Where a house is positioned as neither a bargain nor something to aspire to, who exactly is this appealing to?  A “decent house for a decent price” is not, I submit, a winning proposition in today’s consumer mindset.  That approach, I believe, will automatically default to the Thrift mindset, since there’s nothing to aspire to with such a property, people will simply look at its price relative to comparables.

The task, then, for the professional marketer (and realtor) will be to help the decisionmaker — in this case, the owner who is listing the home — decide how to position the property.  Should it be marketed as an Aspirational to a potential buyer for whom it would actually be a move up in the world?  Or can the seller price the property at a point where, despite its actual dollar cost, it can be positioned as a major bargain?

Doing neither is a significant danger.

-rsh

Image: David Armano, Logic + Emotion

Thanks to Brandie Young’s wonderful post, I found David Amano’s thought-provoking post on “Marketing in a Post-Consumer Era”.  It’s worth reading in full.  Actually, they’re both worth reading in full.

I couldn’t help immediately reacting, however, with skepticism.

Perhaps it’s because the last time we were in a recession, we heard the same thing: conspicuous consumption is out, and frugality is in!  Since then, we have seen an absolute explosion of conspicuous consumerism, celebrity worship taking over as the official culture of the United States, and a continual denigration of the average middle American lifestyle in our cultural institutions.  (I for one do not recall “Walmart” being a dirty word back in the recession of the early 90’s.)

For example, take a look at the Top 10 TV shows for 2008 vs. 1990.

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Shows like Cheers, Roseanne, and The Golden Girls were not about beautiful people doing glamorous things.  Rather, they tried to at least portray something positive (true or not, given that it is television we’re talking about) about the average American lifestyle.

Impossible in 2009?

In contrast, not a single top 10 show on TV in 2008 even tries to portray the average American lifestyle, nevermind in a positive way.  The reality TV shows are contests either to become a pop star or to win $1m in a jungle somewhere.  Two medical dramas about beautiful doctors having sex with each other and saving lives are hardly “average American lifestyle” — for that matter, they’re not even presenting the average American doctor lifestyle.  Then we have pure fantasy fare like Heroes and Lost.

Meanwhile, every morning and every night, Americans are bombarded with celebrity news, celebrity gossip, buy magazines devoted to following the fabulous lives of celebrities (People is the 12th largest magazine in the country by total paid & verified, and grew in 2008 from 2007), and spend hours and hours at Today studios to get on TV for 30 seconds.

I just don’t know that I believe consumers have embraced the culture of “living within their means” and rejecting consumption.

Numbers?

All of the above are mere observations.  What about the numbers?

David Amano cites an article from The Economist purporting to show that the global trend is away from consumption:

Asked whether they want more stuff, consumers in rich countries have responded with an emphatic “No”. The breathtaking speed with which retail sales have plummeted in both America and Europe (see chart) has caught retailers and manufacturers by surprise. In response, companies have tried desperately to prop up revenues using a variety of promotions, advertising and other marketing ploys, often to no avail.

But as they battle with these immediate problems, marketers are also pondering what longer-term changes in consumer behaviour have been triggered by the recession. It is tempting to conclude that, once economies rebound, customers will start spending again as they did before. Yet there are good reasons to think that what promises to be the worst downturn since the Depression will spark profound shifts in shoppers’ psychology.  (Emphasis mine)

Yet, the rest of the article provides pretty thin soup when it comes to identifying these “profound shifts in psychology”.  The Economist says, for example:

Sociologists also detect a distinct change in people’s behaviour. Until the downturn, folk had come to assume that “affluence” was the norm, even if they had to go deeply into debt to pay for gadgets and baubles. Now many people no longer seem consumed by the desire to consume; instead, they are planning to live within their means, and there has been a backlash against bling.

Really? Sociologists?  Which ones?  In what study? Using what data?  Why are these unnamed, unquoted Sociologists deemed reliable?  And are we talking two Sociologists or twenty thousand?  Is there consensus now in the Sociology field (a dismal discipline if there has ever been one) that consumer psychology has permanently shifted?

Maybe it’s just me, but I don’t know that you can make grand claims about the psychological state of millions of people without at least providing some sort of backup beyond unnamed, unnumbered Sociologists.

