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February 2014

Brokerage Design

Is it time to adjust your Value Proposition again?

By NWREporter

February 2014

By Jeremy Conaway

Jeremy ConawayThe value propositions of real estate service providers (agents and brokers) have been the subject of extensive discussion over the past year. Some of that discussion revolved around the fact that today's consumer has little or no idea relative to what services real estate agents actually deliver. There is a growing concern about the fact that consumers don't know what should be delivered. There is a general recognition within the industry that this problem can be directly traced to the reticence of agents to tell customers and clients exactly what services will be delivered out of fear that should the property sell before all of the services are delivered the seller would demand a refund of their commissions due at closing.

Other elements of the discussion revolved around whether or not consumers might seek to access do it yourself (DIY) services in order to reduce the cost of their transaction and improve their net on the bottom line of the transaction. Still other real estate professionals are concerned that consumers will begin to compare service packages and commission rates (you mean they aren't all the same?)
One of the most dependable sources of information regarding the evolving new consumer in any space has been McKinsey & Company, a global management-consulting firm whose experts track consumer behavior from a wide range of perspectives.

By way of example it was McKinsey whose research disclosed that the economic downturn of 2007 - 2010 fundamentally changed the economic landscape by modifying the behavior of American consumers relative to the use of premium brands. It turns out that, prior to 2007, many consumers, especially those within the Boomer Generation, had grown accustom to upgrading their consumer experiences by using either totally premium brand companies or upgraded brand offerings within established firms. While it is certainly true that the "bad times" impacted these consumers less than others, McKinsey discovered that many of these consumers were "intimidated" by the bad times and have since elected to go with lesser selections. By way of example they moved from the Cadillac Escalade to the GMC Yukon - essentially the same vehicle but with a vastly different price.

Through this decision consumers discovered a number of factors that have now become the basis of a new economic reality. The first of these realities takes us back to the 1940's when Sears and Roebuck first introduced its good / better / best system of merchandising. What consumers have now discovered is that much of the difference between "best" and "better" is meaningless hype and that the real ego appropriate decision is between good and better not better and best. In the case of the Escalade they discovered that perhaps they didn't need those expensive "dove" styled wheels that supposedly make their Escalade even "cooler."

The second lesson is that it turns out that in many cases the very element of the program, product and service that was offered as the basis of the upgrade or its "cool" factor was often lower quality than the original. Going back to the wheel example, consumers discovered that the "dove" styled wheel wasn't really chrome, it was "chrome clad" and that it was subject to rusting and deterioration. It turned out that all too often premium wasn't premium but rather really expensive hype. "All you can eat" is not a premium experience if the server never shows up.

Another example of this same trend is occurring in the restaurant industry. It is experiencing an increase in the number of consumers who have discovered that it is often cheaper to bring your own wine and pay a "corkage" fee than to pay what appears to be inappropriately inflated "menu" prices for wine. This is just more evidence of the growing DIY trend in consumer behavior. If one wants upgraded wheels on their Escalade they can often find a higher quality option at a quarter of the price at Amazon, so they "do it themselves" and add the wheels. If one wants to enjoy a premium wine at their expensive dinner, they can stop by Costco (DIY) and facilitate that option and still enjoy a premium meal.

McKinsey's research found that, in response to this discovery, significant numbers of consumers have learned to switch from status shopping to "smart" shopping, and accordingly have learned to live without expensive brands.

These trends are also affecting the real estate consumer experience. While only history can ultimately explain the current portal movement (last month they captured over forty percent of Internet consumer traffic), there is little doubt that part of the movement's appeal will be grounded in the fact that the consumer has discovered that the gap between the real estate experience that is advertised and promoted as "The Best" and the actual experience that is delivered (on many days the "Good") is not worth the additional expense and hassle.

Of course what industry insiders understand is that this result was preordained by a system that denies brokers the ability to have anything other than an incidental impact upon any aspect of service delivery. What consumers "believe" they understand is that what they get is what the broker decides they should receive. Hence the entire industry suffers and consumers continue their search for alternatives.
The executive summary of this situation is that:

  • The economic downturn has sharpened the skills of the consumer to differentiate between good, best and better service provision
  • Significant numbers of consumers have discovered that premium is often not premium but rather hype
  • Consumers have discovered that the "smart" decision is often to augment their service buying decisions with a DIY feature such as Amazon, Costco or Zillow.
  • These consumer trends are being practices not only by Boomers (who can afford to do whatever is necessary to secure a premium experience) but, even more alarming, by Millenniums who are trying hard to enjoy champagne on a beer budget.

This is just another ping in a continuing brokerage business model alert relative to today's consumer. The recommendation is that brokers begin to explore entry-level standards that can serve as the basis of the brokerage value proposition.

Interestingly enough at the beginning of 2013 the Houston Association of REALTORS® created two Task Groups comprised of really bright representatives of their top brokerages. Working over the year these groups created three standards packages. One of these addresses the DIY threat head on. Get on board.