Today, traditional business models are being challenged by a variety of new value-priced business models competing for commission dollars and causing even the best traditional agents to reduce commissions to compete. Instead of creating compelling value, many agents succumb to market pressures and reduce commissions to get the business.
Brokers are also struggling to provide compelling value to their agents, and agents are demanding higher commission splits. To keep competitive, some brokerages are offering 100% splits plus services, paying bonuses to get agents on board or spending big dollars on tech services. Brokerages like Keller Williams, Compass and others are adding value through technology to boost agent productivity and to provide a better consumer experience. Whether broker recruiting strategies are to pay a higher split or to spend big money on technology these moves will inevitably reduce the profits to the brokerage.
With agents reducing their commissions and brokers’ profits being squeezed, it makes you wonder how anyone is going to make any money? Continuing to compete by reducing commissions to the consumer and the split to brokers doesn’t seem like a sustainable business model.
This leads me to talk about technology. It’s expensive to build as evidenced by the 100’s of millions of dollars being spent by the larger brokerage firms! And yet real estate brokerages are either offering tech to their agents for free or claiming they can offer reduced commissions to their customers because of the cost savings derived from deploying technology. Brokerages going down this road are just ignoring the future costs of maintaining, scaling and staying current with their technology. And when agents acquire their own software, they must realize that low cost or freemium models have hidden costs. Agents love free or low fees so how do these tech companies make any money?
You must understand how all this works if we want our entire real estate ecosystem to be intact in the years to come. We cannot all be working for free or nearly free and survive. In the world of software, the freemium model is profitable and sustainable only when the lifetime value of paying customers is larger than the sum cost of acquiring users and producing your goods. This means that software companies using this business model need to create good free software products with limited features so they can get paid through premium upgrades. And/or they need to create additional revenue channels through partnerships or advertising.
If this sounds familiar, it’s because real estate brokerages seem to be on the same path. Since the net profits from real estate sales are being squeezed, brokers must make money from other revenue sources, and they must reduce operating expenses too. We are seeing brokers add mortgage, escrow and other service offerings to offset the loss of income from real estate sales. It wouldn’t surprise me if brokerage websites are capitalizing on paid advertising revenues. There is also a race to obtain better consumer information which will enable agents and the broker to monetize the lifetime value of their clients beyond the closing. I expect brokers to be more engaged with the consumer on behalf of the agent to ensure the maximum lifetime value of the customer. Agents and brokers need to be ready to find additional revenue sources and be able to present extremely compelling reasons why you are worth your commission dollars or broker split. If we cannot do this then FREEMIUM (or nearly free) could become the new real estate business model.
CEO & Founder of RocketUrBiz
“Harnessing Technology, Empowering People”