I was reading an article about cost effective ways to increase profits and came across some great statistics. We are all familiar with the 80/20 rule, or at least should be. The ideas that 20% of the people are responsible for 80% of the income, and 80% of the people make the rest of the left over 20%. You can take this "law" or rule even a step further. 20% of your daily activities are responsible for 80% of your income. OK now here's the hard part, that's right, 20% of your CLIENTS are responsible for 80% of your profit.
FOUL! you say. That's not right, you claim. You might have me on that one, because your business may be one of the 80%. OUCH! Let's back up a second and do some math. IF you closed 50 deals last year, where are the source of those deals. If you are like the average agent who "claims" that 50% of their business comes from referrals, then 80% of those 25 deals should have come from key sources. Furthermore when you look at the numbers the key in on the actual profits.
That's right profit and income are different. At least in my book. Real Estate sales in no different than widget sales or anything else. You might make a sale and even increase your income, but in my mind, there's an opportunity to lose proit.
Confused? I am too.
Let's take an example, say a client calls you to tell you she's in the market for a home. To keep this short, we'll just say that she is nice at first, but then becomes a bit a handful as the process goes on. You show her home after home, and she likes to discuss things on the phone. However, her conversations are shallow and you get that "feeling" of just wanting her to close and you become worried about her even closing. Finally you find something for her and she is under contract. She remains a handful with weekly calls if not more as the closing process nears. You spend time with vendors, loan people, other agents all to get the closing. Finally, the day comes to closing and after you kindly explain to her that you will not be sharing your commission with her and why you EARNED your commission you decide that you will not be putting her on your mail list.
What happened? You've just got paid. Your income went up. However, you've lost THOUSANDS! in PROFIT. If you were able to identify her early on you could have referred her to the office newbie, collected 25% of their income and gone on to meet with another client.
If this idea makes you gasp, think harder. You're falling for the fallacy of increasing sales instead of boosting profits. If you stop marketing to unprofitable customers, you have more time and resources for customers who actually grow your business. "More than likely, 20 percent of your customer base is contributing 150 percent to 200 percent of total annualized profit (TAP); 70 percent is breaking even; and 10 percent is costing you 50 percent to 100 percent of TAP," says Atlanta marketing consultant Michael King. Take a detailed look at your customer profitability data and then direct premium services and marketing to customers who count.
Here's some keys to success next time:
- Identify the 20% of your clients that can give you more business. You have them, just dig deep. It's not just who likes you and who trusts you. Who can you call and actually have a great conversation?
- Identify the top 20% of activities that help you get more closings.
- Get better at qualifying buyers/sellers so that you are only working with the top 20%. Refer the rest.
- As soon as you see the turn (deal is going to take a lot out of you) pass it along so you can move on to the next.
Look, I'll admit I'm one of those sappy Realtors who likes to say he's doing this for the people and likes helping families live their dream. I'm also honest enough to say there are certain people I don't mesh well with. From now on, I will just say no! and pass them to someone who can help them, so I can focus on my 20%!
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