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 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.