Gross Commission is booming but what about your Gross Profit?
The impact of aggressive recruitment and tough market conditions over the last 4 years, culminating in the Covid lock down, has been highlighted by the Gross Margin (Income less Cost of Sales)/Income ) of the Sales Divisions dropping from 35% to 30% from the previous normalised levels in capital city markets. This has a big impact on ongoing profitability, and it has never been a better time to be an Agent.
You would know this if you have been trying to recruit at pre 2017 commission package levels, where you will find Agents have not been joining, you would have to add at least 5% to your older packages.
In this booming market this simple fact means that for good businesses, with high performing Agents, the profit in dollar terms is okay, but in percentage terms gross profit has dropped by 5%.
Some would ask, so what? Well in short, this is the whole point of business, protecting margin, and now in a booming market, margin loss has been hidden by Sales Volumes, however experience says enjoy it while it lasts, but be ready for the return of the normal market conditions, and when that happens the lower sales and higher cost of sales payouts could cause a dramatic turn down in profit.
So how do business Owners manage this? Well, it is not a simple answer, it is a balance of several. These include:
The number of Agents you employ.
The mix of average to high performers you have in your business performing.
Cost management of the expenses you provide for Agents on-top of their commissions.
Clever use of technology and outsourcing, to lower the cost of your transactions.
Other income streams, that you can generate from the deals your business have sold.
You will notice that I have not recommended Principal sales to help fund the profitability, this is because I believe that has happened for too long. The industry is full of Principal selling businesses where the Owners do not get paid their market rate as an Agent, and it is this subsidisation of loss leading Agents, then paying high percentages to their good Agents that causes the downward spiral for Owners, when action to correct it is the answer. This is the test of business leadership.
You can do something about this now, by doing a business financial health check and assessing what would your business look like if turnover dropped 10%, or what strategies you can implement to grow your business beyond it is current performance.
This is not the first time the markets have surged, I recall 2002/03 and 2011/12 but this lift is the first one since the rise of technology enabling platforms and social media, that allow individuals to think they are the whole story. When it gets tougher, well led businesses who have engaged and challenged their teams to be ready for all conditions will show their strength, but for those who are riding along they may not have the profit they thought they once did.
Which business do you want to be?