BrokerageIndustry News

A case study in cost competition

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In a previous column, "The real competition in real estate," I wrote that I will be profiling various brokerage companies that pursue one of the four generic competitive strategies (per Michael Porter’s "What is Strategy?") in real estate. First up is Keller Williams Realty Premier Properties of Essex, Union and Morris counties in New Jersey.

(Note: I have no business relationship of any kind with KW Premier.)

The national Keller Williams Realty International franchise pursues a classic cost leadership (an effort to minimize operating costs to gain a competitive advantage) strategy, and KW Premier is a good example of how that strategy is implemented.

Porter specifically warns against this in his seminal book, "Competitive Advantage": "If its product is not perceived as comparable or acceptable to buyers, a cost leader will be forced to discount prices well below competitors’ to gain sales. This may nullify the benefits of its favorable cost position."

As we will see, the Keller Williams franchise model — of which KW Premier is an example — is built around achieving and maintaining cost leadership, while offering a product to the general agent population that is comparable to that offered by competing brokerages.

The company in brief

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KW Premier is a franchisee with a three-county market area. It was founded in January 2005, and Howard Bunn and Cara Moxley are the two principal owners. In business for about five years, KW Premier has about 145 licensed real estate agents.

KW Premier was ranked No. 14 in profitability and No. 15 in profit-sharing in 2009 out of 690 Keller Williams offices. Within the Garden State Multiple Listing Service participants, KW Premier ranked second in 2009 with 383 units and more than $275 million in closed volume, behind Coldwell Banker Westfield, an NRT office that has been the No. 1 Coldwell Banker office in the New York Metro for the past 20 years.

KW Premier has an office in the towns of Summit, and a branch office in Short Hills. Its sales are mostly focused in Summit, Millburn, Short Hills, Maplewood, the Chathams and Madison.

The price

Arguably, KW Premier’s most compelling offering is its "100 percent split": After paying roughly $35,000 in total annually (commissions, royalties, etc.), an agent is said to have "capped" and is on a 100 percent split thereafter.

After that point, for all intents and purposes, the brokerage services are free to the agent. Prior to capping, Keller Williams charges 30 percent of the transaction as the price (i.e., a 70/30 split).

One could argue that even for the low-producing agents, a 70/30 split (with the agent keeping 70 percent and the broker keeping 30 percent) may be better than what they would be offered at some competing brokerages (with 50/50 or 60/40 splits), and the incentive to achieve higher production is very real.

For producing agents, KW is an extremely low-cost option, especially in a luxury market like the Summit, N.J., area, where the median home price is $885,000 and the average listing is $1.47 million, according to Trulia.

An agent who closes 20 transactions, for example, at 2.5 percent commission rate per side, generates $442,500 in gross commission income. For KW Premier, which caps at roughly $35,000 in commissions paid, it takes just over 5.3 transactions to cap out.

The remaining 14.7 transactions are at a "100 percent split" to the agent, meaning the broker does not receive any share of commission for those transactions. This amounts to the equivalent of a 93/7 split.

A competing brokerage offering even a generous 90/10 split costs the agent a total of $44,250, so in this example an agent with KW Premier would have paid out about $14,250 per year less.

For a truly superior performer who might do 50 transactions in a given year, the savings to the agent over going with the 90/10 split from a competing brokerage would be in excess of $80,000 per year — the equivalent of a 97/3 split.

Some low-cost brokerage models make up for the high share of splits they offer to agents in charging a variety of fees as profit centers. KW Premier does not, simply passing on the cost of overhead to the agents.

The product: core tradeoff

The main tradeoff that cost leaders have to make is in the offerings of the product: Everything that adds to the cost position has to be pared down, unless that results in a subpar product. Cost leaders are not necessarily interested in offering a superior product — merely an acceptable one, at the lowest cost.

KW Premier is a good example of how a real estate brokerage has built all of its systems and offerings around achieving cost leadership. As the Keller Williams corporate philosophy states, "Keller Williams is designed to achieve the highest commission split possible within a full-service company and make a reasonable profit." …CONTINUED