Pricing Models and Negotiating Tips for Brokers & Vendors in Real Estate
Pricing is never easy.
Especially as a vendor approaching the real estate industry. Having done this a few times for various levels of the industry (and as a buyer from the broker side), either at Trulia, RealScout or now at LocalLogic, it’s always a fun conversation to dig into the complexity of pricing within the real estate space. I don’t know what interest is out there for this topic, but as a sales leader in the real estate industry for over 17 years, I wish someone told me this stuff long ago. So hopefully this will help both brokerage leaders and their vendors arrive to better conclusions on pricing.
Price models, as much as value propositions, can be the reason a brokerage doesn’t purchase necessary tech, or the reason a start-up fails. On both ends, there are things to weigh. Pricing in real estate tech has taken many flavors. My goal with this post is to help with many negotiations —and hopefully save people and their companies from wasting valuable time.
Here are several models for pricing in the real estate industry. For the most part I am positioning this towards enterprise sales; in some cases it may resonate for agents.
Pricing By Agent (license/user):
- What is it: Pricing based on total agent count. Usually seen with software or SaaS businesses like a CRM, etc.
- Pitfalls: The 80/20 rule is alive and well in real estate. This pricing model makes it very difficult for brokers with already thin margins to provide good tech to their team. For example, a broker with 100 agents, on average, only has 20 or maybe 30 agents that are truly profitable contributors that incentivize the broker to provide more tools. Yet these are the same agents who are “capped out” or on high splits. A broker may opt out of technology they need because this pricing model is unfriendly to their business model. Other things to consider are part-time agents, or agents on the “books” that don’t sell, like assistants. Makes for messy bookkeeping and difficult negotiations with the buyer.
- Best Practices: In fact, pricing by agent may ONLY work if the broker has a “tech fee” model where all the agents pay in—or some pay in to tiers for group rates. This allows the broker to be a partner and add value to the agent relationship. For some companies, I have provided licenses to all users, while discounting the “working/active” agent count, OR have priced only on transacting agents and given newer/non-transacting agents software for free (at times with a limited service).
Pricing by Office:
- What is it: Pricing based on office count.
- Pitfalls: Difficult for sprawling companies. Also weird for the vendor if one office has 500 agents and the other has 20. Getting the price point right can be confusing. What do you do when you get to virtual offices?
- Best Practices: The only way this makes sense is a shared resource that may be physical in an office—say a 3D camera, and the software license that powers it. I have seen SaaS companies that aren’t pursuing massive revenue goals also price this way as a way to avoid agent count arguments. However, I would advise against this model because too many variables exist among physical offices.
Pricing by Listing:
- What is it: Pricing based on listing count, usually for a time span.
- Pitfalls: Okay, this is much easier for a broker to count the cost against (assign ROI). But do you count MLS listings or just company-owned? Do you count listings on the market for one day or do you snapshot the last 12 months and price accordingly?
- Best Practices: The latter is likely the best call (annual listing count) and is the way many listing marketing services price today. This allows the broker to recoup costs since most listings will sell, but profit margins are tight. Increased costs here often get passed down to agents or recouped via some kind of fee. NOTE: A listing in NYC and a listing in Albany, NY have much different ROI implications. Pricing by listing should take into account median list prices for areas served.
The “Razor” Approach:
- What is it: When a software or service is provided cheaply, or for free at an enterprise level, but upgrades or usability has a pay wall or limit.
- Pitfalls: Broker gets the razor for free or a low flat “access fee” or bulk license fee which is stable, and the agents pay for the “blades.” In some cases the vendor and the broker split upsell fees. In that case, two parties want to extract value and are exerting pressure and agents can feel pressure from both sides to buy something. This can make for overwhelming sales pitches and meetings that agents don’t want to go to (which is already a problem). Brokers have not historically shown that they are a great sales channel (on their own).
- Best Practices: In this model the vendor truly adds value to their clients’ bottom line from whatever value the tech is bringing and the revenue from shared success—difficult for the vendor to manage, but financially friendly to the client. The main risk for the broker is agent burnout. I have seen situations where there is great alignment from the broker and the agent, with a plan for communication and a well-thought out launch plan. For example; pre-marketing -> soft launch -> focus on success with key early adopters -> Launch -> marketing success internally and then continuing the cycle. Don’t forget webinars, handouts and live trainings. Like I said, more burden on the vendor, but if the product actually works, you can see great adoption and sales. This requires a true partnership between the vendor and broker to work. Great for SaaS models that require agent participation.
