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CompensationMaster Newsletter Article, February 2006 "Get them in the
theater, break even on tickets and make your money on popcorn."
It's a business model that is used in movie theaters all over the country and
has become quite popular in the real estate industry.
Many brokers are breaking even or even losing money on their core real estate
business. All their profit comes from ancillary services, such as mortgages,
title insurance and homeowners insurance.
What's wrong with that?
Nothing—as long as the profit from ancillary services is stable. But real
estate is an industry that is in transition. There are many scenarios that could
put that profitability at risk:
- Legislation changes could keep you from owning a real estate company plus a
mortgage company and a title insurance company.
- New competition could enter your market, perhaps from banks or a more
aggressive real estate company, causing margins to drop further.
- Interest rates could rise.
- Your market could cool down—or overheat.
- Your agents might decide they want a piece of the ancillary services
revenue.
You can even have problems if the only thing that happens is that your sales
force gets more productive. Suppose they form teams or make better use of
technology, so they reach higher splits faster. Your loses on the real estate
side increase, so you need more and more profit from the ancillary services to
cover those loses—money you may not be able to get.
What's the answer?
Fix your commission structures so you are making money on your core real
estate business. Then you can make money on real estate and keep the profit from
ancillary services too.
Without wanting to carry the movie theater analogy too far, many brokers
assume that fixing commissions is like raising ticket prices. You're taking
money away from the sales force and putting it in your own pocket.
That's not the case.
You should fix commission structures by tuning the way you pay your sales
force as well as the services you offer them to better meet their needs. This
rationalizes your costs: you spend more in some areas and less in others. You
also adjust your commissions so they are fair to everyone. The result is a more
nimble company that has a significant competitive advantage. (To see how this
works, read some of our case studies.)
Then the next time you’re at the movies, you'll be able to sit back, eat your
popcorn, and think pleasant thoughts about how you are managing your business so
much more effectively.
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