Why Lower-Priced Competition is Gaining Share

Guest blogger Steve Murray is publisher of REAL Trends

In the early 1980s, leading brokerage firms had a tough choice to make. RE/MAX was gaining traction and brokers were entering an era they had not experienced—that of strong price competition for their best agents.

The choice was stark: 1) Keep splits where they were, invest heavily in agent services and probably lose share, or 2) Meet the new split levels, retain agents and cut costs, or 3) Conversely add significant numbers of new, lower-producing agents to make up for the decline in gross margin? Most large firms chose number 3.

Today, many of those choices remain the same. Strong, lower-priced competition (those paying higher splits or capping company revenue contributions) are gaining share and brokers are faced with reducing costs (and agent services) or increasing agent services, trying to retain gross margin. In all likelihood, they will still lose some share to the lower-priced competition.

Complicating these decisions are the loss of revenue and earnings from mortgage, title and other settlement services brought on by the various regulatory bodies that now say what was acceptable is now unacceptable. Many brokers gave ground on their gross margin due to earnings from these core services over the past 15 years and now find it difficult to regain previous levels in today’s market.

What is the Solution?

Some leading brokerage firms are entering new businesses, such as residential property management, commercial brokerage, and property casualty insurance. Each has its plusses and minuses, but all take time to build to a level where the earnings from such endeavors can make up for the loss in settlement services.

Others are getting serious about corporate lead generation and conversion where they can generate a higher margin business through their brokerage. Many others are pursuing a significant reduction in fixed costs, such as space and personnel where such assets are not directly related to the production of sales.

Each of these strategies has its plusses and minuses. Some can produce immediate positive results to the earnings of the firm, and some take much longer to produce a meaningful difference. This much is true, the decline of gross margin has been underway since the early 1980s and is not likely to stop.

In Canada, the typical gross margin is nearly 16 percent more than the 19.5 percent average in the United States. The likelihood it will decline further is higher than the likelihood that it will increase.

Strong Culture

There are those who have not given much ground on shifting more revenues to the agents and who have strong, profitable companies. It takes a strong stomach to place more emphasis on strong culture, accountability to standards and profitability than to focus on size and market share.

Just like so many high-end luxury goods and services providers, it is harder to prove value than it is cut price as a way of growing. As an example, Mercedes-Benz will never be the largest car seller in the world, but they are certainly among the most profitable.

The main point is that all brokerage firms are coming to grips with this environment in their way, and they chose from some of the strategies listed above. However, the decision is no different than it was 35 years ago–value or share? Having both is going to get much more difficult in the years ahead.

This article originally appeared in the October 2015 issue of the REAL Trends Newsletter and was reprinted with permission of REAL Trends Inc. Copyright 2015.

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