The Success/Referral Fee:
- What is it: Free software, lead or service in exchange for a fee.
- Pitfalls: Less common, but still around. It just lends itself to a lot of arguments and requires trust and accountability—and lawyers. In this model, services may be provided for free in exchange for a portion of the success fee. This is less common due to RESPA, etc. An example is a company sending a listing lead for a referral fee (paid if the company gets the listing or sells the home).
- Best Practices: This is not very common from a true vendor. And as mentioned above, this is rife with issues of legality. Better off to charge a flat lead fee and be fine with it. Some states may require a brokerage license to collect a referral fee.
- What is it: Completely free level of service. Possible upgrades at certain level(s) of use.
- Pitfalls: Nothing is truly free. A favorite quote floating around Silicon Valley is, “If it’s free, the product is you”. Meaning, your data or interactions are providing value to the platformin exchange you are receiving some value. A great example of this is posting on a listing portal. Your listing being there is free, but they get to make money around your data. In exchange, you get the marketing ability associated with that brand. This creates distrust at times, and can embitter early adopters because, as value increases in the platform, the freemium bar moves farther and farther away. Any early user of Trulia/Zillow likely remembers a time when it was $99 for unlimited featured listings on the platform, or when it was totally free to be the listing agent on your own listings.
- Best Practices: Know what you are getting into. Vendors need to be transparent. Everyone is in business to make money, so establish early adopter benefits that last. Inevitably, contracts can be altered, but work with the vendor to establish “friendly fences.”
Flat Fee / Monthly Fee
- What is it: Fixed price, usually based on cost/value pricing models. Cost based pricing means that the vendor assesses the cost of creating the tool or service, and adds a layer for profit. Value based pricing, takes less into account the cost of creating the tool or service, and more into the ROI or perceived value received by the buyer.
- Pitfalls: Most vendors aren’t going to tell a broker their costs to create the service or tools or their profit margins. For SaaS there is a high cost up front in creating the tool and service, often recouped over a volume of subscriptions. I think these pricing models are hardest for a buyer to understand – especially cost based pricing models. At the end of the day, ROI or Value based can be the easiest to explain and most common. This is especially true If the product can directly be tied to a metric (leads, closings, recruitment, traffic, etc).
- Best Practices: In this model you should take into account the avg. listing price point per customer, or market as a way to balance your pricing per market. It can annoy a client to know that the same service somewhere else is cheaper, but logical customers understand that the implications of their market typically impact price – i.e. $1M avg market vs. a $250K avg market, usually has pricing that scales similarly.
Negotiating deals – besides pricing, you also need to know where you can negotiate. Here are some recommendations for both sides.
- Cancellation clause: As a vendor in this space for years, and as a broker tech buyer early in my career, there was one clause I loved to ask for—and provide. I called it the “Good Neighbor” clause. This clause allows both parties a mutual cancellation with 30 days notice. Sometimes I packaged this in the first 90 days, or even the first year. These kinds of terms establish trust on both sides. If a vendor fails and can’t cure in 30 days, you can leave. And for the vendor, if a broker doesn’t deliver on expectations, pay their bills, etc, you can part ways as well.
- Delayed Payment: Some vendors don’t need to start billing day oneIt doesn’t hurt to ask for a month free vs. a discount. For example, sign a 15-month contract so you have 3 months to ramp up your agents. Note, you may lose your cancellation clause or need to establish principals to cancel within the first 90 days.
- Bulk Payment: Some vendors value cash, especially early stage startups. Offer cash payments, in full for discounts. (watch cancellation clauses here)
- Price Protection: Love your vendor? Negotiate a longer agreement with price protection. Lock in 2nd, 3rd, 5th, year pricing in advance—try to get upgrades in too.
In closing, I hope this helps everyone get to the best answer and help our industry transform into the future. I tried to be as inclusive as possible, but I may have left some strategies out by accident. If you think of something I missed or have other thoughts, please leave feedback below—and share this if you found value in it.
Onward and Upward!
[Editor’s note: Originally published on LinkedIn]