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15 January 2009

Inman Connect: Scrub Your P&L

Inman Connect: Scrub Your P&L

Last week, I was on a panel at the Inman Connect conference that was part of a broker/owner forum focused on “Building the Lean, Mean and Profitable Real Estate Brokerage of the Future.”  I was joined by John Vatistas of Russ Lyon Sotheby’s International Realty and John Reinhardt of Fillmore Real Estate. With a goal of identifying savings in the typical brokerage P&L, we were asked by our moderator, Brian Boero of 1000Watt Consulting, to focus on three key areas: physical space, commission splits, and marketing.

To highlight in somewhat broad strokes what I discussed:

  1. These three areas are related: When planning a change to one, consider how it could impact the other two.  Whenever possible, tie changes together as part of a cohesive, strategic repositioning of your brokerage.  For example, if you are considering reducing your office size (or radically rethinking what your space could look like), reallocate those savings to your web presence — in effect, moving money from your physical office to your virtual office.  Furthermore, to oversimplify a bit, commission splits could be tied to office size by moving them in opposite directions: more space, lower splits.  Less space, higher splits.
  2. Consider indexing your commission plan.  All of your other expenses are impacted by inflation.  This is the single biggest expense item on the P&L yet most broker/owners allow this cost to creep higher and higher as a percentage of their revenues simply because they don’t index.
  3. Measure, measure, measure.  It’s one of our many mantras here at Better Homes and Gardens Real Estate.  Too many companies are still flying in the dark when there’s data available that might guide them towards increased profitability.  Here are three of my favorite brokerage data points:
  • Productivity Per Square Foot.  We could borrow a lot of analytics from the retail world.  How much are you really generating for each square foot of office space?  Compare your profits per square foot over time, across offices, etc.  Get whatever data you can to compare it to your competition.  I hate to be so glum, but think of it as a sanity check to see if you would be better off subleasing some space.
  • Modified Percent Retained.  Take your “percent retained” (or gross margin), which is your company dollar (or gross profits) divided by revenues (GCI), and further reduce the company dollar by your total marketing spend.  I like looking at this across offices.  For example, an office with $1,000,000 GCI, $640,000 in commission expense, and $120,000 in marketing would have 36{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} retained and 24{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} modified retained.  If you compared it to an identically-sized office with $700,000 commission expense but only $20,000 in marketing, you would be right to say splits in the second are much higher than the first, but when the trade-off is much lower advertising and a better modified percent retained they may, in fact, be better off.
  • Marketing Return.  There is no reason for any broker not to know what their return is for each form of marketing, yet so very few track this.  Identify the source of each of your closings.  Total the gross profits from those closings, and divide that figure by the total amount you spent on that particular form of advertising.  For example, assume you spent $40,000 in your local newspaper and your ads there led to 20 closings that generated $45,000 in gross profits.  Now assume you also spent $12,000 marketing in a particular website and that led to 25 closings that generated $60,000 in gross profits.  Clearly, the latter method is more efficient (by over 4x).  It may not mean you completely abandon the first method, but you may be underutilizing the second.  The analysis isn’t always so clean, but there is plenty to be learned (by you, your agents, and your customers) about where your marketing dollars are best spent.

Let’s keep scrubbing these P&L’s until they’re clean!

4 thoughts on “Inman Connect: Scrub Your P&L

  1. All good and practical points. I would add that one should be continually expanding and simplifying how s/he views what is being measured.

    My son collects rocks. But what’s interesting about him is that he doesn’t try to fill his room with cool stones, but instead he identifies certain characteristics of rocks (e.g. smooth, colorful, etc) and is always looking for the best of these. When he finds an improved version, he throws the old one in the yard (or sometimes the dining room table).

    Your “Modified Percent Retained” is a great metric that I plan on stealing for MAP Core . But rather than adding a new line I will look to replace an existing one, or even two if I can. That will allow our brokers to focus on key indicators, and not get lost in the mass of support detail available.

    J

  2. Jeff – good point. Analytics are fluid; they change with time, circumstances, preferences, etc. And the idea of dropping one when implementing another is valid. Reminds me of the friend who says she never adds anything to her closet without donating something old to goodwill.

  3. Nicolai –

    Great, great post. I do have a couple of questions, however.

    1. “Productivity / Sq. Ft” –> This is something brokers should measure, but then you go directly into Profit / Sq. Ft.

    Are the two identical in your mind? Productivity classically is “output per unit of production” and for RE, it isn’t clear to me that “profit” is the output, as it were.

    Would you track GCI/sq. ft. or Sides/sq. ft. or anything else as well?

    I suppose in short, what are the key indicators of Productivity for brokerages in your mind?

    2. For Modified % Retained… why only deduct total marketing spend? Are you looking to measure some sort of revenue efficiency?

    3. In terms of tracking marketing ROI… this is something all brokers should do, but you should know that this is a notoriously squirrely thing to track or even identify.

    Back when I was still at Realogy, we had a number of meetings with the other marketing folks to try and nail down ROI from various initiatives. The trouble we ran into was dealing with the actual transaction. E.g., customer goes to NRT’s website, clicks on a house, requests a showing, and is connected to an agent. Three months later, that consumer buys a totally different house in a different town from a ERA agent that the original NRT agent referred him to. Do we count that as ROI on the website?

    For that matter, with long purchase cycles, it isn’t even clear that a marketing spend that took place in Feb, resulting in a transaction in October, can be connected effectively.

    Any thoughts/suggestions on cleanly connecting leads to transactions for real estate, so that ROI and other metrics can be calculated?

    -rsh

  4. @Rob – I’ll try to answer one by one:

    #1 – my preference is to always boil down to bottom line, so profit per square foot is the ultimate goal (I vaguely named it “productivity per square foot” knowing that it will differ based on what info is available). Certainly when comparing between offices of a single company that is possible. If comparing to the competition, it’s unlikely that detail is available, so you need to turn to others. MLS data should make transactions and volume per square foot possible (one may be more valued a metric than another for some, depending on what you’re ultimately trying to answer – eg, training efficiency would likely focus on transactions). A broker might be able to get close to estimating a competitor’s company dollar per square foot based on marrying MLS data to what they know of their split schedule.

    #2 – yes, by eliminating general & administrative costs, I’m trying to boil it down to the true sales costs. In practice, some firms will give higher splits to agents but leave the bulk of the marketing responsibility on their shoulders. Others will have a robust marketing program in exchange for less aggressive commissions. I’m trying to smooth that out so that two fairly different models can be compared.

    #3 – your points are completely valid and you are absolutely correct that it is darn near impossible to come up with a perfect marketing ROI metric (Camilla Sullivan, our SVP of Marketing, has told me we would be “zillionaires” if we could ever crack this). I’m convinced marketing people conspire to keep coherent metrics a secret so the rest of us are kept in the dark and just approve marketing budgets out of pure confusion. I’ll keep trying, though.

    Back to some real suggestions. Measuring some true ROI is going to be easier for either smaller offices (with fewer variables in their marketing program) as well as for very specific, trackable programs. To the extent that single transactions come from multiple sources, a less-than-perfect solution is to group all those transactions together and measure against all of the spending categories that had an impact.

    This, however, does not answer your time question, which is an important one. One measurement that I’m trying to get my arms around is “customer lifetime value.” It’s probably not for everyone. Here’s an explanation: http://www.harvardbusinessonline.com/flatmm/flashtools/cltv/

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