Cost Cutting: A Sledgehammer or a Razor?

Find the best ways to trim spending, and you'll keep your business from falling off the rails.

May 1, 2009

One day last summer it occurred to Larry McGee, CRB, CRS®, that his brokerage’s beautiful fifth-floor offices, which boasted spectacular views of Pikes Peak in Colorado, had become little more than a warehouse for desks. "Most afternoons after three o’clock, it was just me and the staff looking at each other," says McGee, broker-owner of The Berkshire Group in Denver.

As he thought more about it, he realized that all 12 of his associates had a home office, a laptop, a cell phone, and various other wireless accouterments to stay in touch and conduct business. The office space he provided was superfluous. So in September, "we became a brokerage without walls," he says.

Ditching the plush digs presented some challenges, but the $5,000-per-month savings were worth it. "When we were making $25,000 a month, that $5,000 was no big deal," McGee says. But when the river of cash slowed to a trickle, the expenditure became a major item. McGee also downsized from two administrative assistants to one. "So far, throwing the office out the window is actually working pretty well," he says.

Tough times present opportunities to cut costs in areas of your business that you haven’t examined recently, says Steve Bloom of SCORE (www.score.org), a national nonprofit agency that provides free advice to small-business owners. "This downturn is a time to get back to traditional best business practices," Bloom says. He recommends taking a hard look at every dime that goes out the door: "What are you spending day to day to keep your business going? Is every cost necessary?"

Many brokers find it’s easy to make the decision to lower costs, but it’s a lot harder determining where to make those cuts. Some areas that are the most painful to reduce, such as support staff, are just the areas where it makes the most business sense to reduce spending. "Cutting support staff is generally the last thing you want to do, but you should do it first," Bloom says. "Examine your personnel expenses and let go of anyone you can’t afford."

Meanwhile, areas that seem to be the easiest targets for cuts—certain marketing programs, for instance—may be better off left alone. "This actually can be a great time to build your business," says Timothy Calkins, marketing professor at the Kellogg School of Management at Northwestern University in Evanston, Ill. "Most people tend to cut marketing, so you can really stand out."

So how do you figure out what goes and what stays? It helps to learn from the experiences of other brokerages that have successfully trimmed their budgets.

Leave No Stone Unturned

Real Estate One, of Southfield, Mich., is one of those brokerages. The company started planning for the housing market shift several years ago and has since reduced spending by a substantial 40 percent. "We saw the market turning and started making adjustments," says Stuart Elsea, co-president of the brokerage, which has 1,400 real estate professionals. "It’s one of the reasons we’re in pretty good shape today."

Elsea says the brokerage’s costs fell into three categories: people, facilities, and marketing. First to go were marketing programs that were artifacts of a more prosperous time. "Then it started to get a little more difficult," he says. "We cut back on staff hours and shortened the hours our branches were open." The company also drastically cut print advertising and started renegotiating its leases.

"Landlords have a high vacancy rate right now, so it put us in a good position," Elsea says. He reduced the amount of space the company was leasing and the price it paid per square foot, and he negotiated shorter-term leases. "We sign one- or three-year leases, instead of a typical five- or 10-year lease."

Real Estate One then cut back on travel to conferences, expense accounts, and perks such as company tickets for ball games. It ordered a wage freeze for all staff at company-owned offices. This past December, the traditional holiday extravaganza became a potluck at individual branches. And the company switched telecommunications providers, which Elsea says has saved a bundle. "It’s amazing what you can do if you shop around," he says.

Certain costs have been shifted to associates. Elsea says the company used to have a number of marketing programs it split 50–50 with participants. "Now, we make them pay 75 percent or all of it," he says.

The brokerage’s ownership team meets every Friday to talk about cost cutting. "Most of the cuts are back-office cuts, things not visible to the customers or even the agents," Elsea says. "But the longer this lasts, the harder it gets."

Some changes probably will be permanent. But others, like the freeze on wages and hiring, will be lifted when times get better. "We plan to stay pretty lean," says Elsea. "But we realize that you can’t cut your way to success. Eventually, you have to find new revenue streams."

