Earlier columns have examined different strategies for competition, per Michael Porter’s much-cited business tome, "Competitive Advantage: Creating and Sustaining Superior Performance."

I described Keller Williams Premier as an example of "cost leadership," as defined by Porter, @properties of Chicago as an example of "differentiation," and The GoodLife Team of Austin as an example of a "differentiation focus."

In this final installment, we turn to an example of Porter’s "cost focus" strategy.

Let us remind ourselves how a focus strategy differs from generic broad-based strategies …

Earlier columns have examined different strategies for competition, per Michael Porter’s much-cited business tome, "Competitive Advantage: Creating and Sustaining Superior Performance."

I described Keller Williams Premier as an example of "cost leadership," as defined by Porter, @properties of Chicago as an example of "differentiation," and The GoodLife Team of Austin as an example of a "differentiation focus" (also see related article).

In this final installment, we turn to an example of Porter’s "cost focus" strategy.

Let us remind ourselves how a focus strategy differs from generic broad-based strategies: "This strategy is quite different from the others because it rests on the choice of a narrow competitive scope in the industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others," Porter wrote.

The "cost focuser," then, aims to become the cost leader for the selected segment of the industry, tailoring its activities to serving that segment while abandoning those segments it cannot serve as the least expensive option.

Thompson’s Realty of Phoenix, Ariz., the brokerage company of real estate blogger and social media star Jay Thompson — is an example of cost focus strategy in action. Many thanks to him for sharing information and insight about his firm and their practices.

(Note: I have no business relationship of any kind with Thompson’s Realty.)

The company in brief

Thompson’s Realty (TR) was founded in February of 2008 by Jay and Francy Thompson. Initially, their motivation was as simple as could be: save money. They did not feel that the brokerage they were with as agents was providing enough value for the money it was taking in splits. So they opened their own boutique brokerage.

See related articles:

A case study in cost competition

@properties: It pays to be different

Small brokerage thinks big: Part 1

Small brokerage thinks big: Part 2

From that start, the brokerage quickly added agents — friends asked if they could join the brokerage, and they said yes. Agents started calling — oftentimes because of Jay’s blogging and social media activities as Phoenix Real Estate Guy (@phxreguy on Twitter) — and they brought in the ones who they thought matched the brokerage value proposition.

Today, there are 18 agents with TR, including Jay and Francy, who cover the metro Phoenix area plus Tucson, Ariz. — which is the branch office of another noted member of the RE.net: Kelley Koehler.

Asked about production numbers, Thompson said that TR doesn’t compare itself to others, so ranking is not important. The company is not after either market share or agent count, he said. More on this below, as it goes to the heart of their strategy.

The price

For the cost leader, whether generic or focused, the price is the primary competitive tool. In order to be successful, the cost focuser must be the leader in cost for its chosen segment.

TR starts agents out at an 80/20 split. From there, after two transactions, the split goes to 85/15; after three more transactions, the split goes to 90/10 for as long as the agent is with TR. Each "level" resets every year, but once you achieve a level, you are there for life.

So an agent who completes five transactions is at a 90/10 split for the remainder of her time at TR for as long as she works there. If she only completes three in 2010, then the "level" resets and she has to do three in 2011 to hit the 90/10 plateau; she is, however, always at the 85/15 level having reached that in 2010.

Each agent is charged $25 per month for errors and omissions insurance coverage — which is passed on to her at cost. Apart from the insurance fee, there are no other fees to the agent. No transaction fees, no technology fees, nothing. On the other hand, all membership dues, multiple listing service fees, etc., are also the responsibility of the agent.

The product: core tradeoff

As with other cost leadership strategies, in order to achieve cost leadership, what is not seen as valuable to the target buyer segment is jettisoned from the product.

In TR’s case, the biggest item was office space. There is no physical office for TR; it is a "virtual" brokerage with everyone working out of his or her home, local cafes, or wherever else works for the particular agent. Having no office, there are no office meetings or sales meetings or anything of the sort. It turns out, this is part of the appeal as well.

