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Discounting, Brand, and Real Estate

September 5, 2008

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At the recent RISMedia Leadership conference, I walked around listening to the conversation, attending the sessions, and talking to people.  Not suprisingly, the market was very much on people’s minds, and a number of people were talking about pressure on commissions.

That pressure is nothing new, of course.  Discount brokerages have come and gone and stayed and come again.  Rebate models are everywhere on the Web.

In that context, however, I thought it relevant to at least think about this article from MarketingProfs.com:

If your business has experienced a drop in traffic or sales, you may be considering offering discounts to your customers. Sales. Discounts. Markdowns. Perhaps even “Markdown Madness”…?

Offering items at a sale price is a very tempting tactic. In the short term, it drives traffic and sales. What you lose in margin is made up in volume. Problem solved, right?!

Bigger problem, created. What you’re really doing is eroding your long-term margins and your long-term sales. (This is especially true if you run a business based on quality and value versus being a low-price provider.)

The problem with discounts is that customers don’t see the price drop the same way you do.

As a business person, you clearly understand you are temporarily cutting into your own profit to give a little more to the customer and keep their business.

As customers we see it different. The moment you discount, it re-calibrates the perceived value of your products/services. Selling something for $200 today, and discounting for $150 tells us you are making more money on the $200 version… And you’re still making money on the $150 version… so the $200 version was over-priced. The new perceived value, $150.

As a consumer buying something, we get this. As a marketer selling something, we tend to ignore this fact.

I urge everyone to read the whole thing.  It’s really valuable food for thought.

The question at the heart of the post is whether real estate brokerage today is a ‘business based on quality and value’ or a ‘business based on being a low-price provider’.

My sense is that most of the professionals and leaders in the industry think of real estate as a profession based on quality and value.  At the same time, there is this undertow often unspoken (and sometimes spoken) that the brokerage business model is fundamentally broken.

A highly-respected industry executive with a large brokerage flat out told me at the Conference something along the following (paraphrasing bigtime here from memory): “If I sell your house, worth $500K, and collect 3% commission, then I get paid $15,000.  If your house is worth $200K, I only get $6,000.  Do you really think I did $9,000 worth of additional work to sell your $500K house versus your $200K house?  Nobody believes that anymore.  Consumers are getting wise to it.”

Because of this, the recommendations from Marketing Profs do not appear to be on point:

First, if customers are complaining about your prices, make sure you actually aren’t charging too much. Compare yourself with your competition. Recession or not, if you were already dramatically out-pricing the competition without a dramatic difference in quality or service, perhaps you should consider lowering your prices. (I’m not recommending getting yourself into the low-price game, just make sure your higher prices offer higher value.)

Second, instead of giving away money, strategically provide add-on services or products. Instead of discounting the price of a hair cut at the salon, give away a bottle of that great shampoo you used that made my head tingle and hair smell so great. Instead of cutting the price of your website building services, offer a complimentary, 6-month, search engine optimization (SEO) service.

Well, in real estate, the “competition” has the same issues you do.  So it isn’t at all clear that any one broker is “charging too much”.  Furthermore, since the fundamental problem is in explaining percentage-based pricing to consumers, it isn’t clear that the price is “too high” in and of itself.

Furthermore, in a full-service brokerage, it isn’t immediately clear what “add-on” services a broker can provide in lieu of discounts.  Home inspections?  Lawnmowing services?  What?

At the same time, the consumer perception of the value of services is that all realtors are overpaid for the services they provide.

How to get out of this pickle?

-rsh

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15 Comments leave one →
  1. New Homes, Communities permalink
    September 10, 2008 4:54 pm

    Why is the compensation for most sales jobs on a commission basis? Motivation.

  2. September 12, 2008 2:44 pm

    @Chad –

    Wow, thanks for a great and detailed comment. I’m not sure where to begin… but let’s start here.

    Seems to me that your practice is a solid one, that offers consumers the choice. That 95% of them choose the back-end loaded commission deal is good to hear, in part because they had a choice.

