What is Activity Based Pricing?

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The short answer: it was developed as an accounting tool for manufacturing to price products. It was also adapted to the service business. Now there is a simple version to price real estate services. Here's the long answer:

Consumer Choice models were first offered as an agent with RE/MAX in August, 2004. Over time, significant experience was gained with different approaches and what works and what doesn't; the pitfalls, potholes, roadblocks and agent/broker scourge as well as documented successes. This stuff works! We believe it IS the future for the real professionals in this business.

Where did the current models come from? They were developed based on a service/consulting fee model used for over 25 years as an executive with EDS, an IT and Business Process services provider. It is based on Activity Based Costing.

  • Define every direct activity in a process at it's lowest convenient level and determine time and expense for performing that activity. In real estate, there are basically two types of labor activities: administrative (does not require a real estate license) and professional (a licensed agent).
  • Group activities into major functions or components
  • Develop cost models for each activity and major function
  • Do the same for indirect (or overhead) function.
  • Spread the indirect cost over the direct expense of each activity as a percentage of direct expense to the total.
  • Add a reasonable profit margin (have to be careful not to price yourself out of the market).
  • Develop a compelling value proposition on why you are better than everyone else at a competitive price (not necessarily lower) for your services. BOLD because it is so important!
  • Show potential clients (sellers and buyers) your complete activity list that includes prices (this is called transparency) and collaborate with them on the services necessary to achieve their objective.
  • Sign the contract (simple conclusion, there are, of course, other factors for both parties to be comfortable with before you get to this conclusion).

Determining the time and expense is easier than setting a value on your time for the different types of activities. Each individual must come to this conclusion on their own. I will say that it should be based (normally) on your skill level and experience in the business. Just like any other service business I can think of.

Using this model, we would rarely let a consumer strictly define what services they want to buy. It is and must be a collaborative effort. Our skills and experiences must be a factor in developing an overall plan. In addition, there are complimentary models for both SELLERS and BUYERS. (Buyers can and will pay their agent when there is a compelling reason to do so.).

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