The second reason why The Economist feel justified in talking about a permanent shift towards thrift is an as-yet-unpublished BCG study showing that people have greater distrust of big business.  Um… okay.  And that has to do with thrift… in what way?  Bling brands like Chanel and Cartier aren’t seen as “big business”… so why would people being pissed at Bank of America and GE mean there’s a permanent shift?

This isn’t analysis or trend predictions; it’s more like wishful thinking.

In contrast — and this being a frikkin blogpost, as opposed to an article for a respected business magazine, I’m not spending hours of research on this — let me give you some numbers:

Total iPhone Sales, in millions of units

Unless you are prepared to argue that the iPhone, which costs $199 with a two-year commitment to AT&T Wireless (and who knows how much in other countries), is a necessity for 17,377,000 people worldwide… I daresay that the reports of the death of consumerism are greatly exaggerated.

Whole Foods (NASDAQ: WMFI) reported that its 2008 revenues jumped to $7.9B from $6.6B in 2007.  Now, you may be in the demographic that believe Whole Foods is fully worth the cost, and organic milk is a necessity, but can we at least agree that this data point is inconsistent with a “profound shift” in consumer psychology towards thrift?

Another interesting fact: in 2008, Rolls Royce set a new sales record, and marked the sixth consecutive year of sales growth.

Now, let’s be fair — one can find tons of counter-examples.  Luxury brands are seeing demand dry up.  Luxury retailers are getting hammered.  Champagne sales are down.

But there’s a pretty big gap between, “People ain’t got no money now, so they’re not buying bling” to “People no longer want bling.”  Especially to a marketer.

Marketing In a Post-Middle Era

I think what is actually happening — and has been happening for years — is that the psychological middle has been disappearing in America.  Can’t speak to global consumers, but for U.S. consumers, that’s been going on for a while.

Due to trends in marketing, culture, media, entertainment, and society as a whole, I believe that Americans are now in either a Thrift mode or an Aspirational mode, with nothing in between.

Aspirational, Fo' Sho'

Put in terms of apparel brands, I believe the American consumer either wants the cheapest cheap pair of jeans from Walmart or Old Navy, or the $297True Religion designer jeans.  They no longer want the $65 mid-priced Levis sold in department stores.  I base this partly on Levi Strauss & Co’s 2008 Annual Report, which shows that 2008 revenues from North America were down compared to 2007, which in turn was down compared to 2006.  Levi’s is making its money in Europe and Asia, not the U.S.  Plus, friends who work in retail tell me that Levi’s these days is making sales in mass merchant channels (e.g., Walmart, Costco, etc.) rather than higher-priced department stores.

When marketers like David Armano talk about new strategies for marketing, I think it is useful to look at those strategies through the now-bifurcated Thrift vs. Aspirational consumer psychology.  For example, Armano writes:

As my diagram illustrates, marketing can not longer be a 360 degree “blitz” that assaults consumers with reasons to buy. The future of business will be simple. Providing better products, better experiences and providing indisputable value through things like services will get the right people saying the right things about you. This means there’s going to be a Darwinism effect at play here. Inferior brands, services and marketing strategies are going to fall on deaf ears and wither away while superior brands with more relevant and meaningful ways of connecting with their customers will prevail. We must remember that the social web DOES NOT create recommendations (or criticisms), it only amplifies them and accelerates the speed at which they spread. (Emphasis added)

The first thought is that “getting the right people saying the right things about you” is absolutely perfect for the Aspirational brand, products, and services.  But that is relatively useless for Thrift brands, products, and services because consumers are really only looking at one thing in Thrift mode: price.

For example, take gasoline.  Despite attempts by refiners to say their gasoline is higher-performing, or has cleaning chemicals in it, or saves the earth, or whatever… consumers are going to buy gas based mostly on price alone.  No amount of “relevant and meaningful ways of connecting with their customer” will matter one bit if your gasoline is $1.86 a gallon and the BP across the street is $1.75 a gallon.  You probably lost the sale, bub.

This is not to say that Aspirational mode disregards price.  The annual Barney’s New York Warehouse Sale is a madhouse, as one example.  Folks like to save money.  But there’s a big difference in saving money on something you want in the first place, vs. choosing a product based on price.

Nor is this observation meant to disparage the very real work that marketers have to do to go from a Broadcast model of marketing to a Conversational model.  It is, however, to point out that the tool one would use is based on the need.  You don’t use blogs and Twitter and recommendation marketing to promote pure commodity products, where the power of social web is low.  But you don’t use the “BUY BUY BUY!” screeching to sell unique luxury goods either.

