Marc Davison (@1000wattmarc) of 1000watt Consulting is one of the top thinkers and one of the most compelling writers in our industry, and his latest posts on the future of brokerage are examples of why one might think of Marc as Master Yoda of the Real Estate Jedi Academy. You can read part 1 here, and part 2 here. Marc takes on topics that are near and dear to my heart — real estate brokerage models, the future, and branding — and it goes without saying that I have to add my two pennies to the conversation.
As this post is likely to get long, let me summarize briefly at the outset.
I take Marc’s premise at face value (and agree with him), but then extend the solution beyond what he proposes. Our difference in approach lies in our different backgrounds — Marc was trained as a copywriter, and comes out of the branding/advertising world. I trained as an attorney and an entrepreneur, and come out of operations and marketing arenas. As a result, where he sees the need for a complete and effective repositioning, I see the need for a complete and effective reengineering. At the end of the day, we end up at the same place, since repositioning is impossible without a level of reengineering, and reengineering is impossible without a new understanding of brand.
Nonetheless, I believe there are valuable insights to be had by comparing and contrasting our different approaches, so to some extent, I’ll be focusing on differences between our approaches and viewpoints. Again, I think it’s important to keep in mind that Marc and I likely agree far more than we disagree, and that our agreements are fundamental while our differences may be stylistic and relatively minor.
Having said that, let us dive right in.
The Sickness Unto Death
At the outset, I must note that there is no gap between Marc’s diagnosis of the real estate brokerage and mine:
Today’s brokerage is dying. Its value proposition, earnings and moribund branding all are in dire need of defibrillation. Clear!
Its future hangs in the balance. A ghostly spirit invisibly hovers over its stilling life form, hoping for resuscitation and a second chance to exact influence over the marketplace.
As I have pointed out before, a business where the average profit margin is 3% is beyond sick. It is dying. An enterprise where the owners are earning three cents on every dollar of revenues for putting their capital at risk is simply unsustainable. There is little doubt that, as Marc says, brokerages wounded by the “open gash of lopsided splits are now on the gurney as the present model heads for open-heart surgery.”
Marc identifies the causes of the sickness:
Open the brokerage up. Inside, cancer looms. Unlike Virgin America, the brokerage views its customers as leads that it captures, drips, manages and forces to convert through dubious value propositions rather than first-class comfort and engagement.
Many of the agents who brokers recruited brought nothing other than a pulse, a passing grade and a business card to the table. Their qualifications pale in comparison to what Yelp requires for a customer-service position.
From one hand the brokerage baits through a sympathetic understanding that real estate is the most important transaction they will ever make. From the other they switch those who they lead-generate off to the least experienced in the roster who renders the largest split.
Brokerages skimp and save where investing matters most, such as your Web site and agent training, and spend irresponsibly on things that matter least, like space, content and advertising.
All true. Sadly, tragically, everything Marc writes is all too true. However, I cannot follow Marc in condemning brokerages for skimping and saving on the Web and agent training. With such lopsided splits ruling the industry today, it isn’t clear to me that a brokerage should invest in the Web and agent training. For what? To take a profitable agent and turn him into a loss center?
In virtually every other industry, a company loses money on the newbies. A new attorney is a net loss for the law firm that employs her at exorbitant starting salaries; only after two or three years can the firm expect to make money off of that lawyer. A new trader on Wall Street barely knows enough to pick up lunch for the senior traders who have learned the ropes, but the bank will train him up in the hopes of making back that investment many times over in the future. Only in real estate brokerage does the company make more money on the newbie than it does on the veterans. Is it any wonder that a brokerage doesn’t really want to invest in agent training? Why invest in lead generation, bringing in new business, when each individual agent thinks of the client as mine instead of ours?
Where Marc and I start to diverge a bit is in the prescribed course of treatment. Marc believes that the key is to rebrand and to reposition the brokerage brand for the future. He recommends three steps:
- Determine your customer’s frame of reference.
- Connect consumers’ frame of reference to your vision.
- Keep your promises.
Read the whole thing.
Since I just wrote a post where I touched on brand as a promise, and the importance of keeping that promise, I heartily concur with Dr. Davison’s prescribed course of treatment. I just think there are prerequisites.
To refer back to Marc’s own analogy, what the patient needs is open heart surgery, not cosmetic surgery. Determining frames of reference is all good, and keeping the brand promise is necessary — but first, you have to be in a position where you can do something about all of that.
Given the fundamental structural defects in real estate brokerage today, a company can formulate an amazing vision, have a strong brand promise, identify the customer’s frame of reference, and create savvy connectors between the customer’s frame of reference and the company’s brand promise… and still fail miserably. In fact, it is likely that the company will fail miserably unless underlying defects are cured.
This post about the rebranding efforts underway at Yahoo is illustrative of the issue:
The thing is, Yahoo doesn’t need new branding to talk about whatever it’s doing that’s worth talking about. It just has to do it and then talk about it, using all of the tools at its disposal to be authentic, relevant, and meaningful.
What’s worth talking about is operational reality, and the participation of third-parties that can confirm those truths. The branding emerges from that stuff, and isn’t a glossy label slapped over it. And it can’t precede that stuff, either, which is exactly what I worry Yahoo is going to do.
Hiring the big gurus to do their branding thing belies a fundamental unawareness or misunderstanding of the reality that Ms. Bartz herself has referenced…or a blithe willingness to put the company’s marketing way out ahead of what the business can deliver. [Emphasis mine]
Now, I believe that Marc’s repositioning actually attempts to go further than a simple rebranding campaign. Because repositioning includes things like:
For your brokerage of today to be the brokerage of tomorrow, you will have to remove every agent who can’t support that promise — and probably every managing broker who can’t assist in drilling your brand ideals down through the ranks.
