Is All Your Profit in Popcorn?

[Read time: 3 minutes]

By: David J. Cocks, CEO

"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 ourcase 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.

Are You Stuck in the Technology Sinkhole?

[ read time: 4 minutes ]

By David J. Cocks, CEO

How do you know you are in the technology sinkhole? You invest in technology...
Your agents become more productive... Your revenue goes up... BUT your profit goes down!

About three years ago, we started to see a pattern in the companies with whom we were consulting. Firms that had invested in technology, and had seen significant revenue growth as result, were now losing money.

WORSE in the second year!

Interestingly, a number of companies did see the increase in profit they expected in the first year. The losses didn't show up until the second year, making it difficult to identify the cause of the problem. We found it because of the thorough financial analysis we do as part of our consulting. When we noticed the same problem in company after company, we realized this was a problem affecting the whole industry.

How does an investment in technology cause this problem?

What we discovered was that the investment in new computers, new software, and the Internet worked the way it was supposed to – agents became more productive. Revenue went up. But selling more pushed many agents up to higher split levels. This reduced the company dollar, making it more difficult to pay for the increased technology expense. As an example, let's look at a company where:

GCI = $5 million
Company dollar = 32%
Profit = 2% (or $100,000)
Technology investment = $50,000 annually

Let's say the technology investment results in a 5% increase in revenue. 5% of 5,000,000 is $250,000. So revenue goes up by $250,000.

32% of $250,000 is $80,000. So the company dollar increases by $80,000. $80,000 less the technology investment of $50,000 leaves a net profit increase of $30,000. So in the first year, profit increases to $130,000.

So far, so good. Now, let's look at what happens in the second year.

Let's say all the agents benefited equally from the technology, and everyone moved up to a higher split. Say they go up 2.7%.

Now company dollar drops to 29.3%. You now have $135,000 less to pay your bills than you had last year. Your revenue is up, but your profit is gone.

The situation can be even worse if all agents do not benefit equally from your technology investment, which is what happens in the real world.

Suppose the entire increase in revenue comes from your top producers, who are at an 80% split level. The company dollar on those sales is just 20%, so instead of gaining $80,000 you only increase profit by $50,000 – just enough to pay for the technology investment. Although revenue increased, profit stayed the same. That's in the first year. It could be worse in the second year.

How do you get out of the sinkhole?

You need to be able to recover your investment in technology. Some firms do this by charging user fees for technology or referral fees for leads that come in over the Internet. Other companies increase off-the-top fees, like relocation, for business directly attributable to the new technology. However, these fees are not popular with agents, who feel they are being "nickel-and-dimed" on one thing after another.

The best approach

Your best strategy is to re-design your compensation plans so they are based on your current costs of doing business, including the amount you invest in technology. When you use CompensationMaster's system to design your plans, you can make sure your expenses are covered and build in the profit you need to grow your business. Our consultants can help you design compensation plans that are aggressive and highly competitive in your market. We can also work with you to introduce them to your sales force and managers, ensuring that the introduction occurs with a minimum of disruption and that you get the results you need. 

Are you Becoming Commoditized?

By David J. Cocks, CEO

If your profit margins are being squeezed tighter and tighter, there's a good chance that you're becoming commoditized.

Commoditization is the process that transforms a profitable, differentiated product or service into a commodity.

As markets for any product or service develop over time, they coalesce. The products and services evolve to the point where they fully satisfy the needs of most customers. As soon as one company identifies and launches a differentiator, it is quickly met by competitors, who introduce the same feature.

The products and services come to be viewed as commodities, despite attempts to brand them and preserve their distinctive value propositions.

Once reduced to commodity status, the most visible difference between products becomes price. Price wars ensue, forcing prices lower and lower.

When products are perceived to be interchangeable, the focus shifts to the selling process. Highly skilled sales representatives become superstars. They develop a following among their customers, who express a strong preference to work only with them. Because they have the ability to bring their customers with them should they choose to move to another company, they can command higher and higher commissions, perquisites and other concessions from their employers.

At this point, not only is the product a commodity to the customer, but the company is a commodity to the sales representative.

Businesses are caught in the middle, between declining prices and ever-increasing salaries. Profit margins, already under pressure, diminish to the point where all but the most competitive firms are forced out of business.

How do you deal with commoditization?

The answer is to acknowledge what is happening to your industry and embrace the change – if nothing else, it will remove many of your competitors.

Study what has happened in other industries that have already passed through this stage and look for a way to differentiate your firm – preferably with something that can be sustained over the long term and can't easily be copied by competitors.

The strategy we recommend is to find a way to better meet the needs of your sales force. When you devise a powerful way to differentiate your firm from other employers, you can attract and retain the best sales force, creating a long-term competitive advantage. You can differentiate by offering styles of compensation not available from competitors, such as salaries or high-split plans, or give associates a choice of compensation plans. Or you can offer packages of training, administrative support, marketing support, and benefits that fit associates' needs better than competitors.

The key is to ensure that your firm retains its profitability while gaining that competitive advantage. 

BIG Hat, NO Cattle? | Thriving in a Market Downturn

Thriving in a Market Downturn

By David J. Cocks, CEO

Is your business all hat and no cattle? In other words, are you focusing on increasing revenue at the expense of profit?

A lot of business owners focus primarily on top-line revenue growth, even though a business can't be run on revenue alone.

Here are some common misconceptions we see in the market:

Top Producers = Profit

Betting the farm on top producers might leave you without a farm. Big-name sales associates can negotiate high commissions and generous perquisites. Although their volume is impressive, it is not unusual to find companies losing money on their most productive sales associates.