One Implication

If I am right about how culture and mass psychology is moving us away from a broad embrace of the Middle towards a Thrift vs. Aspirational modes, then there is one clear implication: You don’t want to be the guy in the Middle.

You don’t want to be Macy’s competing with Target and Walmart on the low-end (price/Thrift) and competing with Barney’s New York on the high-end (Aspirational).  You don’t want to be Tommy Hilfiger competing with Walmart’s in-house brand on the low-end, and True Religion on the high end.  You don’t want to be the brand that is too expensive to compete on price, but not quite hip or cool enough to compete on aspirations.

Next Time, On As The R.O.B. Turns…

So all this is fine and good, but what does it mean?  If you’re a regular reader, you know that I deal mostly with marketing, technology, and real estate.  All this talk about iPhones and $300 jeans is interesting, but how does it apply to me?

That, dear friends, will have to wait for the next installment, since this already got to 1,800 words.  But some questions to prep:

• If the Middle is disappearing, and the two dominant modes of consumers are Thrift and Aspirational… have you considered how you are positioning properties not only to demographics, but also to psychographic profiles?
• Are your services marketed as Thrift or Aspirational?  What does it mean to market services in an Aspirational way?
• Consider your brand, both personal and organizational.  Are you positioned as the Low-Cost Provider or the Aspirational Luxury Provider, or the Middle-of-the-Road A Bit of This and a Bit of That Provider?  What are the implications going forward?

To be continued…

-rsh

Last night’s Lucky Strike Social Media Club (LSSMC) dinner featured a presentation by Phil Thomas DiGiulio (@holaphil) of Wellcomemat on “Video and Social Media”.  I thought it was an interesting topic in and of itself, and am grateful to Phil for coming by to have the conversation with us.

During the dinner — as is normal for LSSMC — a topic came up that I thought needed more elaboration and discussion.  One of the sub-themes of social media and its impact on marketing is how professional it ought to be.  Should companies, for example, have an “official” corporate Twitter handle, like @onboard?  What topics are appropriate for a corporate blog?  And so on.

Video, as it turns out, is directly implicated in this sub-theme.

Professional vs. Confessional

One of the biggest barriers to implementing video as a marketing strategy is cost.  I have priced out what it would cost to have a professional video made for my employer, and the ease with which one can spend $15K on a 3 minute video is staggering.

Video is inherently a more difficult medium for an amateur.  Video editing — even as it is made easier with technology — remains a more technical, a more difficult, and a more expensive proposition than editing text.  Simply consider the fact that you may need to buy a piece of software to edit video.  And that’s assuming that you have the visual aesthetic sense, a talent for crafting narrative using motion pictures, and skill with blending sound and image and motion — all of which are somewhat specialized skills.

Phil usually recommends that you hire a professional to do a well-crafted video, and for good reasons.

On the flipside, however, there has been a growing trend in the world of video towards a more intimate, more amateur, and more “raw” approach.  Perhaps the explosive popularity of reality TV is reprogramming our cultural expectations.  Perhaps the wide availability of cheap equipment and editing software is bringing “moviemaking” to the masses.  The popularization of sites like YouTube certainly helps to spread video works that wouldn’t have seen the light of day in earlier times.

For example, Nigahiga is one of the top subscribed channels on YouTube.  This is a typical video:

While Nigahiga videos are hilarious, with decent editing, a story, and some really funny actors, part of the appeal is its extremely amateurish production values.  The exact same script, exact same actors, exact same everything, but done professionally by a TV production crew would be horrible.  Audiences would be making fun of the terrible script, the bad acting, and the not-so-funny jokes.

Why is that?

Audience Expectations: Artifice

I think the reason is that the modern audience grew up in the era of mass media.  Few of us remember a time before movies, a time before television.  The Millenials don’t remember a time before the Internet.  Few Gen-Xers remember a time before VCR’s.

Movies and TV are a part and parcel of our culture, our memories, and even our identities to some extent.  As we grew up surrounded by filmed entertainment, our knowledge of and expectations of motion pictures have also grown.  We are no longer fascinated, as the first viewers of movies were, by grainy black and white footage of a train pulling into the station, over and over and over again.

