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Structured pricing

publication date: Apr 5, 2009
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author/source: Leigh Caldwell
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In challenging business environments companies need to change their strategies. Property agents are experimenting with numerous alternative business models – whether it’s new pricing models such as structured pricing, a refocus on property management and letting, or new services such as custom websites.

What does it take to implement a new strategy? Culture change in the organisation, new business processes, flexible systems and an understanding of the market. In this article we look at the opportunities and challenges involved in implementing structured pricing, to help estate agents make an informed decision about whether to adopt this controversial new model.

The article identifies the successes – and warns of some pitfalls – experienced by agencies who have implemented alternative pricing models. Finally it includes a checklist you can use to keep on track while adopting the new approach.any time we get half an hour of recessionfree news, Robert Peston pops up to remind us how dreadful it’s going to get. But the property sector is suffering worse than most. Sales are down 70 per cent on 2007 levels, and prices up to 20 per cent lower mean that your fees are down even on the properties that do sell.

Some agencies may have the cash to ride this out and wait for the old business model to start working again. But others suspect that those days are never coming back. What’s certain is that estate agents that want to make money in 2009 need to find new ways to do it. If you don’t want to spend what remains of your cash reserves, you need new sources of income. There are two main ways to achieve this.

Look to lettings

The first, which is sustaining lots of agencies particularly in London, is to concentrate on lettings and property management (Blenheim Bishop, for example, has closed its sales office altogether). This works if the landlords can afford to pay management fees, but they have their own financial pressures and often they are cutting back to a let-only service.

The second way is to recognise that you offer a valuable service to both sellers and buyers, even if a sale hasn’t yet happened. Economics state that whenever value is provided, people will pay for it.

The key is a method called structured pricing, in which you identify services that are of value to buyer or seller and charge money for them. Often this means providing a broader range of premium and enhanced services, to show that you offer higher value than the standard agency service.

Structured pricing – what to offer:

  • some agencies are offering their vendors personalised websites just for their own property – separate from the agency’s main website.
  • other are providing enhanced marketing services – such as brochures, 3D models and additional photography – for which vendors will pay extra fees.
  • agencies which are good at tracking data can offer extra research services to property developers or even to individuals looking for the best opportunities to buy.
  • some are starting to offer architectural reports – such as the Property Potential Report from Betternest – which show vendor or buyer ways to improve the property.
  • the most ambitious are helping sellers to makeover their properties or even to make major improvements such as extensions or loft conversions, and taking fees of several thousand pounds.

The additional services you can provide are limited only by your imagination and your knowledge of the marketplace.

Implementing structured pricing

But what is involved in making a change like this in your business model? Your staff members are used to a traditional way of doing business and the paperwork and processes are set up for it. Is it difficult to adopt a new approach?

The four things you need to get right:
1. Culture.
It’s important to wean negotiators off the old model of commission-only, and help them understand the benefits of creating maximum value for each customer. They may need training or new sales materials, but most of all they need leadership from the head of the agency to set the tone. Customer value must become the mantra for all new opportunities – the customer benefits and the agency will too.
2. Business process.
If you have been using the same contracts and agency instruction paperwork for years, it’s time to change. The new process will involve agreeing specific services and providing them at agreed times, while still keeping sight of the ultimate goal – to sell the property. Fortunately these two objectives are complementary – providing value to a vendor is also going to make the property more attractive and fit with the marketing you would normally do. But you will need to change some of the ways you do things at present, and have the discipline to make sure they happen correctly. In a big agency this could mean a formal change management programme, but the practicalities are simply: training, responsibility, accountability and good management.
3. Understanding the market.
In order to work out which services your vendors and buyers will pay for, you need to understand them. Fortunately that’s one of the biggest strengths for most agencies – the psychology of knowing what people value and what they will pay. A good negotiator will enjoy the freedom of finding the best package of services and the right price for each vendor – just as they will use the same skills to maximise a price.
4. Strong and flexible systems.
Providing the necessary framework for all of these changes are the systems you use. To make a fast change in your business model, you need flexible software. To monitor the value you provide to each customer and charge accordingly, you need reliable software. To provide new and enhanced marketing services to your clients, you need good web integration and software that is easy to use.
If your software is a modern web-based package which supports structured pricing, it’s just a matter of coming up with a new service, configuring it and setting the right price. If you are using an older package which only handles commission, this may be the time to invest in a new system – implementing a new software application is often a great way to put in place the new culture and processes that go hand-inhand with this new business model.

