Inman Connect: Scrub Your P&L

Inman Connect: Scrub Your P&L

Last week, I was on a panel at the Inman Connect conference that was part of a broker/owner forum focused on “Building the Lean, Mean and Profitable Real Estate Brokerage of the Future.”  I was joined by John Vatistas of Russ Lyon Sotheby’s International Realty and John Reinhardt of Fillmore Real Estate. With a goal of identifying savings in the typical brokerage P&L, we were asked by our moderator, Brian Boero of 1000Watt Consulting, to focus on three key areas: physical space, commission splits, and marketing.

To highlight in somewhat broad strokes what I discussed:

  1. These three areas are related: When planning a change to one, consider how it could impact the other two.  Whenever possible, tie changes together as part of a cohesive, strategic repositioning of your brokerage.  For example, if you are considering reducing your office size (or radically rethinking what your space could look like), reallocate those savings to your web presence — in effect, moving money from your physical office to your virtual office.  Furthermore, to oversimplify a bit, commission splits could be tied to office size by moving them in opposite directions: more space, lower splits.  Less space, higher splits.
  2. Consider indexing your commission plan.  All of your other expenses are impacted by inflation.  This is the single biggest expense item on the P&L yet most broker/owners allow this cost to creep higher and higher as a percentage of their revenues simply because they don’t index.
  3. Measure, measure, measure.  It’s one of our many mantras here at Better Homes and Gardens Real Estate.  Too many companies are still flying in the dark when there’s data available that might guide them towards increased profitability.  Here are three of my favorite brokerage data points:
  • Productivity Per Square Foot.  We could borrow a lot of analytics from the retail world.  How much are you really generating for each square foot of office space?  Compare your profits per square foot over time, across offices, etc.  Get whatever data you can to compare it to your competition.  I hate to be so glum, but think of it as a sanity check to see if you would be better off subleasing some space.
  • Modified Percent Retained.  Take your “percent retained” (or gross margin), which is your company dollar (or gross profits) divided by revenues (GCI), and further reduce the company dollar by your total marketing spend.  I like looking at this across offices.  For example, an office with $1,000,000 GCI, $640,000 in commission expense, and $120,000 in marketing would have 36{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} retained and 24{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} modified retained.  If you compared it to an identically-sized office with $700,000 commission expense but only $20,000 in marketing, you would be right to say splits in the second are much higher than the first, but when the trade-off is much lower advertising and a better modified percent retained they may, in fact, be better off.
  • Marketing Return.  There is no reason for any broker not to know what their return is for each form of marketing, yet so very few track this.  Identify the source of each of your closings.  Total the gross profits from those closings, and divide that figure by the total amount you spent on that particular form of advertising.  For example, assume you spent $40,000 in your local newspaper and your ads there led to 20 closings that generated $45,000 in gross profits.  Now assume you also spent $12,000 marketing in a particular website and that led to 25 closings that generated $60,000 in gross profits.  Clearly, the latter method is more efficient (by over 4x).  It may not mean you completely abandon the first method, but you may be underutilizing the second.  The analysis isn’t always so clean, but there is plenty to be learned (by you, your agents, and your customers) about where your marketing dollars are best spent.

Let’s keep scrubbing these P&L’s until they’re clean!

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