As filmmakers advance their art, as TV producers get savvier, as actors and directors and lightning and sound engineers and editors and the rest of the production industry continue to improve their art and technology, our expectations of professionals continue to rise as well.

Just last decade, CGI was a big deal special effects wise.  We audience members oooh’ed and aahh’ed at movies like Terminator 2 and Jurassic Park.  Today, we take CGI for granted, and harshly criticize crappy CGI work.

The result of all this improvement and sophistication on the part of the audience — as a direct response to the continual improvement by industry-leaders in film and television — is that we hold professionals to a far higher standard.  We are so jaded by movies, by TV, by big explosions, by car chases, and special effects that to break through our awareness and make an impact requires something extraordinary.

For example, this Sprint ad:

From a marketer’s perspective, having worked at an ad agency, the level of execution on that video/ad is incredibly high.  The amount of thought that went into it, the CGI-work, the models, the video shoots, the ad copy, the script, the voiceover work… all of it likely required thousands upon thousands of manhours of work by some of the best and brightest in the advertising industry — namely, Goodby, Silverstein & Partners, the winner of the 2008 Ad Agency of the Year by AdWeek.

That is the level of skill, of art, needed to break through with professional video.

In contrast, when the audience is confronted by video that is clearly not professional, and is intended not to be professional, then the expectation changes.

Audience Expectations: Humanity

The Nigahiga video on YouTube embedded above is a perfect example of changed expectations.  The martial arts fighting sequence in the Nigahiga video is hilarious precisely because it is so amateurish, and intentionally so.  What the viewer is responding to isn’t the technical perfection of the fight scene, but the humor and the personality of the actors (and the filmmaker) as evidenced by their staged “fight scene”.

What the audience expects in an amateur production is humanity, not artifice.  They want authenticity and personality, rather than perfect execution.

In that situation, I believe that the bad lighting, the bad acting, and low production values are a bonus rather than a detriment.  They help to create authenticity.

The Nigahiga videos would not be improved by professional lighting, or a soundstage.  They would be hurt by it.  Getting professional actors to act out the skits would not make the videos more interesting or more entertaining; I rather think professional acting would make the videos less entertaining.

This is, frankly, the connection to “social media”.  Video, I think, has a unique ability to help viewers assess the honesty and authenticity of the person on camera.  Visual cues, speech patterns, the facial expression, gestures — all of these things help a viewer decide whether the person they are viewing is “keepin’ it real” or faking it.

If you understand social media properly — that is, as an expression of the Cluetrain concept of authentic human connection, rather than as a collection of technology tools — then you will implicitly grasp that video is just another tool for that expression.  Based on that, you can make decisions on whether and how to use video to maximum effect.

Danger, Will Robinson, Danger!

There is, however, real danger with video, and one that I don’t think is well enough understood.

The danger is not the unprofessional video with shaky cameras and bad lighting.  No, the real danger is the mediocre professional video.

Because the audience expectation is so high when it comes to professional work, in order to avoid looking like an idiot, your execution must be extraordinary.  This is both prohibitively expensive and incredibly difficult.  The difficulty is easily illustrated with this video from Cyberhomes (which is a good company of good, smart people):

The cheesy stock photography, the horrible music, the “professional” voiceover, all combine to make what is a deadly boring corporate video.  This is not to say that the team at Cyberhomes didn’t do a good job — it did.  But the video is not extraordinary, and it couldn’t possibly be — it isn’t a Goodby Silverstein campaign costing millions of dollars.

Once the decision was made to go the “professional” route, Cyberhomes could not help but fall into the “crappy corporate video” hellhole, not because of anything its team or videographer or editor did, but because what they could not possibly do given the likely budget for something like this.

There is a price for artifice.  A rather significant one in the current media environment.

If you are unwilling or unable to pay that price, then your video project is doomed from the start.  It may be a better strategy to go the other way and go for an amateurish, human connection driven video play instead.

I think Jim Duncan’s “hey, I’m talking on camera while I’m driving somewhere in my car” videos are absolutely fascinating.  Unfortunately, I can’t embed them on a WP.com blog, so go view a sample here.  An embeddable sample is from Robin Greenbaum, of Prudential Douglas Elliman, in New York:

The parts where Robin’s real voice comes through, when she’s giving her opinions and views rather than when she’s reading off some description of the Windermere, are fantastic.  She sounds like a human being, like an interesting person with strong views, with whom one might be able to have a conversation.