TR, or, more accurately, Thompson himself, does offer a range of Web-related services for company agents. For example, he will build a blog for an agent who asks for one; hosting the blog is free and is incorporated with TR’s hosting package. He will also build and host single property websites if the agent provides the copy and the photos.

Due to TR’s Internet presence, the TR website generates a significant amount of leads every month. Thompson estimates that TR distributes about 300 leads every month to its agents; there is an additional 15 percent of the transaction fee if one of these broker leads end up in a closed transaction. …CONTINUED

TR does not offer a companywide customer relationship management system, nor is there any unified messaging platform. The company does share certain documents, such as forms, via the free Google Docs application, but otherwise, each agent is responsible for his or her own technology needs.

At first glance, it appears as if TR really doesn’t provide anything to its agents. However, in an interesting twist, a great deal of the value proposition of TR is not in what it provides, but in what it refuses to require. Its product, if you will, is freedom.

For example, TR has no rules whatsoever on signage. The state of Arizona does, of course, so Thompson requires his agents to put whatever notifications that the law requires. But apart from that, they are free to do whatever they’d like.

TR branding is not required; there is no uniformity as to size, kind, messaging, whatever. Even Keller Williams, the generic cost leader that celebrates an agent-centric culture, has standard signs. TR doesn’t even require that.

There are no rules regarding minimum commissions. Each agent is free to set whatever commission rate he or she wants to, without interference from Thompson or anyone else. There are no internal rules on referrals; each agent works out his own deal with other TR agents on any referrals. There are no forms to fill out, no reports to write, and no sales meetings.

Despite Thompson’s Internet presence and emphasis on blogging, no agent is required to blog or produce content for TR or for her own blog. Every agent is free to do and free not to do whatever he or she wants, with some important caveats.

First, all laws and regulations have to be obeyed. And second, Thompson places a significant emphasis on customer service and ethical behavior.

While an agent is free to do whatever she wants, if what she wants is something Thompson considers to be unethical or not in the client’s best interest, he will likely part ways with that agent. There are, however, no codified rules or handbooks or any such thing; it’s a matter of judgment.

TR quite literally allows its agents to run their own business within TR as they see fit. I happen to think there’s something to the West, particularly the old frontier territories like Arizona, that is particularly amenable to this emphasis on independence.

As a small virtual brokerage, TR does not offer formal training. Rather, each agent is free to (there’s that word again) sit down with Thompson one-on-one on any topic he or she wants to discuss, whether blogging best practices or difficult REO (bank-owned property) transactions.

As one might expect, there is no professional staff at TR. No administrative assistant, no transaction manager. Each agent is free to hire his own staff, of course, but TR doesn’t provide them.

So for the low price ranging from 10 percent to 20 percent of gross commission income, the agent basically gets liability coverage, assistance with websites, leads from TR’s own website (for which there is an additional fee), and almost limitless freedom to run his or her own business as he or she sees fit. Freedom is the product of TR.

Who is the Focus?

Because the core value proposition is one of freedom, TR does focus on a fairly narrow niche of agents.

First, they must be experienced: no fewer than three years of experience. Newer agents find the total lack of structure to be chaotic, rather than liberating, and the lack of requirements feel more like lack of service and support from the broker.

Second, the agents must share Thompson’s values about customer service. He admits that it sounds hokey and every Realtor says they care deeply about customer service, but that he really is quite passionate about it for his own practice and for TR.

He has turned away several top-producing agents in the Phoenix market because he didn’t like their attitude about customer service, he said.

Third, while not a requirement, most of TR’s agents are tech-savvy and social-media aware. As one of the major value propositions of TR is the online presence of Thompson himself, as well as his expertise on using blogs and social networking tools, it only makes sense that the Focus would be on tech-savvy agents.

