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If you plan to embrace and
excel using any of the new business models emerging in the real estate industry,
it's imperative that you understand and differentiate between unbundled
fee-for-services versus discounted fees. Absent
this knowledge, it could end up costing you consumers as well as hefty dollars
in lost income.
One Working Example: A Trip to the Bakery. You manage a local bakery
that specializes in pies. Each day you price fresh pies to sell in two ways:
- As
an entire pie (bundled) at $8.95
- By
the slice (unbundled, a la carte) charging $2.25 for each of the six
individual pieces.
If a whole pie doesn't sell by the second
day, it's considered stale; and since it's now in competition with fresh pies, a
marketing edge is required.
So you discount the previous day's price to $6.95 even though it took the same
amount of time, cost, and effort to make as did the full-price, fresh pie.
In fact, the day-old pie might even cost you more since it had to be
wrapped and refrigerated over night. Obviously, if your bakery finds that
it's selling more day-old pies than it is fresh, you are slowly going out of
business by not even covering your hard costs of making/baking/marketing pies
let alone generating profit.
Applying Unbundling and Fee Discounting to the Brokerage Business
When you apply the bakery example to real
estate, fresh pie by the piece is an example of unbundled, fee-for-services real
estate. You allow various tasks and services (based on your business
philosophy, policies, and liability) to be accessed by the consumer and charge
for the cost of the service including your profit. Discounting, on the
other hand, is polar to fee-for-services since you offer the entire bundle of
tasks or services (i.e.: listing, sale) but charge less often without covering
the hard costs involved.
Commission price wars between full-service brokerages have infiltrated real
estate markets across the country. In an effort to garner a larger swath of a
market, attract attention, and annihilate the competition, many brokerages are
slashing fees by twenty-five percent or more. In fact, at the mid-year
meeting of the National Association of Realtors® in May, it was stated that
double-sided percentage commissions have dropped to an average of approximately
4.2% across the country.
While touting that they provide full-service
to consumers, formal discount brokers often have little idea the affect reducing
commissions will have on their ability to stay in business and deliver
results-oriented service to consumers. Subsequently, they may trim the
quantity or quality of services the consumer' receives, causing the consumer to
fall short of meeting his objective and end result.
Unfortunately, these shortfalls may not be
apparent to the consumer since the brokerage keeps singing the
"full-service" refrain; however, the discount broker who is not
staying on top of what it costs to stay in business could take a listing today
and be out of business tomorrow!
A sage, professional broker, responding to
an agent who queried when they'd be slashing commissions like discount brokers
in their marketplace, responded, "Never. It makes no sense to
compete with someone who's trying to go out of business!"
Another potential downfall of the discount brokerage model is not understanding
what the exact price-point-plus-profit is for discounted
services provided. Absent this information, the discount brokerage is
likely to erroneously strive for volume, not quality. It's assumed that
the more consumers a discount broker can attract, the lower her pricing
structure can move and still allow her to stay (hopefully) in business.
Discount brokerage is a little like taking
your car to an auto mechanic solely because he quotes the shortest timeframe and
cheapest costs. How does he believe he can accomplish it? With volume.
But doing so, he often sacrifices quality and best results.
Should he find another component of the car
that needs repairing, he may choose to overlook it due to his tight time
schedule and the need to repair more cars. Or he might approach you to pay
additional money to solve the problem. Either way you've lost confidence
in the
mechanic and his business. Over time, he will realize that his focus on
volume instead of quality and best results has destroyed the hope of repeat
customers as well as the prospect of many new ones.
Defending legal actions against the company
erodes what little is left of his bottom line and he's forced to close his
doors.
In addition to discount brokerages, price wars between real estate brokerages
are also precipitated by the onslaught of dot.com companies providing a wide
array of both discounted and unbundled services, many at bargain-basement
prices. Online companies like www.erealty.com, www.cyberhomes.com and
www.ziprealty.com are drawing consumers online by providing cost-effective
alternatives in cyberspace, available 24/7 with unique online and telephone
response systems to make the consumer feel connected, informed and important.
The Bottom Line: Understand How Fee-for-Service Brokerages Differ in
Application from Discount Brokerages
In the final differentiation between discount brokerages and unbundled
fee-for-services companies, it's important to understand how each varies in
application. The discount brokerage assumes that the consumer needs the
whole menu of services and is willing to transfer control to the broker/agent to
attain it. More importantly, fee discounters assume that consumers are
primarily interested in cost, not flexibility and quality of services/tasks
available. In contrast, the fee-for-services company or consultant assumes that
one-size-doesn't-necessarily-fit-all real estate consumers and that some are
capable of performing and orchestrating various parts of the transaction on
their own. Additionally, that some consumers want to exercise more control
over what transpires and desire tailor-made, needs-based results by
working in partnership with the brokerage.
If new business models and services are part of your new horizon, your first
step should be a thorough understanding and differentiation between unbundled
and discounted services. If you fail to understand the distinction between
the two, you may find yourself sacrificing results, consumer satisfaction and
business success at the altar of attempting to save the consumer money.
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