And that, my friends, is social media.

-rsh

One of the most valuable pieces of data in our industry, I think, is the annual Power Broker Report and Survey conducted by RISMedia.  The 2008 edition is no exception, and is available here.  I highly recommend it if you’re interested in our industry as a whole.

I like to play with the numbers as soon as I can get my hands on them.  I’ll probably be writing about one or more aspects of this over the next few weeks, but thought I would share some interesting tidbits.

I only looked at the top 750 brokerage companies in the survey report because the numbers started getting wacky.  For example, the #961 company did 13 transactions totalling $70,000 in volume in 2008.  That just doesn’t sound right — either there’s a data entry error, or that company ain’t in business no mo’.

Plus, I excluded the top three companies: NRT, HomeServices of America, and Long & Foster, simply because they are such outliers that they really skewed the results.  For example, #3 Long and Foster more than doubled the sales volume of the #4 company, Prudential Douglas Elliman.

In any case, here are some numbers to chew on:

• The average number of transactions in 2008 was 1,894; the median, however, was 931.
• The average sales volume in 2008 was $498.2m; the median was $208.6m.
• Assuming a 2.5% GCI rate, the average GCI for the Top 750 was $12.5m, with the median coming in at $5.2m.
• Assuming a 26.7% company dollar retained (taken from the 2007 REALTrends Brokerage Performance Report), the average Company Dollar was $3.33m, with the median at $1.39m.
• The companies in the Top 750 employ an average of 271 agents; the median number comes in at 128 agents.
• The average GCI per agent is $53,444, while the median GCI per agent is $38,031.
• The average Company Dollar per agent is $14,269; the median is $10,154.
• In total, the top 750 companies added 43,906 agents in 2008, while 51,753 agents “left” — a net loss of 7,847 agents.  (Note that there’s a pretty good likelihood that many of the 51K agents who “left” went to another company, and forms a portion of the 43.9K number.)
• Similarly, 293 offices were opened in 2008, while 355 offices were shuttered, a net loss of 62 offices among the Top 750 companies (less the top 3 outliers).
• Regardless of the above disclaimer about outliers, among the Top 15 companies ranked by sales volume, the #1 company (NRT) did more than #2 – #14 combined: $132B vs. $131.8B.
• If you take the Top 15 companies by Sales Volume and re-rank them by GCI Per Agent, the only company to appear on both lists is Keller Williams Realty, Oklahoma City, who is #7 on Sales Volume and #6 on GCI/Agent with $403K in GCI produced per agent.  This would make them the most efficient large brokerage in the country.  (At least, based on calculation assumptions.)
• The second most efficient company in the Top 15 by Sales volume is Alain Pinel Realtors, who is #9 in sales volume and #28 on GCI/Agent with $115K in GCI produced per agent.  Incidentally, the #1 company, NRT, is 158th in GCI/Agent with $65K GCI per agent according to this report.
• Without question, Keller Williams dominates the Top 750 list in terms of brokerages represented under its brand.  337 of the top 750 are Keller Williams franchises.  Coming in second is RE/MAX with 141 of the top 750.  Coldwell Banker comes in third with 50 franchises.

There are more interesting tidbits, and there are conclusions to be drawn from the information.  But for now, I thought some of the above was pretty interesting.

More to come.

-rsh

I had a roommate in college who was an architecture major as an undergrad.  He was such an insufferable snob — for example, in the entire year we lived together, he never watched any movie that wasn’t by Fellini — that my view of architecture and architects may have been unfairly colored.

Thankfully, I recently learned just how fascinating architects are, especially in the post-Green era.  So I started to dig around just a bit.

And I must ask… why aren’t architects blogging more?

I asked this question on Twitter and LinkedIn and got some interesting responses, but thought to expand on them here.

Seriously Compelling Content

Blogs are, of course, for those who work with the written word.  At the same time, there’s no denying that pictures and graphics liven up what would otherwise be a wall of text.  Architecture is inherently a visual medium, but one that requires quite a bit of explanation (via words) to appreciate it fully.

For example, look at The Visionaire, a new building by the Albanese Organization, designed by Rafael Pelli.

The Visionaire, by Rafael Pelli

That’s a beautiful building.  And a beautiful image.  There are more stunning images of gorgeous buildings in the world of architects.  Look at this image from Centerbrook:

Discovery Research Center, Dekalb Plant Genetics Corp.

