Yesterday there was a fairly spirited debate about the future of real estate commissions, particulary on the side of the buyers' agents, and whether a flat-rate structure truly represents the future or is little more than the latest marketing fad.
(NOTE: Some of you are probably clicking away from this page, including my wife who may be heading here instead of reading what her husband has to say. Some may view this entire debate as little more than an internecine squabble - agents arguing with each other. Rather than pulling out the rulers and measuring, we're instead blogging away. If you haven't quite clicked away, though, it might be worth staying since it is the service you will be receiving and, depending on which side of the transaction you're on, the dollars you are spending that are being discussed. I also believe your intelligence is being brought into question, but that's just me.)
I believe it's safe to assume everyone is familiar with Nordstrom. Fairly pricey clothing, offset by personalized service and an overall service guarantee that can't be beat: you can return an item for any reason - ANY reason - and the refund promptly is provided with a smile, no questions asked. How can they do this? Because they have the utmost confidence in their value proposition. A Tommy Bahama shirt is the same whether purchased at Nordstrom, Robinsons-May or Macy's. The difference is in the value of the service provided to the customer.
Nordstrom does not deign to enter the fray with sales on presidential birthdays, national holidays, or random Fridays spread throughout the calendar. The only discount to be found comes twice a year during the semi-annual sale. For some, like my friend Dawna, the semi-annual sale is a national holiday unto itself but that's another story. How can the store justify only two extensive sales a year? Again, supreme confidence in their value proposition.
For any business, the decision must be made at some point whether the business model will be based on price or on service. Even for those claiming that you can have excellent service at a lower price, public perception ultimately will be their undoing. If it walks like a duck and quacks like a duck, you're not going to convince someone you're a swan.
Two restaurants can have essentially the same menu and the same quality food, but if one has soft lighting and linen tablecloths and the other features a couple of wide-screen TVs tuned to ESPN, there's little doubt the former can charge more based on the ambience and remain as profitable as the latter. Each appeals to the clientele. Diners are not going to the second restaurant for a romantic evening (unless you're me, as my wife likely will point out). They're going for the food and the lesser price. End of story.
I believe this will be the crux of the debate regarding the future of real estate commissions - service and value versus price. And it's not at all a new debate. The only difference between the debate now and the debate then is we have the blogosphere (sorry, Kathie) in which we can hammer each other over the head with our own perspective.
All of the arguments that commissions based on a percentage of the sales price are doomed to extinction completely miss the fact there is a portion of the population - a significant portion of the population, in my view - who happily will pay for service. They want all of the trappings - the soft lighting, the candles, the violin music versus the NFL Game of the Week available in their own living room - and will pay to receive it. It is why AJ's markets remain in business even though there's little significant difference in its meat departments versus its parent company, Basha's, except in the greatly increased price.
When service is your value proposition, service will sell.
Now take the flip side. Let's take the idea of a capped, flat-rate fee for service for buyers' agency as has been promoted and argued endlessly of late. Promises have been made that the service will be excellent, and of this we have no doubt. How you measure such an intangle or, more importantly, how the public measures such an intangible remains to be seen but we digress.
Let's say you advertise that you will cap your commission at $4,000 on a sale of properties $250,000 and under, with whatever remains of the co-broke on a property passed through directly to the buyer. Clearly, you should see an increase in business as those looking for the discount swarm like moths to the flame ... until another heat source appears on the horizon offering a cap at $3,900. And then another at $3,800. $3,700. $3,300. $2,500. Where does it end?
Take a look at the stock brokerage industry and the massive discounts offered a few years ago (most continuing today) and tell me, is there ever an end? I argue there is not. Once the journey down the discount path has begun - once the driving force of your business plan is not the service but the price, it's virtually impossible to pull back from the bring. There always - ALWAYS - will be someone undercutting the rest of the competition. It's the nature of a free-market system.
But let's go back to having service as the center of your business model. Service is intangible. It's touchy-feely. In many cases, it's nothing more than a feeling, a rush of endorphins akin to eating large quantities of chocolate. Most people can't define what makes great service better than good service, but they know when they've received it.
How do you compete when service is your core? By providing increasingly good service, of course. And is there any question that good service - communication, negotiating skill, contractual knowledge - is of benefit to the consumer at large? Can you honestly say there is nothing noble, nothing worthwhile among those who choose to promote service over price?
Is there any concrete evidence that a seismic shift will take place whereby consumers as a whole eschew service in favor of price, in real estate and other industries? Only in the discount crowd's rationalizations.
With service as your core message, provide excellent service and price becomes secondary. With price as your core message, all your client base wants to know about is the price and how it compares to everyone else. Service becomes secondary.
You can't have it both ways because the public won't buy it. Just ask the progenitors of the McDonalds Happy Meal for Adults.
(c) Jonathan Dalton, 2006 / Jonathan Dalton's Arizona Homes | 