    But let’s zone in on this piece (because it’s repeated by other commenters):

    Owners who know anything at all would not accept this fee structure because the agent has no incentive to get the job done… they’re already paid. That, and they’re paid such a small amount (which is why the seller chose this to begin with) that they have no money to actually market the property with. In the end, the home seller pays $1000 and the home often doesn’t sell… so in this scenario, the agent wins and the sellers lose.

    The main issue appears to be that compensation for sales (as New Homes, Communities) mentions is that commissions motivate the salesperson, while flat payment does not.

    Two points about this.

    1. While this works for the seller, it simply does not apply to the buyer rep. If anything, the fact that you are on commission makes me wonder if you as my agent on the buy-side are in fact free from bias and are representing my interests properly.

    I know there are agents and brokers out there who offer paid buyer representation, but for the most part, buy-side agency is a dual-agency or in-reality-seller-rep. So my question is, why don’t more brokers/agents offer flat-rate buyer agency to remove the apparent conflict of interest altogether?

    2. While it may be true that commissions motivate salespeople, that actually works slightly differently than one might think. It is not always the case that just because a salesperson is on commission that she will be focused on maximizing value for the seller; in many cases, the salesperson is maximizing value for herself by under-selling the property.

    At the full 6% commission, an additional $10K in sale price translates to $600. How many agents are going to put in the extra work, hold out for higher offers, market a little harder, etc. to get $600? As the saying goes, a bird in hand is worth two in the bush. This applies to commission salespeople as well. I have personally witnessed far too many salespeople in and out of real estate take the first offer on the table because it means saving two weeks of work for not a lot of gain. Is this really in the seller’s best self-interest? As you write yourself, 4 or 5% of nothing is still nothing. There is an incentive built in to straight commission sales to get a deal done, any deal, rather than waiting for the best deal.

    Furthermore, the commission based sales does mean that lower-priced properties simply aren’t as attractive to sell as higher-priced properties, even if the work required is the same. This is at the heart of the problem, right? You can perform excellent, superlative work, whether my house is worth $100k or $1M. But you get paid 10x the commission for selling a $1M home as you would a $100K home — how does that payday translate to work performed? Is an agent posting 10 times as many flyers for a $1M house as he is for a $100K house?

    I don’t think anyone with even the slightest bit of knowledge believes that being a real estate agent is “easy”. Becoming one is easy, to be sure, but staying one is extraordinarily difficult.

    That does not, however, explain the oddities of real estate service pricing, and why more brokers and agents do not offer multiple payment options for the customer to design the package that makes the most sense for him.

    -rsh

    PS: BTW, it should be pointed out that in a per-hour time & materials basis, the agent can simply charge the client for the cost of marketing the property, and let the customer choose how much he wants to spend on what sort of marketing. So it isn’t necessarily clear to me why a flat-rate customer would always be working with an agent who has no money to conduct marketing.

    PPS: Somehow, other professional services seem to survive just fine on flat pricing. What makes real estate so different?

  3. September 13, 2008 7:31 pm

    One of the most thoughtful posts on pricing and service in real estate that I’ve seen Rob. Way to go!

  4. Gail C. permalink
    December 2, 2008 7:00 pm

    I agree. Wonderful debate. So here is the true million dollar question: are we going to sit around in this downturn housing market while people’s equity shrink or can we get creative – sellers and brokers together – on a new model for marketing homes? My perspective: my husband and I bought a house, are fixing it up with our own blood, sweat and tears (and his skills). We will live in this place for a few years, having survived construction hell, mud, no heat etc. If we are lucky, we will have a margin of 10% over our real expenses, BEFORE he gets paid for his skills/labor. We aren’t going to be able to pay a broker commission of 5-6% and why should we? Isn’t our labor/equity/agita of several years worth more than the efforts of a broker? Why can’t sellers and brokers work together to front-end and back-end the transaction to keep everyone motivated and keep the values in perspective?

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