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sign-inBleeding is not good for your business' health!
Date: June 26, 2007 4:54 PM
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In real estate today, large numbers of agents are competing for a shrinking market. With unlimited real estate information available online and multitudes of sites competing with, and seeking to replace the agent, the public increasingly looks at the agent (and brokerage), who only offers the traditional full-service package payable only by commission, as a commodity to be shopped by price. Limiting themselves to the traditional commission model, agents and brokerages are indeed swimming in a bloody red ocean of cutthroat competition.
By contrast, real estate consulting, which provides the consumer responsible choices in the services they can obtain and how they can pay for them, while paying the professional fairly for their time, experience, and expertise, creates an "uncontested market space, ripe for growth that makes the competition irrelevant."
While technology and the growth of the Internet provides stiff competition to the traditional model, the sky is the limit when you offer choices such as hourly consulting or a flat fee, while keeping commissions in the mix. The fact is that today's consumer often has needs that just aren't addressed by the traditional full-service model and failure to provide options serves just to send the consumer elsewhere where they will likely get shoddy services and certainly won't get the quality counsel and care that a real estate professional can provide.
But what truly makes real estate consulting a wide open blue ocean is the income that can be earned by assisting consumers that aren't even involved in a transaction (or not yet) such as needing counsel in making the move-versus-improve decision, whether or not to refinance, questions about taxes and assessments. Red oceans? Blue oceans? Read on...
Red Oceans vs. Blue Oceans
In last year's best selling book, "Blue Ocean Strategy", authors Chan Kim and Renee Mauborgne describe how "today's major business successes have come from re-imagining the business at hand." They pointed out how "innovative leaders, who could see beyond the ordinary, have redesigned normal businesses, and even entire industries, because their vision and knowledge prompted them to seek and implement solutions that had not been considered."
I will always be grateful to my friend and colleague Ken Deshaies, who in writing the forward to my book "Ripping the Roof off Real Estate", introduced me to this must-read book. It is the inspiration that gives me the utmost confidence that the real estate industry MUST find new ground to satisfy the changing consumer demands. For those agents, brokers, and owners who are struggling with the declining profits and shrinking margins in today's competitive real estate environment, this book is very instructive. Two companies that the authors study in particular are worth looking at:
Cirque du Soleil: Created in 1984 by a group of street performers, Cirque du Soleil, in less than twenty years achieved a level of revenues that took Ringling Bros. and Barnum & Bailey Circus - the global champion of the circus industry - more than one hundred years to attain. As the authors point out, "what made this rapid growth all the more remarkable is that it was not achieved in an attractive industry, but rather in a declining one." What is particularly instructive about Cirque du Soleil's success was "that it did not win by taking customers from the already shrinking circus industry, which historically catered to children. Instead it appealed to a whole new group of customers: adults and corporate clients prepared to pay a ticket price several times as great that charged by traditional circuses."
Curves: Since franchising began in 1995, the Texas-based women's fitness company has grown like wildfire with total revenues in 2006 exceeding the $1 billion mark. On average, a new Curves opens every four hours somewhere in the world. However, as the authors discuss, what makes their growth really fascinating is that according to the experts, at its inception, "Curves was seen as entering an oversaturated market, yet it exploded demand in the U.S. fitness industry, unlocking a huge untapped market, a veritable "blue ocean" of women struggling and failing to keep in shape through sound fitness." Curves simply responded to what the consumer was asking for, which clearly was not being offered by traditional gyms.
The authors lay out the basic premise of the book as follows: "Imagine a market universe composed of two sorts of oceans: red oceans and blue oceans. In red oceans, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products (and services) become commodities, and cutthroat competition turns the red ocean bloody. Blue oceans, by contrast, are defined by untapped market space, and the opportunity for highly profitable growth. Most blue oceans are created within red oceans by expanding industry's boundaries, as Cirque du Soleil did."
The authors challenge companies to "create uncontested market space, ripe for growth that makes the competition irrelevant. Companies caught in the bloody red ocean follow the conventional approach, fighting to beat the competition within the existing order by dividing up existing - and often shrinking - demand. Blue ocean strategy on the other hand, is about growing demand and breaking away from the competition by creating a leap in value for buyers of their services in wide open blue oceans."