Treat Marketing With Care

Effective marketing is one way to generate new business, which is why experts like Northwestern’s Calkins say it’s smart to closely analyze how your marketing dollars are being spent before making any big decisions on cost-cutting. Instead of scratching programs entirely, you can save money—and still see great results—by refocusing your campaign on a more targeted audience, he says. When resources are tight, reaching out to everyone in your market is as unwise as it is impossible.

"It’s almost counterintuitive," Calkins says. "You may feel that you need to broaden your customer base and get out a very general message right now, but the truth is you have to become very focused."

That means identifying who’s most likely to buy, "given the local market and your particular franchise. You have to be very clear about what type of buyer you want to capture." It may be investment buyers, empty nesters, or second-home buyers. "Ask yourself, ‘Where can I specialize?’" he says.

After identifying your niche, it’s time to market directly to those customers—and only those customers. "You have to get away from this idea that any buyer or seller is a good one," he says. "It takes a lot of courage to say, ‘That customer or buyer is not right for me.’" Failing to do so only dilutes your brand. "Once you lose your focus, you lose your distinctiveness and become just like all the other groups out there," Calkins says. "There’s nothing to set your business apart."

When the market rebounds, it’s easy to spread out again into different areas, but that core business will remain. "You’ll get better and better at that specialty, which will give you a unique business and brand," Calkins says.

SCORE’s Bloom adds that in difficult economic conditions, companies should consider using some of their marketing dollars to educate customers. Buyers and sellers may be hesitant to make a move because they aren’t knowledgeable about the market.

"Teach people about what’s going on," he says. "Think about what type of information you can give to the consuming public." Tell people about the increasing affordability in their area, and talk about the inventory available. Your goal should be to give people a compelling reason to buy now.

Providing educational opportunities, whether through workshops, e-mail campaigns, or other public relations efforts, also keeps your business name in the public eye. But be honest, says Bloom. "Don’t paint some glossy picture," he says. "You want people to feel you’ve helped them be better prepared." When the market recovers, people are going to remember who has the most knowledgeable and competent real estate professionals working for them, Bloom says.

Advertising must also become more focused. Spending a lot of money advertising generic listings is "absolutely a waste of money," Bloom says. Instead, focus on what makes your listings special.

Find Economies of Scale

Four years after starting his boutique brokerage, Brian Cane, CEO of PacifiCal Realty Group in San Diego, had expenses totaling $25,000 a month—much of it for marketing and advertising. It wasn’t a problem until he and his 12 associates managed to sell just two properties in three months early last year. "All of a sudden, I had $75,000 going out and an income of about $10,000," Cane said. "Something had to shift."

Beginning in February 2008, Cane spent six weeks interviewing the biggest real estate groups in California, finally joining Keller Williams in May 2008. Cane kept his business name, but he and three of his associates moved to a nearby Keller Williams office (the other nine opted not to affiliate with Keller Williams or left the business). The arrangement has cut his monthly expenses by more than half. The biggest savings came from overhead. Cane no longer had to pay $3,000 a month for office space, plus he was able to drop the copy machine lease and disconnect the 14 phone lines in his old office.

"Once I made the move, I didn’t have any need for a receptionist or marketing coordinator, either," Cane says. "So I no longer had to pay those salaries." His transaction coordinator stuck with him, although at a reduced salary. "My customers haven’t noticed a difference," Cane says. "They’re still being served by the same people, just in a different place."

The move has been great for his bottom line. Cane sold $13 million worth of properties in 2008, which is $4 million less than in 2007. But his net profit has gone up 21 percent. How? Before, as an independent broker, he netted 31 percent of his gross sales, but in his first nine months with Keller Williams he has netted 52 percent of sales. The shift put an additional $40,000 in his pocket in 2008. "I’m following a much better economic model," Cane says. "I had to start cutting extraneous expenses and creating larger margins."

McGee of The Berkshire Group in Denver is happy with his change of venue, too. He currently leases space in an executive office suite, which provides communal conference rooms and a desk for an administrator who plays traffic cop for the brokerage. The cost: a mere $700 a month. "The biggest challenge I saw was in maintaining our culture," says McGee. He started weekly meetings for associates to share ideas and keep each other up to date on their listings and sales efforts. "Mostly, it’s just mutual emotional support," McGee says with a laugh. "The market’s tough. People are struggling. But overall, our brokerage morale is pretty good."

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