Estate Agency Maths, 101.
It’s shocking that 85% of small company owners are surprised by the calculation I’m going to share with you today, and the reason I’m writing about it now is so you can make the right changes for your business at the very start of the year and gain maximum benefit from this point onwards.
Let’s imagine an agent with an average selling price of £250,000 who completes 100 transactions a year at an average fee of 1% (all figures net of VAT). The maths looks like this:
(250,000 x 1%) x 100 = £250,000. If the agent is operating on a 20% margin then this equals a pretax profit of £50,000.
Let me pose a question: how many market appraisals can the agent afford to lose if they increase their average fee to 1.2% to still generate the same profit? 10? 20? 30? The answer is in fact, 84.
Let me show you my “workings in the margin” as I was required to do at school.
If you list 80% of the market appraisals you carry out and then sell & complete on 75% of them, then to complete on 100 transactions you need to do 167 market appraisals.
Therefore, if you raise your fee to 1.2% then your average fee = £3,000 and your profit margin increases to £1,000 (33%) per transaction. In order to generate the same £50,000 profit you only need 50 completions and therefore just half the number of instructions. This assumes all costs remain equal although it’s likely that half the volume of transactions would enable some cost reductions but I’ll ignore these at this time.
By contrast, let’s consider an agent that’s operating at 1.5% and decides to reduce fees to gain market share. How many more market appraisals would they need to win (assuming all the other ratios remain the same) if they reduced their average fee to 1.2%?
The answer is 41, almost 1 extra per week.
One of our brilliant speakers highlighted this to our members several years ago and quite a few were shocked when they applied the same calculations to their own business. That’s because most people think of discounting as reducing the top line income by a small amount as opposed to the key point of reducing the bottom line profit by a substantial figure.
This issue is principally caused by not being aware of what your true profit margin is. The reality for most agents is that the costs are substantially fixed – the salaries, premises, portals, utilities, etc. are mostly inflexible. That’s why reducing fees by a small amount can have a devastating effect on the profit. But here’s the good news, the opposite is true. Raising your fees by just 0.2% might cause your profits to near double.
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