But it’s worth spelling things out in case folks read Marc’s writings and think that what he means is a new website, a new slogan, a new “Vision Statement” for the company, and a new logo.
What is important for most real estate brokerages at this stage of the change in the industry is not a repositioning exercise. Rather, what is important is creating a business that can deliver — what is important is operational reality.
The fundamental defects in the operational reality of real estate brokerage are the following:
- Lack of ownership of the customer relationship
- Lack of Management
- Misaligned financial incentives
Lack of profit, lack of training, lack of investment in things that matter — they all stem from these three fundamental problems. Unless these three things are fixed, no amount of brand repositioning can work. In fact, in the absence of structural change, the brand repositioning will end up as an exercise in repetitive futility where a brokerage makes a promise, realizes it can’t keep the promise without eviscerating its bottom line, and be forced to abandon the repositioning.
First and foremost, the real estate brokerage of the future must own the customer relationship. If brokers continue to insist that customers hire individual agents and not firms, then they are doomed to continual irrelevance. Worse yet, they cannot avoid exploiting the agents who are the people bringing in all the business, all the money. There is another industry that works similarly to real estate brokerage of today: pimps. (NOT safe for work. If you click on this link, watch from around the 3:00 mark.) Pimps don’t bring johns to the prostitute; they recruit prostitutes who bring johns in themselves, and take the money. Marc is right to point out that firms spend money on things that don’t add value to customers; what he overlooks is the fact that those things help recruit and retain agents. A beautifully built-out, expensive space in a prime location is like a pimp’s fur coat and alligator shoes; they’re not meant for the customer. This is not a model for success in a legitimate business. Brokerage has to own the customer relationship if it is to provide real value to the agents who are associated with it.
Second, brokers must manage its operations, including agents. Lack of management is endemic in the real estate brokerage industry, based in large part on the “independent contractor” principles which really means, “I don’t have to pay you, and you don’t have to listen to me.” If installing effective management means getting rid of unpaid independent contractors and going to an entirely salaried staff, then that’s what it will take. Like I said, open heart surgery, not a facelift. But for a brokerage to have on its staff people who do two transactions a year is to essentially declare to the world, “We don’t give a damn.” For a brokerage to have agents on ridiculous splits such that every transaction means a loss, rather than a profit, to the firm is to declare, “Our business plan involves going bankrupt.”
Third, the compensation structure has to be changed. The firm must be able to make more money from its experienced veterans than from the newbies. The financial incentives in real estate brokerage is bass ackwards. Every dollar a broker spends training an agent is two dollars he’s throwing away, since the better an agent, the worse the profits from her work. So not only are you out of pocket on the training spend, you’ve just decreased your profitability. For the agent, doing any sort of work that benefits the firm as a whole is a total waste of time. An agent doesn’t get paid to mentor other agents, to write market reports, to go to meetings, or to do any “non-billable” work no matter how valuable to the enterprise and to the customer experience. The agent is entirely out for himself, and every dollar the broker takes looks and feels like exploitation. In fact, current compensation structure positively encourages intra-office competition, since the lead is “mine” not “ours” and I have to look over my shoulders to my deskmate just as if she were sitting at a competitor’s office across town. For the paid staff, since they do not participate in the transaction, they could care less whether the deal is worth $10m or $100K; they get paid the same no matter what. Their interest is to do as little as possible for their paychecks like classic bureaucrats. Neither rebranding nor repositioning can succeed when the incentives are so aligned towards non-cooperation, non-collaboration, and naked competition.
These three things are connected, and there is a rough sequence. Owning the customer relationship naturally leads to the need to manage the operations. If the client belongs to the brokerage firm, then the broker has all sorts of incentives to manage the transaction and the operation to ensure customer satisfaction. The client won’t walk with the fickle agent, who may be recruited by a competitor. The client belongs to the firm. And if the firm is managing the staff to deliver on its promises, to deliver real value that can be replicated, then employees of the firm will need to be compensated differently from today in order to create proper financial incentives for everyone involved: broker, agent, and staff. Otherwise, who takes orders from someone not paying him?
This is the operational reality of brokerage today. And the brokerage of the future will not be created without a new operational reality: one that aligns incentives, manages operations, and creates value for the firm as a whole by delivering hitherto unheard of value to the customers.
Reengineering the Brokerage
As I pointed out at the outset, this sort of reengineering cannot be accomplished without significant thought as to brand and repositioning. Of course a firm will need to identify the customer’s frame of reference, then connect it to the firm’s brand promise, and then work like rabid dogs to fulfill that promise every single day.
I just happen to think that repositioning cannot happen without reengineering first. The problems of brand irrelevance in real estate today arise from structural defects, not the other way around. Fix the underlying structure, and the brand promise cannot but help rise up out of the new operational reality of the new breed of real estate brokerage.
This reengineering is not a technology issue, although it cannot be done without technology. It isn’t simply a discipline issue, although it cannot happen without discipline. It isn’t even a financial issue, although reengineering without financial changes cannot happen. It is, quite simply, a matter of will.
Do the owners and the senior management of brokerage companies today have the will to change? Do they have the will to embrace the risks attendant with reengineering the entire process from the ground up? Do they have the will to alienate many of their “top producers” and invest in things that will enable a new operational reality?
The future of the industry hangs in the balance.