In his forward, Ken referred to consulting as real estate's "blue ocean strategy". In today's struggling real estate industry, with unprecedented online competition and the commission system under attack as it has never been, consulting is a wide open blue ocean, just waiting to be tapped.
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Mollie Wasserman said:
I just received a comment from another agent regarding this article and thought it would be good to address it here. Here is his comment:
Mollie,
Interesting article.Let's take this pre-supposition a little further. Let's suppose that sometime in the future the "Blue Water" concept takes hold on the Real Estate Industry. Now we have a "perfect world" all Blue waters. What do you think will happen?
These tranquil blue waters will turn RED! Why? In order to get the business out there real estate agents will have to compete (just like now) exept for the fact that there will be far lower commissions (or no commissions), and far lower fees. These fees for our services will go even lower! Eventually It will get to a point where it isn't profitable to be in business.
The industry will be in the same position as today but without the ability to make the money that is possible today. At some point in time we real estate agents are forced to either learn to compete or get out of the business. Even if we get to "Eutopia Land" (all Blue Waters) we are going to have to beat our competition to get business. Personally I think that it is far better to learn to compete now, than later where we are all working for nothing.
John Smith Agent
My Response:
Dear John:
I don't believe you understand Consulting. This is NOT discounting. Offering alterntive ways to be paid does not impact you doing your traditional commission transactions. It will not lower your income but instead increase it because you get paid for things that in the traditional model you did for free.
The consumer is not, for the most part, looking for cheap - they are looking for choice. If you give them choices in how they can pay you, many will still choose a tradtional commission because it mitigates their risk. But, by being TRANSPARENT in what you do and how much it costs you to do it, if they choose a commission, they understand that they must pay a premium for that option. Or, they can share the risk with you and pay less but you're guaranteed to be paid.
Offering an hourly rate or a flat fee opens up opportunities to do business with a whole new group of consumers. Case in point: homeowners who may be deciding whether to add on to their house or sell and buy a bigger house. They traditionally do not seek out an agent because:
a) they don't buy that they could possibly get objective advice since one choice will pay you and the other won't.
b) there is no way to pay you for your counsel.
Another example: sometimes, whether we like it or not, sellers will find their own buyer. Sometimes this happens very innocently - they mention to their neighbor that they are thinking of selling and the neighbor has a friend who would love to buy the house. Wala! They have a buyer - now what do they do? This is when they need a professional most but unfortunately, because we don't offer any flexibility, most of the time they go to an attorney to negotiate and troubleshoot their transaction and attorneys can't do this as well because this is NOT what they do. By having an hourly rate, you can offer to negotiate and troubleshoot the transaction, they have expertise and representation for a reasonable cost and you get paid very well for the time you spend and a paycheck that you never would have had!
One more: homeowners are often thinking of refinancing or their tax bill seems high. Many would love to pay a professional to run the numbers and see if it makes sense for them to do a refinance or check their home's assesment. We have lost hundreds of thousands of dollars over the years as an industry because we can't address these "wide open blue oceans" of untapped business.
Our ACRE grads are making a lot of additional income helping folks who don't fall into the traditional "full commission for a full package of services" and getting paid for it. This in no way takes away from their traditional business.
This is what I mean by Blue Oceans - everyone is fighting over the consumers who are looking to buy or sell and will pay by commission. With the growth of technology allowing them to do many functional tasks on their own, our industry's refusal to offer choices simply cuts us out of providing the vital fiduciary counsel that is so needed.
Consulting is not about "not competing". On the contrary, it's about competing and wiping out the competition because you can not only offer the standard fare that everyone else does, you can also tailor your services to their needs. Remember, discounting is about lowering your "contingent-on-an-outcome" pay where you are still shouldering all the risk. Consulting is about offering choices to the consumer both in the types of tasks they need you to perform and how they would like to pay for them.
Commissions are built on high risk - high reward which is why they MUST be high in order to make up for the unpaid work we all do when transactions don't happen. When you work by the hour, or by a flat fee, the consumer is paying for the services themselves, not risk mitigation, and the agent gets paid very well for the expertise and time they provide. BIG point of difference.
I encourage "John" or others to learn more about consulting by reading some of the articles written on this blog or check out what ACRE agents, clients, and industry leaders are saying in the Testimonial section.
Mollie Wasserman