Are you losing listings because discount agents are willing to work for peanuts in your farm area? If so, you may feel the need to reduce your commission just to compete. Before you do, take a moment to consider the impact on your business.
While discounting your commission may work in the short term, in the long term it will drive down your profit margins, reduce your marketing and lead gen budget, and make it impossible to maintain high customer service standards. Not exactly a recipe for a top producer.
That’s why we put together this guide to take a deep dive on the math behind discounting commissions, and show you how you can beat the discount agents by adding unique features and benefits, making personal commitments, and standing behind your promises.
Proof That the Math on Discounting Commissions Just Doesn’t Work
Unless your business model is built on massive volume or market domination, discounting rarely leads to success. As real estate agents, we are not selling high volumes of toilet paper, like Walmart. We also don’t have the investment budgets for a market domination business model, like Uber. Instead, we need to sell one home at a time.
Let’s take a look at the math to see why discounting your commission is a recipe for disaster:
Crunching the Numbers on Discounting Your Commission
Many agents talk themselves into discounting without really thinking long term: “If I just reduce my commission, I can sell more homes.” While this may be technically true, how many more deals will you really close? 10% more? 20%?
How much would you need to reduce your commission to sell 20% more than you are currently selling? For the sake of argument, let’s say you reduce your commission rate from 3% to 2% and it increases your business by 50%. Surely the math will work then, right?
Well, let’s actually do the math to find out: Let’s say you are currently listing 10 homes a year. With an average sales price of $300,000, your annual gross commission from listings would be $90,000 (($300,000 x 3%) x 10 = $90,000).
Your expenses are as follows: variable costs (including the listing marketing and the split to the brokerage) come to 40%, and your fixed annual expenses (MLS fees, association dues, business marketing, and other fees) are $9,000 a year. This leaves a net profit of $45,000 ($90,000 x 60%) – $9,000 = $45,000.
Net Profit From a 3% Commission
Number of homes listed: 10
Average sales price: $300,000
Total profit: $45,000
Believing you would sell 50% more widgets, you reduce your listing commission from 3% to 2%. Therefore, your average listing commission would be $6,000, but you will sell 50% more, or an additional five homes each year. Therefore, your total gross commissions would be $90,000 (($300,000 x 2%) x 15 = $90,000).
Your cost per sale would remain the same at 40%, but your operational expenses increase by 30% to $11,700 because you had to upgrade your systems and add part-time help to handle the extra calls. After working much harder to sell 50% more homes and dealing with 50% more clients, your net profit would now be $42,300 (($90,000 s 60%) – $11,700 = $42,300). $2,700 less than when you listed and sold just ten homes!
Net Profit From a 2% Commission & More Listings
Number of homes listed: 15
Average sales price: $300,000
Total profit: $42,300
You’re Worth More Than That!
Think about the feeling of working harder while providing the same high-level customer service, but you are making less money. It wouldn’t take long before you begin to feel taken advantage of. Over time, your equipment will need to be upgraded, and the cost to keep up with technology is expensive. Before you know it, your customer service begins to slip and you start getting bad reviews. You know you need to step it up, but you are overworked and haven’t had a raise in over a year.
Now a new competitor enters your market and is offering to list homes for just 1.5%. Out of cash reserves, you have no choice but to reduce your commission to match theirs. Now for each listing you sell, you are nearly losing money. Does this strategy sound like a solid business plan?
Of course it doesn’t. All you did was double your workload and reduce your income. Wouldn’t it be great if you could compete with the discounters on value instead of price? Next, I’ll walk you through a system that dozens of my coaching clients used to do just that.
How You Can Keep or Even Raise Your Commission Rate
“Raise my commission… is that even possible?” you ask. The answer is yes! In fact, several agents who I coach have been able to increase their commissions by adding a unique feature to their offering. The question is obvious: “What unique feature can be added to justify a higher price?” To answer this question, we only need to look to blenders. Specifically, the Vitamix. This may be a strange analogy, but stick with me—it just might change your business and your life!
The $500 Blender Lesson
About 10 years ago, a health scare got me focused on eating a plant-based diet. I was traveling frequently and I would bring a small blender, with apples, kale, and protein powder, with me to make healthy “green drinks.” The small blender I purchased was an Oster brand for which I paid about $20 at my local grocery store. My wife and I also have another blender at home. A large Black and Decker blender with the twelve buttons like your mom had. We paid about $55 for it.
