Activity Based Pricing - A Primer

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I began using Consumer Choice models when I established my relationship with RE/MAX way back in August 1, 2004. Over time, we accumulated significant experience 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! I believe it IS the future for the real professionals in this business.

Where did the models come from? They were developed based on a service/consulting fee model I used for over 25 years as an executive with EDS, an IT and Business Process services provider. In fact, it is a business model I have been familiar with for longer than my career with EDS. It is based on Activity Based Costing. Here's the simple explanation:

  • 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, we developed complimentary models for SELLERS and BUYERS. (Buyers can and will pay their agent when there is a compelling reason to do so.).

2 Comments

It's was amazing to me when I first met Merv how we came from such different backgrounds and yet, had similar thought processes regarding how to put together reasonable compensation for our work. Whereas Merv used the terms administrative versus professional, I used functionary versus fiduciary, but the end result was similar. Merv is far more analytical than I - I'm more geared toward marketing - and his SmartPlan product is amazing, not just as a way of figuring out fees but more importantly as a presentation tool to help the consumer understand how we get paid and make the choices transparent. I'm sure ACREs who have purchased it will agree with me that it's a very "smart" investment to look at.

Merv, you have just handed the ACRE Community an important set of building blocks. For new ACRES especially, as well as for many others, this speaks so clearly to the "What do I do now?" question. Well done!

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