Mergers and Acquisitions = Profit

One of the most popular ways to grow a business is by acquiring or merging with another company. But if the company was not properly valued, efficiencies don't materialize as expected, or compensation plans are not restructured to reflect the combined company's expense structure, the net result can be negative.

Cash Flow = Profit

In smaller companies, we often see owners who pay themselves with what's left over after expenses are covered. Although this helps ensure the company's cash flow, it's not an accurate accounting of profitability. Owners who sell need to pay themselves as if they were regular sales associates – and compensate themselves for the time they spend managing the business.

How Healthy is Your Business?

Even if your revenue is on a steady upward trend, your business may have hidden profitability problems. Now that you've paid your taxes and have all your year-end numbers, it's a good time to do a quick check to make sure your cattle are growing as fast as your hat.

You'll need a few statistics for the past three years to do the assessment:

• Total revenue;
• Total expenses;
• Operating profit;
• Sales representatives ranked by production.

First, look at the trends to make sure both revenue and profit are increasing, and then calculate the percentage increases. If revenue and profit aren't growing at the same rate, that's a red flag.

Now look at expenses. They should be growing at a slower rate than revenue. If not, that's a red flag.

Last, look at sales force production levels for the past couple years. If they're not stable, that's a red flag.

Did You Find Any Red Flags?

If you did, there's still time to make changes. Adjusting compensation plans can help solve some of the toughest profitability problems. We encourage you to discuss any red flags with your accountant, and of course, give us a call to see how we can help.

The bottom line: make sure you don't spend so much time focusing on your big hat that you don't have a place to hang it at the end of the day. 

Aligning the Goals of the Sales Force & Management

By David J. Cocks, CEO

When management start talking about increasing profitability, sales representatives start to worry. They know improving profitability usually means cutting commissions and eliminating expenses, possibly for marketing, administrative support or benefits they value. They are concerned the increased profitability will come at their expense.

But that's not the way CM Global Partners and CompensationMaster approach the situation.

One of the main reasons our system is so successful is we don't just come in and transfer money from sales representatives to the company. We wouldn't be able to achieve the 98% retention rate we are currently getting if that was the way we worked.

Instead, our strategy is to optimize the way our clients do business.

Better Meet The Needs Of The Sales Force

First, we re-allocate expenses to better meet the needs of the sales force. We come in and analyze the market, the sales force, and the company's financials. We talk with the sales representatives and find out what they want. Very often this produces some surprises for the management team, which may not have realized the needs of the sales reps have changed. We identify groups of sales representatives that are not having their needs met and look at what the company can do to better meet those needs.

Very often we can identify expenses no longer providing the value they should. In some cases there are benefits the sales force doesn't want anymore. For example, sales representatives might not want health insurance because spouses' employers provide coverage. In other cases, investing in training or additional administrative support might give the firm a competitive advantage in its market. We help our clients re-allocate their expenses to produce the maximum value for the sales force.

Motivate Effectively With The Right Commissions

Then we design compensation plans that are consistent and fair to everyone. We eliminate exceptions and disincentives to greater production. We try to give all the sales representatives the same opportunity to increase the amount of money they make.

We like to offer a variety of plans so each sales representative can choose the risk- reward combination that he or she finds most exciting and motivational. And we make sure the sales representatives are paid as much as possible while ensuring that the company has enough money to pay its bills and make a profit.

Reward Sales Force For Increasing Revenue And Reducing Expenses

One advantage of our system is we tie together human resources, finance and sales management, and align the goals of those three groups.

With a contribution-based approach, sales representatives are responsible for contributing their fair share towards corporate expenses and profit. Once a contribution has been made, they are able to keep most of the rest of the revenue they bring in.

Sales representatives are motivated to increase revenue; as they sell more, they make more. But with this system they also increase their income by reducing expenses. When expenses drop, the amount they have to contribute decreases, so they keep more of the money they bring into the company.

The result is that the sales representatives acquire a perspective similar to the one management has, with twin goals: increasing revenue and keeping expenses under control.

Top 4 Tips To Ensuring 2015 Is More Profitable Than Last Year

By David J. Cocks

You have closed the books for last year so now it's time to look at your results and see what changes, if any, need to be made for this year.

Tip #1 

Obtain the following statistics for the past three years. If you don't already have them at your fingertips, they should be in the end-of-year information you get from your accountant: 

•Total revenue 

•Total expenses 

•Operating profit 

•Sales representatives ranked by production

Tip #2 

Start by looking at the trends. Revenue and profit should both be increasing. Now calculate the percentage increases. Are they comparable? Revenue and profit should be growing at the same rate. If they aren't, that's your first indicator of a problem.

Tip #3 

Now look at expenses. They should be growing at a slower rate than revenue – and, optimally, slower than profit. If not, that's a second indicator. Also look at what expenses are increasing. Are they temporary investments that will help you increase revenue, or are they permanent?

Tip #4 

Finally, look at production levels for your sales force over the past couple years. Are they fairly stable? If there have been lots of changes, particularly if revenue is up and profit is not, that's a third indicator. Significant increases in productivity, such as those brought about by the Internet or customer relationship management software, cause many financial problems.

How Did You Rate? 

If you passed with flying colors, congratulations! If not, there's still plenty of time to make changes. Many profitability problems can be fixed, particularly in commission-based industries, by adjusting your compensation plans appropriately.