One morning, my daughter asked me if I’d make her one of my green drinks. I mixed the kale, apples, and protein powder in the little Oster blender and she loved it! If you have kids, you understand how difficult it is to get them to eat anything healthy, especially when it is competing with sugary cereal.
The next day, she asked me again to make her a green drink for breakfast. I used the large Black and Decker blender, because the Oster could only make one drink at a time. “YUK!” my daughter says, “This doesn’t taste the same, it has chunks in it.” She poured it out and made herself a large bowl of sugary cereal. Frustrated that my child was missing out on eating a healthy breakfast, I went on a mission to find a large blender that could blend kale as smoothly as the Oster.
I Looked for Social Proof to Find a Better Brand
Like any logical consumer, I asked my friends and family what blenders they use. My uncle recommended the Vitamix for two reasons. He said it could grind anything; he used his to grind almonds into flour for making almond bread, and he also said it was “cool” to own one. Furthermore, my uncle had purchased his Vitamix over 20 years ago, and he said it still worked perfectly.
When I did my research, I discovered it that Vitamix was founded in 1937 and came with a seven-year warranty and a satisfaction guarantee. That was enough for me to commit to spend $500 on a blender! Yes, 2,500% more than the $20 Oster. A $500 blender with only a single switch and a dial, no less.
Now what was my reasoning? My underlying reason was the features of its large capacity and sharp blades that could blend kale smoothly. Those features allowed me to be able to feed my children a healthy breakfast. The benefit to me was that it made me feel like a better parent. That benefit was worth much more than the $500 price tag to me. Now let’s take a look at how you can apply this lesson to your personal brand.
How to Work Less & Make More Money
Instead of lowering your commissions, what if you decided to add value and raise your commissions by 20%? The increase wouldn’t position you as the most expensive agent in town, but you might be near the top. Sure, some customers are cost-sensitive and you will need to overcome their objections to the higher commission, and others will outright tell you no. The question is: Are you worth it?
To be proactive, you can do a marketing campaign announcing a new unique feature you are offering and the benefits that come with it. You might find that most of your loyal customers were not concerned with the increase and others took a little talking to, but overall, the added unique benefits were successful and sales only dropped by 10%.
With the increase in commission, your average commission is now $10,800. You are listing nine homes a year for a gross commission of $97,200 (($300,000 x 3.6%) = $10,800). Variable costs to sell are still 40% and your added feature increased your operational costs by $800 annually, making your profit $48,250 (($97,200 x 60%) – $9800 = $48,250).
Now you are providing better service, making more money, and doing less work! Does this make you excited about real estate again? It does for me! Now we need to set you up for success by learning how a customer determines value.
5 Ways to Prove That You’re Worth the Full Commission
When you learn how to communicate your value in a way that customers see you as a premium brand, you will differentiate yourself from your discounters. Think about the last premium purchase you made. What was the main reason you committed to purchasing it? Was it how long they have been in business or their guarantee? If so, you’re not alone. In the book “How to Sell at Margins Higher Than Your Competitors,” authors Lawrence L. Steinmetz and William T. Brooks suggest there are five ways customers determine premium value.
5 Ways to Signal Your Premium Value as an Agent
1. History of Service
Companies that have stood the test of time communicate to the consumer that the company will continue to be there to warranty their product. Traditionally, brands that don’t take care of their customers don’t last longer than a few years.
2. A Specific or Unique Feature or Benefit
A feature is something you do or provide that is proprietary or perceived to be exclusive. A benefit is what the customer receives that they cannot get or is not guaranteed by your competitor. We will review this in depth later.
3. Clear Expectations
Premium companies know who they are and who they are not. To prevent future disappointment with their customers, they set clear expectations of their products and services.
Guarantees of service and warranties communicate that a company is going to stand behind their product or expectations of service they set.
Third-party testimonials and reviews are important to validate the claims that the company is making. Premium companies often use celebrity spokespersons to provide third-party validation.
Think about your real estate business—can you communicate the five determiners for the services you provide? If the answer is yes, then great, you are well on your way to earning higher commissions. If not, then we have some more work to do. Most premium brands offer all five of the determiners of value listed above, but not all do. Next, we’ll show you how you can demonstrate your value if you haven’t been in business for decades.
How to Think Like a Premium Brand
If you want to earn a premium fee, you must think and act like a premium brand. Let’s look at a premium brand that has consistently competed with many discount competitors and continues to come out on top: Mercedes-Benz!
