Escape pricing pressure

Get paid what you’re worth

by Wayne Einhorn, Co-Founder, Entrepreneurial Development Institute

Most consumers have a tendency to oversimplify anything that they do not fully understand. This is the reason why we are so easily manipulated by the media and advertising. We are products of an impatient culture – we do not invest our time easily. Rarely do we as consumers invest the time to understand the true value of our purchases unless it is readily available.

How many of us investigate value thoroughly when we purchase a car? If we did we would compute value in the following way:

• What is the estimated annual maintenance cost? Cost for brake work, filters, oil change, tune up, etc. for the particular model of car;

• Cost of tires, insurance, body work, replacing a key, or a computer chip. The cost of other major repairs and the history of occurrence for the particular model;

• Warranty costs and resale value, and;

• Finally, how all this comes together in an overall value calculation incorporating price as only one variable.

This process is just too much work for the average consumer and therefore it is easier to oversimplify and allow ourselves to level the playing field. In the end, we justify it by generalizing and concluding that “they are all the same.” This behaviour exists in almost every industry, validating that human nature, like water, often takes the path of least resistance.

The internet has accelerated this desire to commoditize. Consumers are able to shop a need and look at hundreds of sources in a matter of minutes. An individual can open multiple windows and compare vendors side by side without even getting up from their breakfast table. The only differentiator becomes price. Therefore, this simple approach promotes the trend of turning our products and services into commodities. Other examples of this trend include hotels, flights, and rental cars, all of which have been largely commoditized through pricing comparisons at sites like www.expedia.ca or www.hotels.com or www.hotwire.com.

Our services in the real estate industry are no exception. We are often compared with the competition solely on commission rates and never on the value that we provide. Would you ever consider shopping online for the best price from a doctor, dentist, or even a chiropractor? As such, we have not seen these professional service providers competing for business on a common website with price as their key customer benefit.

Some industry players don’t actually believe that we’re worth the money we charge. Although it rarely happens in public, there are those among us who believe that we are not worth what we charge. They are the segment of the industry that quietly discounts commission hoping no one will notice except the client making the decision on the specific deal. This business model is a downward spiraling plunge into nonprofitability. I would urge anyone who wants to discount the price of their real estate services to take an honest look at their costs and their operating risk. Often, when considering our pricing model, we forget to factor in the real costs of our business; the risk associated with our revenue model, and, the lifestyle we are working for. The true test is the real value we bring consumers and our ability to communicate it.

If we do not believe what we are worth, we do a poor job of illustrating our value to the consumer. Once we have a hard look at our pricing model and understand that we are worth every penny we charge, we have to become experts at illustrating our value to the consumer. If the tens of thousands of realtors were unable to pay the significant fees paid to MLS providers and real estate boards, who would maintain the data that so many buyers, sellers, banks, trust companies, and other industry stakeholders depend on? How can you translate this and other benefits into an explanation of tangible dollars that you will contribute to your client’s proceeds? We provide the practical answer to this question and

start this analysis by documenting an understanding of our competitors.

We do not understand our competitors in a comprehensive way. Our competitors can be broken down in three main groups and each has specific characteristics that will affect the proceeds of a transaction:

The For Sale By Owner Option:

• What are the real costs of the transaction?

• How much does the owner value “time?”

• What impact does experience have?

• What is the success rate?

The Discount Broker Option:

• What is the true cost of a discount brokerage?

• What other services are not offered that will affect the convenience, speed and security of the sale and what impact does that have on “net proceeds?”

Other Full Service Brokerage Options:

• What are your unique and compelling selling propositions as compared to other full service brokerage competitors and what is the affect on the deal proceeds?

• What other differentiators benefit your client and what effect do they have on proceeds?

We must analyze all of the characteristics of each of these competitors and “dollarize” their economic impact to the proceeds of our client’s transaction. Only then do we understand our competitor in relation to our own offering with a detailed breakdown regarding the effect on net proceeds. This understanding is a start but is not enough to alleviate pricing pressure. Most of the industry is unable to demonstrate, in simple terms, our differences in value to the client. This forces most agents to spend more time talking about cost with the client and inevitably leads to commission cutting. It is not that most of us cannot explain the “dollarization” above anecdotally to the client. The real problem is our presentation to the client is complex and the client does not understand the impact, therefore it causes the client to go back to comparing what they do understand; commission cost to them.

In today’s world each competitor in our transaction is providing a laundry list of features and benefits and they all look compelling to the inexperienced consumer. We need to take the responsibility of presenting a simple analysis and focus this analysis on the needs of the vendor.

Action Items

• List all of your competitors in the three main groups

• Understand what they offer the consumer

• Define your competitive differences

• Dollarize the cost or benefit of each of these differences as it relates to the consumer

• Ensure you “dollarize” the cost of time in the analysis

• Calculate the overall impact and compare to the competitors in the analysis

Your final analysis should provide your customer with a real dollar value supported with factual detail based on your assumptions. Any financial benefit will now more than offset your commission rate as compared to your competitor, effectively providing a tangible net value for your service. The process of analysis can be complex, yet the presentation and conclusions are simplistic. The client is now ready to pay your commission rate with the expectation of a far greater net return.

Rarely do we as consumers invest the time to understand the true value of our purchases unless it is readily available.

They want to sell their homes:

• In the least amount of time

• With the fewest hassles

• Receiving the most amount of money or net proceeds

Knowing this, we now need to create a tangible dollarized value proposition that identifies the features and benefits as it relates to the client’s needs. At Entrepreneurial Development Institute (EDI) we have developed simple tools and online “wizards” that help customize a value proposition for our members. We have taken the time below to list a number of action items so that you can produce a simplified version of the tool yourself.

Wayne Einhorn is co-founder of the Entrepreneurial Development Institute (EDI), a leading coaching, consulting and training organization. For more information, please visit www.edicoaching.com