Notorious R.O.B.

Matthew Rathburn puts the NAR Profile of Home Buyers and Sellers 2008 into context. I think it’s worth reading the whole thing, including the cool graphs he’s put together.

Matthew’s got some useful insights from the realtor’s perspective:

Whereas some agents are dwelling on the issue that the Buyer is finding their home on the internet 32% of the time and only 33% of the time by the agent; I prefer to look at the fact that consumers are only find the home they buy in the newspaper less than 3% of the time. Knowing this should help agents save some money. To me, fear of the “future” is less productive than knowledge of the present.

If the seller is demanding expensive newspaper marketing, I can show them this report and then show them all the marketing I can do, just by using Postlets.com. You can show that you’re covering 80% of the most useful marketing venues, just by being an agent, putting a sign in the yard and using MLS with IDX, Postlets, Realtor.com, Zillow, Trulia, Craigslist, etc…

This sounds right to me. But there’s an angle here that Matthew isn’t thinking about.

If the Buyer is finding the home on the Internet 32% of the time, then the price charged by the Agent has to go lower. By how much? Who knows. Even if the total price charged to the Buyer/Seller remains the same, the percentage of that price that goes to the Agent for his labor has to go down, to reflect the investment made in the capital asset of the website by the Agent, or the Broker, or whomever.

The 33% of the buyers found by the Agent directly –> the Agent in that case is bringing more value to the Seller, as compared to the 32% who found the property on the Web.

If the seller is demanding expensive newspaper marketing, but you can show them that just by using Postlets.com, you can cover 80% of the most useful marketing venues, then you also have to be prepared for the seller demanding that you cut your commissions. After all, if you have to do less work, then you should be able to charge less and still make the same profit.

The assumption that technology simply lets an agent make more money is wishful thinking. Consumers also recognize that technology makes your productivity higher, and accordingly, can expect that your price will go down. This is one of the big disconnects in the market today: brokers and agents seem to expect that all of the economic value created by technology will be captured entirely by them, while consumers expect that they will get that value. (Might be useful here to look at Redfin and any of the other rebaters.)

The real outcome is likely in between Agents capture it all, and Consumers capture it all. But rest assured that at least some part of the savings will be passed on to the consumers, like it or not.

-rsh

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