Mercedes-Benz has long been a premium brand and has consistently maintained higher prices despite car manufacturers like Toyota and Honda selling comparable sedans for tens of thousands less.
Customers don’t have an expectation to go to a Mercedes-Benz dealership and demand that they sell them a new C-class for the price of an Accord. When we look back at the five determiners of premium value we outlined above, we can see why. Mercedes-Benz always signals their brand value in their marketing.
In the chart below, we compare Mercedes-Benz marketing messages to Honda, a top competitor. Here are the keywords they use from their websites to differentiate their products.
|Began as a racing team in 1914
Automotive company founded in 1927
|Began as a parts company
First automobile, a truck, was produced in 1963
|Features or Benefits
Image (Others will envy you!)
|48 months or 50,000-mile warranty
|60 months or 60,000-mile warranty
|J.D. Power Awards
Words like performance, innovation, and image are powerful features and benefits to someone with additional income to spend. We can see clearly why Mercedes-Benz commands a higher price for their cars than Honda. Honda is successful in its own right, selling 400% more cars per year than Daimler, the parent company of Mercedes-Benz, but the scarcity of a Mercedes-Benz adds to the value. Let’s be honest: Would you pay a premium price if they were one the most common cars on the road? I surely wouldn’t.
How to Put Premium Branding Into Action for Your Real Estate Business
For you to be able to command a higher commission, you must be completely clear about the features and benefits of working with you. You need to confidently set expectations and provide them with assurances that they know they have little to risk by selecting you.
Now that you have a better idea of how premium brands signal value, let’s go through how you can apply these lessons to your real estate branding to get more listings.
How to Create Features & Benefits That Will Beat the Discounters
To position yourself as the premium agent in a sea of hungry, commission-cutting agents, you must begin with determining your specific talents or unique features that create the benefits of working with you.
Features are things you or your company has or offers. This could be something like being an expert in cutting-edge technology, past experience in other industries, a downtown location, or international marketing.
Benefits are results or outcomes your consumer will receive from using your service. This could be less stress, providing a better experience or a faster sale due to your unique sales process and marketing plan. To help you start brainstorming your own features and benefits, here is a list of real estate features and benefits associated with premium agents:
10 Features & Benefits of Premium Agents
|Premium Agent Feature
|Benefits for Clients
|More financing options than the competitors
|Better investment, save money
|A customized process
|One-to-one, not handed off to a team
|More availability, due to having a team
|1-Hour response time
|Higher education (designations, degree)
|Do the right thing
|White-glove service (luxury)
|Be seen as fashionable or up-to-the-minute (status)
#1 in customer satisfaction
#1 in market share
|Proven marketing plan
|Net more money
|Interior design background
|Staging is made easier
Select from the list above, or create your own specific features and benefits of working with you and your brokerage. If you are not in the position or don’t have the ability to change your company’s features, then look to see what parts of the sales process you can commit to improve for your clients to create the benefits of working with you.
If you’re still having a hard time coming up with features for your services, here are three easy ways to communicate your premium value to customers to show them why you’re worth the higher commission:
1. Set Clear Expectations to Earn a Higher Commission
The first way to demonstrate your value is by setting and managing expectations. This is an important step if you wish to earn higher commissions than your competitors. Setting clear expectations with your customers begins with your personal commitments. Personal commitments are the things that you can commit to providing to your customers today. We can commit to them because we are in control for each of them.
When I built my real estate company, I created a list of ten commitments that our customers could hold us accountable to—we called it our “Customer Bill of Rights.” Here is the list of the personal commitments we made to our customers. Feel free to use this in your marketing:
Real Estate Customer’s Bill of Rights
Our agents will always be:
1) Responsive: All calls will be returned within 24 hours, excluding weekends.
2) Available: We will keep you informed throughout your transaction.
3) Respectful: We will always treat you with respect.
4) Competent: We stay educated and informed regarding industry issues, so we can advise you appropriately.
5) Honest: You have the right to know the truth, even if you don’t want to hear it.
6) Fair with fees: You will be charged fees that are both reasonable and fair.
7) Confidential: All of our conversations and communications will be considered confidential.
8) The customer is in control: You have the right to make the ultimate decisions on your transaction.
9) Transparent: You have the right to know all the details regarding your transaction.
