Perspective on commissions

Where did the models come from? We developed them based on a service/consulting fee model I used for over 25 years as an executive with EDS, an IT and Business Process services provider. In fact, it is a business model I have been familiar with for longer than my career with EDS. It is based on Activity Based Costing. Here's the simple explanation:

• Define every direct activity in a process at it's lowest convenient level and determine time and expense for performing that activity. In real estate, there are basically two types of labor activities: administrative (does not require a real estate license) and professional (a licensed agent).
• Group activities into major functions or components
• Develop cost models for each activity and major function
• Do the same for indirect (or overhead) function.
• Spread the indirect cost over the direct expense of each activity as a percentage of direct expense to the total.
• Add a reasonable profit margin (have to be careful not to price yourself out of the market).
• Develop a compelling value proposition on why you are better than everyone else at a competitive price (not necessarily lower) for your services.
• Show potential clients (sellers and buyers) your complete activity list that includes prices (this is called transparency) and collaborate with them on the services necessary to achieve their objective.
• Sign the contract (simple conclusion, there are, of course, other factors for both parties to be comfortable with before you get to this conclusion).

Determining the time and expense is easier than setting a value on your time for the different types of activities. Each individual must come to this conclusion on their own. I will say that it should be based (normally) on your skill level and experience in the business. Just like any other service business I can think of.

Using this model, we rarely let a consumer strictly define what services they want to buy. It is and must be a collaborative effort. Our skills and experiences must be a factor in developing an overall plan. In addition, we developed complimentary models for SELLERS and BUYERS. (Buyers can and will pay their agent when there is a compelling reason to do so. More about that in a future case study).

This is only an introduction to this subject at best. We plan a series of articles that will be real case studies on why it works most of the time and why it doesn't some of the time. Ardell at the Rain City Guide is right:

For now...price matters is the key, and almost none of the discussions anywhere, focus on different fees for different home prices. So basically, they are ALL wrong.

We will attempt to fix that.