How does it work in practice?

One major property management company is making substantial changes to their pricing model now, to deal with the shift in the property market and the wider economy. Reconfiguring their software has taken only a day or so – but the changes in culture have been more important. The sales people and negotiators have had to adapt to a new way of making deals – reluctantly at first – by introducing customers to a pricing structure that reflects a more complex combination of services, instead of a flat percentage or monthly fee. But as they realised that the new model was actually a better fit to their clients’ needs, it has also become a tool for winning business and closing deals.

Their business process has changed along with their way of measuring and reporting financial results, all of which required new training and some system changes. The new model will increase revenue by up to a third and is likely to keep the company profitable in a very different trading environment. All of this took just a few weeks – most of which was spent on working out the financial implications. The lead time for system changes and retraining was minimal.

A number of estate agencies have been adopting similar changes, the highest profile being Lauristons, which dropped its commission structure in December 2008. As part of a change like this, transparency is key. It’s important to show the value you are offering them, to avoid suspicion.

A number of low-commission or no-commission online estate agents have entered the market recently as well, all of which rely on powerful modern software systems to enable them to charge for a range of value-adding services to their vendors. These agencies will be strong competitors in the future – unless traditional agents can adopt the innovative new pricing model while retaining their great advantage in local understanding and personal service.

CHECKLIST FOR IMPLEMENTATION

If you’re interested in using structured pricing in your agency, the following checklist will help you to put it in place quickly while avoiding some of the risks.

1. Write down all the value that you provide to your vendors and buyers – everything from the aspirational and emotional benefi ts of a new home, to the fi nancial importance of the valuation you carry out and the marketing advice you give them on the best way to present their property. You might brainstorm this with colleagues and even satisfi ed clients.
2. For each value that you have identifi ed, think of a service you could provide to make it even stronger. For example, perhaps one of the values you provide to a couple buying their fi rst house is the vision of a new and better life for their family. Think about enhancing that by introducing them to the local schools, help with furnishing their new baby’s bedroom or just getting to know which neighbours also have children of the same age.
3. Set up your software systems to know about the new service and the process for selling it. If your software doesn’t handle services such as this, you might consider a new package at this time.
4. Make a statement about the culture of your agency. I recommend writing this down – either for your own reference or to share with your staff. One example is, “We are committed to the seller and the buyer getting maximum value and service, as soon as they walk in and all the way through to completion.” Think about what it means and write something that you’re passionate about, so that nobody gets away with just paying lip service to concepts like ‘value’.
5. Prepare sales materials for your new services and new structured pricing model. These don’t need to be expensive brochures – often it will just be a new Web page or a Web document/PDF which your software will generate. Ideally it should be customisable to each vendor, because you will want to provide them with a customised price and offering based on their circumstances. Again, choose software that can help with this.
6. Train your staff in the culture and process of offering these new services to your clients. There’s no formula for this – you are the best judge of how to teach them whatever they need to know to be successful.
7. Test the new processes so that you know that both your staff and your software are going to handle it in the right way. You might use a “mystery shopper” to run through the whole sales cycle with your negotiators, so that you know everything works from end to end.
8. Start to let clients know that you have a new way of doing business. You might start with sellers who have already instructed you – by showing them how these new services will give them a better chance of selling their property. Or you may advertise the new approach to new sellers, or send a trial mailshot to a set of addresses. With the right message, structured pricing can stimulate interest from homeowners who have been resigned to waiting out the downturn.
9. Monitor the results. Any new way of doing business has to be measured, so you know how successful it is and can improve it with experience. Once again, your software should be able to help with the marketing and monitoring so that you’ll know how much money this new approach is making for you. Good luck with structured pricing, we would be very pleased to hear from readers with stories of how they are getting on with this – or any other innovations in their business model.

Leigh Caldwell is a director of Pex Software, a supplier of enterprise software to the property industry. For info, go to www.pexsoftware.com.