(Part 1 is here)
So in the last post, I made the case that Redfin 3.0 is significant because of who made the decision. Redfin was and remains (a) an innovator in brokerage business models, (b) a technology leader, and (c) led by smart people who don’t make snap decisions. Their decision to move away from the whoever happens to be available brokerage-to-consumer model to a one-to-one agent-to-consumer model suggests that perhaps the real estate transaction is so emotional, so psychological, so personal that consumers cannot form a relationship with any company or brand, but only with another human being.
In this part, I explore the possible consequences of that assumption: real estate consumers can and will form a customer relationship only with a human being. I believe that assumption has real implications for the hot topics the industry is debating and talking about today.
The Anti-Redfin Poster Child: Keller Williams
If there is a major company/brand that stands for the opposite of the Redfin proposition of broker-centricity, it has to be Keller Williams. This is a major brand (the second largest in the United States by agent count) that explicitly and publicly rejects the idea that the broker’s brand matters at all. Here’s a 2010 video released by KW making this very point:
And here’s the second video by KW, which leverages research done by NAR to support the proposition that the only thing that matters to real estate consumers is the agent:
KW doesn’t just talk the talk of agent-centricity; it actually walks the walk as well. Like Redfin, you don’t have to like KW or agree with their philosophy, but you do have to agree that KW has done a whole lot more than just talk about being focused on the agent. For example, all of the technology decisions of KW is filtered through something called the Agent Technology Council. Other companies might consult agents, get their feedback, etc. but I’m not aware of any that actually puts the decision directly in the hands of a group of agents.
There are a couple of consequences that arise from the KW agent-centric model.
The Consequences of Agentcentricity
The first and easy one is that any sort of brand advertising or corporate branding is a waste of time and money. I think it’s fair to say that Gary Keller and the people of KW are thrilled that competitor like Century 21 spent millions of dollars on brand advertising in the SuperBowl. I couldn’t find any reports on what the impact of the SuperBowl ad was on C21 (including say traffic to century21.com) but I don’t suppose we’ll see the February data until next month.
The second consequence is made plain by Mark Willis, the CEO of KWRI, in the 2012 Swanepoel Trends Report. I don’t have the report handy as I’m on the road, but the essential point that he made was that KWRI believes that agent count is still a most important measure of success, and that KWRI focuses a good deal of time, resources, and attention to recruiting agents into their system.
If the Redfin 3.0 decision points to the idea that customer loyalty can go only to a human being, then the implication is that the brokerage should focus on increasing the number of human beings with whom a customer can interface. This is essentially what Willis is saying: agent count matters, so we recruit continuously.
There is a corollary here as well. If the brokerage’s brand doesn’t matter positively in customer relationships, then it doesn’t matter negatively either. Look at the first video above. One man says “A great company with a great name could have a bad individual; I’d rather have a good individual”. The unspoken implication is, “A bad company with a bad name could have a good individual.” The company simply does not matter.
The rational thing to do as a broker, given this insight, is to recruit as many agents as possible, without particular care and concern about “agent quality”. Just as a positive experience with an agent does not then reflect back upon the company, but adheres to the agent, a negative experience does not reflect back either.
Of course, there are minimal standards — no brokerage wants to get sued, since they are the ones who will be held legally liable for an agent’s malpractice. But as long as what the agent is doing or not doing won’t get lawyers involved, I don’t see any reason why the brokerage should care all that much about recruiting “only the best”. Given how emotional and subjective real estate appears to be, it isn’t clear that what one consumer would consider good is what another would consider good in any event.
This is not to suggest that in the real world, Keller Williams doesn’t care about agent quality. If anything, they care a great deal. KWRI thinks of itself as a training organization that happens to run a real estate company. Most fairminded observers would agree that KW tends to put its agents through more, rather than less, training compared to its competitors not named Redfin. And the training yields benefits like increased sales which leads to increased royalties and splits and so on.
The salient point is that none of that training, none of that focus on agent quality creates (nor are they intended to create) any sort of corporate brand or corporate brand promise. The rational strategy for brokerages, then, is to examine the ROI of recruiting the best, spending money on training, equipping them with top notch technology, etc. vs. the ROI of simply recruiting as many agents as possible while spending as little as possible on ancillary services.
Because “brokerage brand means nothing” cuts both ways: if a great brand doesn’t attract consumers, then a terrible brand doesn’t repel them either. It’s all about the agent, and the more you have, higher your likelihood of having consumers attach themselves to one or more of your army of agents.
In a very real sense, Redfin 3.0 would validate the business practices of the so-called “Big Box Brokerages” that the RE.net is so fond of bashing.
