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Let's Start Tipping Brokers

March 31 2019

hbq lets start tipping brokersIn the past, we've talked about the compensation model for brokers (here and here). As Redfin continues to grow, the fixed-fee/discount model is continually positioned as a superior one. There's REX and its $2,000 fee, Homie and its $1500 fee, and a slew of others who are hitching their wagon to the trend that fixed-fee aligns best with the incentives of the client: why pay more simply because you spend more?

The issue, as is well documented, is that there is often a stigma with 'discount' that implies lack of quality services provided when compared to the traditional brokerage model. What drives consumers crazy with the latter is the fact the agent gets paid more the more you spend, not necessarily due to better service. Is there a third structure that would optimize the alignment of incentives? Yes: tipping.

Tip Your Broker

What if brokers worked like restaurant servers and worked off a below-market wage and earned tips? Here's how this may look:

  1. Brokers earn a basic livable wage (salaried)
  2. Unlike the current model, where the commission is agreed to before the transaction, a range of "tip" is agreed upon upfront
  3. Post-transaction, the client selects the tip amount based on quality of services rendered (and perhaps the default option is in the middle)

By keeping the salaried portion just above a livable wage, it creates the incentive to earn tips, unlike a fully salaried position. Similarly, it keeps the carrot in front of the stick, maintaining some pricing power in the hands of the consumer, and establishes a fair practice of tipping where it cannot be completely excluded, but is based on the actual quality of services rendered.

Let's dive through some of the most likely Q&A topics:

Q: What sort of range should we establish for tips?

A: Similar to restaurants, where the tips generally fall somewhere in the 15-20 percent range, the suggested broker tip range would be in the neighborhood of 3–6 percent.

Q: What's stopping clients from always tipping the minimum?

A: What's stopping restaurant patrons from tipping 10 percent? There will always be the cheapos, but by establishing a social-conventional norm, it is highly likely the average falls within the middle of that range.

Q: How does this better align incentives for both the agent and the client?

A: For those that argue a discount model works best, the counterargument could be made that beyond providing services that justify the fixed-fee, there is simply no incentive to provide more quality beyond that point. You are effectively incentivizing agents to do the minimum required to justify the discounted/fixed-fee dollar amount. Through the tip model, there exists a constant incentive to do more for your clients. It could also be the case that the maximum in the tip range is a soft one in that clients can tip more if they so desire. This is an advantage over the traditional 6 percent model in that, again, if the agent feels they've done more than enough to justify 6 percent, there's no incentive to keep going.

For clients, you feel like you have fair say over payment. When terms are agreed to before services are rendered, clients are at the whim of the agent. Would you agree to pay your server a 20 percent tip before she even seated you? Why do we do this in real estate brokerage?

On the Quality of Agents

Agents are often benchmarked by gross commissions. This is a deeply flawed metric. While there is certainly a relationship between gross commissions and quality, it is not very strong. Just because someone has racked up a ton of sales doesn't mean they are necessarily a good agent; it means they are either operating at higher price points or simply doing more business.

Should we be penalizing those whose clients just take longer to buy and/or at lower price points?

Quantity is not quality. Let's go back to restaurants. All the servers at the end of the night compare their tips. Server A has $300 while server B has $150. Can you confidently say Server A is better? What if they had worked 30 tables and earned $10 each, which represented an average of just a 10 percent tip? The high turnover was clearly a result of patrons rushing to leave. Server B, on the other hand, only served one table, but they lingered in enjoyment and left a 30 percent tip. Server B is the better server despite lower gross tips.

Herein lies a potential challenge: by incentivizing quality over quantity, you risk actually earning less. That may be true because higher turnover generally leads to more money, but over the long term, quality earns more. If we began to measure success in the industry by tips as a percentage of sales (i.e., Server B's 30 percent average vs Server A's 10 percent), we can better understand who the best agents are, not those who have the biggest marketing budgets, connections, team sizes, and highest price points.

How powerful would it be to come to a client and say, "I'm paid a modest base salary and additional based purely on the quality of services I provide. Generally, that means a tip of between 3–6 percent, and historically I've averaged at the top of that range when compared to my peers. Let me prove to you why I'm worth it." What client wouldn't sign up for that offer?

The question is, as brokers, are you willing to bet on yourself in such a manner?

To view the original article, visit the Homebloq blog.