In housing market downturns, most brokers react to the pressure on their bottom line by cutting expenses. The area that can provide the most immediate relief is a reduction of personnel spending.
Occupancy-related expenses are the next biggest area of spend for most firms, but given the longer term nature of lease agreements, this area is a little harder to unwind. Brokers will typically then look to spending cuts in marketing, advertising and promotional. Interestingly though, there’s not a ton of wiggle room in this area given the trends we’re seeing in our benchmark studies.
In 2012, brokers were spending an average of 7.3% of their gross margin (company dollar) on
advertising & marketing-related (A&M) expenses. Incredibly, over the last 10 years, this number has dropped to 2.1%, a staggering 71% decline. So how is it possible that so little is being spent on A&M in a sales-centric business?
Reasons for the decline
One of the main reasons for this decline is that lower-cost brokers continue to increase their market share. Firms that incorporate flat-fee, monthly-fee, 100%, capped, and other models have been part of the fastest-growing segment of the market over the last decade. And it just so happens that firms like this tend to spend much less on A&M than your traditional real estate firm.
If you’re only keeping $0.06 or $0.07 on average out of every commission dollar earned, there’s not a lot of margin for spending on much of anything, let alone A&M. In these models, the onus is typically on the agent to promote their business, and this is an acceptable trade-off as far as they’re concerned.
This reduced A&M spending is not just a habit of the new entrants to the market. Incumbent 100% and low-cap firms like RE/MAX and Keller Williams are in the same boat. Affiliates of these major national franchises typically spend very little on A&M, instead relying on global brand recognition to support their agents.
Interestingly, traditional brokerage firms, while a smaller contingent than they used to be, are not letting up on their A&M spending. In our benchmark report, we can separate out the models, and in looking at only traditional brokers, which I would define as firms with uncapped graduated commission plan models, their A&M spending has been very consistent.
In 2012, these firms spent an average of 8.6% of gross margin on A&M, compared to 9.1% in 2022. Since these models keep more of every commission dollar earned, they can afford to spend more on A&M for their agents.
Traditional firms are not a dying breed, as there will always be a contingent of real estate agents who want and need a full service broker, but it’s apparent that they’re not as prevalent as they used to be, given the industry-wide trend in A&M spending in recent years.
The bottom line is that most brokers who are looking to cut spending don’t have a lot of play on the advertising & marketing front. Given the national average, reducing A&M expenses won’t necessarily make a meaningful overall impact on most brokers’ bottom lines.
Scott Wright is a partner with RTC Consulting.