Fourth, and most importantly, TR focuses on agents who chafe under rules and regulations. Much like Thompson himself, TR’s agents want the freedom to conduct business — ethically and within the laws — as they see fit without a manager looking over their shoulders and second-guessing them.

For that niche of agents, TR’s strategy is to be the "cost leader" with an extraordinarily aggressive schedule for splits. I could argue that KW offers a lower price (aka, higher splits) for agents who are top producers and excellent recruiters, but for a low-to-mid-volume agent, TR’s services are extremely inexpensive.

The fit and strategic competitive advantage

Thompson said TR is built around "passionate customer service." But analyzed from a strategic standpoint, it is actually built around freedom.

The product isn’t so much what TR will do for the agent, but what TR will let the agent do for himself or herself. And coupled to freedom is the lowest cost for brokerage services that makes sense for Thompson to offer. The rest of TR’s operations all fit together around this concept.

No office lowers cost, but also increases freedom, by not having office meetings, sales meetings, required desk fees, and so on. That, in turn, attracts those kinds of agents who are looking for an unstructured free environment. …CONTINUED

Those kinds of free-spirited agents are also precisely the kind of agents who find enormous value in Thompson’s online presence and independent way of doing business. The agents currently with TR were not recruited; they came to Thompson and asked if they can work for him — in large part because of his social media presence.

Having such low overhead means that Thompson can allow his agents to set their own price for services to the consumer, which in turn increases the freedom and independence of the agent. And that freedom means that Thompson is also free from management responsibilities and can focus on his social media presence, which in turn fuels "recruitment" and lead generation. It all fits together.

And the system works. Thompson estimates that his brokerage is at about a 9 percent profit margin based on total gross commission income — and that’s astonishing to me, considering that the splits are expected to be 90/10. On a company-dollar basis, it means that 90 percent of company dollar drops to the bottom line as net income.

An important note, however, is that the TR model may not be particularly scalable. It works with a couple dozen or so agents, all of whom are free and independent. It isn’t clear whether it could work with a couple hundred agents, as the liability increases dramatically for TR.

On the other hand, Thompson doesn’t want to scale; he said he’s quite content being the small boutique brokerage that emphasizes customer service for consumers and freedom for the agents.

Main strategic threat

As with other cost leadership strategies, the main strategic threat for TR is that someone else could offer an even less expensive set of services to the focus segment of freedom-seeking agents. This, however, appears unlikely because of all of the strategic fit elements.

For example, without Thompson’s social media and online presence, it is unlikely that a competitor could offer the sort of support and lead generation that he creates for his agents. Building that sort of national notoriety takes time and effort, which a competitor would find difficult to do.

The emphasis on freedom is difficult to overcome since Thompson quite literally requires almost nothing beyond obedience to laws and ethical behavior; in theory, a competitor could require even less by accepting unethical behavior or activities that aren’t customer service oriented.

But that would likely be a different segment of the agent population than the one on which TR focuses.

Furthermore, there is a tipping point between low cost and service; TR’s agents still feel as if they are receiving brokerage services at the low cost they pay. To go even lower — say a 100 percent split model — the question will be whether such operations could offer any service at all.

Conclusion

Virtual brokerages are one of the fastest-growing segments of the brokerage population because low overhead contributes to offering a low-cost service to agents. TR is just one example of such an operation.

But it would be a mistake to think that all that one needs to do is to get rid of office space and run a virtual brokerage to be successful. As TR shows, there has to be a strategy of some sort that fits together.

Whether the virtual operation is organized around a single idea, like freedom, or around some other set of principles, it does need to be organized and the strategic fit has to exist. Simply being the lowest-cost provider isn’t necessarily going to get it done.

Cost focus strategies can work if the segment being focused upon finds adequate value given the low cost of service. And TR is an example of that strategy.

Robert Hahn is managing partner of 7DS Associates, a marketing, technology and strategy consultancy focusing on the real estate industry. He is also founder of The Notorious R.O.B. blog. You can reach him on Twitter at @robhahn.

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