Unlike artists, however, architects have to create buildings that people work in, shop in, play in, and live in.  There are layers upon layers of things going on that I had no idea even existed.

For example, solar path.  It makes perfect sense once it’s explained, but until it is, it’s one of those things that a normal person rarely (if ever) thinks about.

Solar path diagram

Architects routinely think about stuff like this, as well as all of the engineering that goes into a project.  I heard Stephan Kieran of KieranTimberlake spend a good 5 minutes talking about a wall.  With cross-section diagrams, showing heatmaps.  I rather think he could have gone on for a good half-hour just about a wall.  Maybe more.

And all of it is fascinating, because so much of it is simply a brilliant exercise of human ingenuity.  Intelligence, applied.

Plus, architects write.  Centerbrook has published a freakin’ book.  And here’s the whole list of their publications.

And last, but not least, non-architects are genuinely interested in architecture.  It is an art form, after all, and one that impacts the average person’s life in subtle and not-so-subtle ways.  Every New Yorker knows that a part of his identity is tied up with the skyline, the buidings, the iconic ones like Empire State, and the forgettable brownstones lining 11th street.  Every homeowner lives every day with the result of decisions made by some architect or three.  People are interested in architecture.

The whole heady mixture says to me, “Blog!”

Thankfully, some architects are starting to get into the blogosphere.

KieranTimberlake has a blog.  Unfortunately, KT seems to use it mostly as a repository for press releases, which makes it basically useless.  I learned through LinkedIn that Modative has a blog, and it’s quite good.  (I’ve linked to it in a new blogroll category.)  Most of the other architecture blogs appear to be written by critics, academics, journalists, and so on, rather than by practicing architects.  If you know of blogs by architects, please send along the link, or post it in the comments.

Effective Marketing?

Turning to the topic as a marketer, rather than a new kid-in-candy-store enthusiast, I confess that I am puzzled why more architects wouldn’t blog.  It strikes me as almost the ideal marketing vehicle for the profession.

Perhaps the bigtime developers who hire architects for the most part grow up in the industry and know all the architects they’ll ever want to know.  Maybe the plethora of design and architecture magazines makes it unnecessary for architects to market themselves.

If you’re Skidmore, Owings & Merrill, maybe blogging just isn’t something you need to do.

But what about all those who aren’t already world-famous architects?  How would a potential client know to hire you?  What does he judge you on?

I ask because I genuinely do not know, never having hired an architect, nor having been one.  But since architecture is still a services-based profession, where one’s intelligence, wisdom, judgement, aesthetics, philosophy, and temperament all come into play, it seems to me that letting people know who you are, how you think, what interests you, and what your design philosophies are would be an excellent way to let like-minded clients find you.

Sharing knowledge, sharing insight, and being a genuine, authentic person are proving to be the most important method of marketing in the post-Cluetrain world.  Architects have knowledge, have insight, and are human beings — get on the cluetrain!  Let the world know your views on things.  Talk about projects as an insider.  Let us see that you’ve put in hours of thought into just how sunlight should strike the window at a precise angle at 3PM on a Friday in April.

Let us behind the curtain.  We may have no idea what you’re talking about, but we will recognize that you do.

So architects of the world, unite in blogging and social media!  You have nothing to lose but your aura of mystery.

-rsh

If you could go ahead and try to go virtual, that'd be great, okay?

Let us talk about land.  About buildings.  The pure physicality of bricks, wood, steel beams, stairways, elevators, walls and roofs.  You know, real estate.

Normally, the conversation would be all about homes, condos, and the like — the stuff of the daily business of realtors and consumers.  But I have in mind a slightly different take.

Let’s discuss brokerage offices.

This topic has been swirling around the industry for quite some time now, but a few recent events brought it into focus for me.

First, the LeadingRE Conference in Scottsdale.  I got to speak with Matt Dollinger quite a bit while out there, and thanks to Pam O’Connor’s graciousness, I had the opportunity to hear some of the top broker-owners in the country talk about some of their top issues. The cost of leasing office space and how to minimize it was a frequent topic of discussion.

Second, a brief conversation on Twitter with Derek Massey (@derekmassey) about the desirability of virtual setups vs. physical offices.