The Consequences of Technology’s Failure to Build Customer Relationships
The larger and more important consequence of Redfin 3.0 is that if the thesis is borne out, the implication is that technology cannot and does not result in control of the customer relationship. That then raises the question of whether the brokerage company should invest in technology at all, and if so, to what purpose?
I don’t have the financials, of course, but I would be willing to bet that Redfin spends more on technology than just about any large (multi-state, multi-office) brokerage company in America, at least as a percentage of revenues. Furthermore, Redfin does not buy its technology off-the-shelf from a variety of vendors like so many other brokerages do, resulting in very little product differentiation. Redfin builds its own technology or customizes whatever it buys heavily to fit its particular model and its particular vision.
Even with Redfin 3.0, Glenn makes it clear that Redfin will continue to differentiate itself from other brokerages through technology:
We’ve also deepened our technology differentiation. We now give every customer electronic signatures, online tour scheduling, uploaded notes and photos from their tours, email and web marketing for their listing, online insights from listings we’ve previewed, and a digital Deal Room for tracking escrow deadlines and tasks.
This technology won’t substitute for personal relationships, but personal relationships won’t substitute for technology either. A modern brokerage can’t compete without both, and without creating a new covenant between consumers and agents. The old model is broken in some ways, but it works in others. With Redfin 3.0, our humble hope is to give our customers the best of both.
What I wonder about is (a) is that really differentiation?, and (b) what for?
My first observation is that there are dozens of vendors who either provide or would like to provide all the various and sundry tools that Redfin mentions. And differentiation on a technology basis — if it isn’t to capture the customer relationship — strikes me as fragile, since anyone could buy such a product more or less off-the-shelf. Digital signatures, for example, can be had from Docusign; transaction management from Dotloop, and so on and so forth. Of course Redfin’s execution might be better than (or worse than) the off-the-shelf stuff, but I’m not convinced that the difference is dramatic enough.
The second question, however, is far more pertinent. If customer relationships in real estate must go through an individual agent, and brokerage brand does not matter one way or the other, then the brokerage’s ROI in technology investment looks like this:
Technology Investment < (Company Dollar Per Agent x # of Agents)
Company Dollar in turn breaks down as: CD = (Volume * Home Price * Broker Split) + Fees
The investment has to result in increases in one of five numbers — Volume, Price, Split, Fees… or # of Agents.
Given that we have assumed the thesis (that technology does not lead to control over customer relationships), I’m unclear on how such things then impact Volume or Home Price. I suppose the notion is that by equipping the agent with cutting edge technology, a consumer is more likely to list or buy with that agent, and list or buy higher priced homes with that agent.
Here’s the thing: who has the greater incentive to make that investment? The agent who captures the lion’s share of the commissions, holds the customer relationship, cultivates those longterm relationships, etc. or the broker who is on the short-end of the splits? We see this played out in the real world at, once again, Keller Williams. Top producing KW agents and agent teams routinely purchase their own technology solutions, ones they believe fit their business needs best. And most agents, being the people who hold the customer relationship, would prefer to have the technology fit their workflow processes, their unique approaches to building and maintaining relationships, and their level of technology competence.
I’m also unclear how how technology investment impacts the broker split positively — the notion might be that since the brokerage is providing XYZ technology, the agent will reduce her split from say 80% to 75%. I’ve not ever seen that happen, though exceptions might exist.
The two most common ways I have seen brokerages generate ROI from tech investment is by increasing Fees (e.g., even KW had to charge $10/mo to provide eEdge) and by increasing the number of Agents… and quite frankly, most agents are annoyed by a constant drip drip of fees.
Ergo, my tentative conclusion is that the rational strategy for a brokerage — assuming the thesis of Redfin 3.0 — is to invest in technology only to the extent that it will result in more Agents. Then provide them the freedom to go purchase their own technology with their own money.
It is a tentative conclusion because we may find that the Redfin 3.0 model, where salaried agents use a one-size-fits-all system provided by Redfin to build and maintain customer relationships, leads to greater market share (i.e., more customers) and higher price points. I’m skeptical since individuals are all so different, work at such different paces, have different ways of relating to different people. It seems somewhat counterintuitive to believe that all the different personalities and skillsets can be served equally effectively with a single technology platform.
We shall see.
In Part 3, I’d like to explore these implications even further. The consequences above — that brand doesn’t matter at all, and that technology ROI comes mostly from increasing the number of agents — have implications themselves. The main one, at least as I sit here thinking about it now, is that the rational strategy for the brokerage of the future may be to think of themselves as a wholesaler, rather than as a professional services company.
More to come….