10) Committed: We promise to stay in contact and be available to you long after the transaction.
Now it is your turn. Make a specific list of things you are willing to personally commit to for your customers. Feel free to borrow from my list and add some of your own.
Setting clear expectations of the features and benefits, as well as setting the right expectations with personal commitments, instill confidence in the mind of your customer. Compound that with a guarantee of service, customer testimonials, and reviews and your offer becomes unstoppable!
2. Offer an Undeniable Guarantee of Service
Have you ever purchased a premium product and didn’t receive a guarantee or warranty? Not likely, because premium companies stand behind their products and services. Guarantees are a powerful sales tool that you can offer your customers to get higher commissions.
The reason guarantees and warranties are so important to signal your value is that they address a customer’s concerns before they can even raise them. The common concern most customers have is, “If their claims are not true, what do I have at risk?” A warranty or guarantee will help the customer mitigate the risk in their mind, reducing their stress. Most customers will gladly pay extra for that peace of mind. In fact, a big part of the reason I paid $500 for a blender was the lifetime warranty.
Example: A Powerful, 30-Day, No Hassle Guarantee
This is the guarantee we made our customers at my brokerage: “The 30-Day No Hassle Guarantee.” This guarantee allowed the seller to cancel the contract in the first 30 days, no questions asked. This is an easy offer if the homes in your area are selling in less than 30 days.
You could also offer a 90-day home sale guarantee, where you guarantee that you will sell the home in less than 90 days or you will buy the home yourself. Obviously, there are some fine print details to these offers, but the important part is the value you are offering your customers.
Next Steps: Create a Guarantee That Works for Your Real Estate Business
If you have read this far, I am going to assume that you are the kind of agent who stands by their word, service, and company. I also believe you want all your customers to be completely satisfied with their sale or purchase and if they were not, you would gladly go above and beyond to make it right. Therefore, you are already guaranteeing your services, but you may not have made it clear to the customer by putting it in writing.
If you want to beat the discount agents, then this is the first step. Will you commit to taking that step today? Here are two great writing prompts to get you started:
1. What is the warranty or guarantee you can offer if the customer expectations, that you set, were not met?
2. How will you communicate this to them?
3. Bulletproof Your Testimonials
The final determination of value for your potential customers is customer reviews and testimonials. Real estate agents are busy and once the sale is made, many forget or are not confident enough to go back and request reviews or testimonials. If you want to beat the discounters, you’re going to have to dig a little deeper and work for those reviews.
It has been said that “A happy customer tells one person about you but an upset customer tells ten.” This has been compounded with technology. An agent can have hundreds of satisfied customers, and only a handful of reviews. If just two of those reviews are negative, it can drive sales down. Today, social media has the ability to launch your business into the stratosphere or destroy it in less than 280 characters. This is why getting reviews should be high on your list of daily goals. Because of higher volume, many discount agents have tons of good reviews. If you want to beat them, you need some of your own.
Years ago, I purchased a brand-new vehicle. After the paperwork was finalized, the salesman, Phil, asked me if I enjoyed the experience of purchasing a vehicle from the company and him. I affirmed that I felt the transaction was easy and stress-free. He immediately asked me if I would be willing to share that on social media. I was happy to because they did an outstanding job. He then asked me to stand in front of my new shiny black pick-up truck for a photo op.
They had strategically positioned the truck directly in front of the large dealership name that spanned across the front of the building. Phil took the photo, posted it to the dealership’s Facebook page, and asked me if he could tag me in the post.
I realized later that the entire process, from the initial inquiry about my experience to positioning the truck for an ideal photo opportunity, had all been part of their sales process. This little detail insured that they had social evidence of another happy car buyer.
Next Steps: Add a Specific Step to Your Sales Pipeline to Get More Reviews
Take the time to make it a step in your sales process to request reviews and testimonials before closing out your file. Customers are busy, so you may need to nudge, encourage, and even nag them to get reviews and testimonials.
What can you add to your sales process to insure you are capturing customer reviews and testimonials?
Developing your unique features and the benefits of working with you will allow you to stand out among the competition. Communicating your personal commitment, providing a guarantee, and customer testimonials will put your customers at ease. All this will reward you with higher commissions and prevent you from having to reduce your commission in order to compete with the discounters.
Over to You
Do you have a smart strategy to beat the discount agents we didn’t mention here? Let us know in the comments, or if you’re an active agent, join our Facebook mastermind group here.