Third, conversations off and on with people like Joe Ferrara (@jfsellsius), Eric Stegemann (@ericstegemann), and others who are either trying to start or thinking heavily about “virtual brokerages” with no overhead for office space.

Fourth, this report the existence of which just crossed my RSS feed: Beyond Brick and Mortar, Rethinking the Real Estate Office.  I haven’t read it, and at $299 for a copy, I’m not likely to read it anytime soon.  But if you have, or plan to, please let us know what the findings are.

Direct Cost…

The direct cost of brokerage office is actual, measurable, and large.  According to the RealTrends 2007 Brokerage Performance Report (yes, I need to get the 2008 report), all respondents had Rent & Related Occupancy costs that came in at 4.94% of GCI.  This figure, however, is a bit misleading in my opinion, because rent and occupancy costs are paid entirely by the brokerage.

Since average company dollar is 26.7% among respondents, the actual direct cost is about 3.7 times the GCI figure in terms of impact on the bottomline.  For example, a company with $10m in GCI would end up with $2.6m in company dollar.  Occupancy costs, at 4.94% of GCI is $494,000 or 18.5% of company dollar.

Add in the 0.83% of GCI for Supplies (pens, paper, etc.) that having a physical office necessitates, and we’re looking at 21.6% of company dollar going to expenses associated with having physical space.

In contrast, the combined expenses for Communications (e.g., telephone, high-speed internet, etc.) and Technology (e.g., website) for respondents were 5.1% of company dollar.  Even if you assume that going to a virtual brokerage setup would double the cost of Communications and Technology, we’re looking at 10% of company dollar expenses vs. 21%.

A 50% reduction in cost is something anyone is going to look at, especially now.

vs. Indirect Cost

There is, however, another side to the equation.  Actually, two other sides.  That makes no sense at all, so I suppose it’s more like two factors on the other side.

First, agent productivity.

Some of the brokers at the LeadingRE show expressed the view that agents are unquestionably more productive when they are sitting together in a physical office.  Unfortunately, I don’t know that there is any study or data available on the relationship between office and productivity.  Are we talking a 100% improvement or a 1% improvement?

The impact of productivity is far-ranging, however.  Let’s take that hypothetical brokerage from above and extend the analysis.  Based on my bad math, it goes something like this:

To do $10m in GCI, at an assumed rate of 2.5% per side, and a avg. Home Price of $250,000, that brokerage had to do 1,600 transaction sides totalling $400m in volume.

If we further assume that every agent did 20 transactions, that translates to 80 agents.  (Now, I know the reality is 80/20 rule, where 20% of the agents do 80% of the transactions, but for simplicity’s sake, let’s pretend they’re all robots.)

A 10% decrease in agent productivity by going virtual means a loss of $1m in GCI, resulting in a $267K in lost company dollar.  The net savings from shutting down the office then is only $227K.  If the productivity loss is 20%, then Hypo Realty ends up losing $40K from the ‘cost-saving’ move as the $534K loss in company dollar more than offsets the $494K in savings.

Second factor, however, is agent splits.  One of the justifications for a brokerage charging a split is to pay for overhead, such as office space.  Get rid of that, and it seems unlikely that the brokerage can maintain the same splits.

Moving from a 26.7% company dollar scenario to a 5% decrease — 21.7% company dollar — means that even if the productivity loss is only 10%, Hyop Realty is now losing $140K from its ‘cost-saving’ measure: decline of $717K in company dollar vs. saving $494K in rent.

All of a sudden, going all virtual doesn’t seem quite so attractive.

And neither of these factors take into account possible ’soft’ costs, such as loss of brand value due to not having any storefront space in a highly visible street, or possibly a more difficult time in recruiting, or any of the other hard-to-measure impacts.

So What’s the Answer?

Because the financial ‘model’ above is so quick and dirty, it may be that there’s a balance point, especially given the 80/20 rule of productivity where you provide office space to your most productive 20% and gain the benefits of that, while saving on occupancy costs for the 80% who aren’t producing much anyhow.

Without analyzing a particular company’s financials and its market conditions — e.g., prevailing rents for store-front office space — it’s impossible to say whether Virtual is better or Physical is better.

But I figure folks more knowledgeable than I will step forth and provide further insight.  In particular, I think some sort of metrics of agent productivity would be enormously helpful.  Perhaps the Inman report has that answer.

Looking forward to your thoughts.

-rsh