Discount Brokerage Sneaks Up on Commissions; Service Is Next

March 1, 1998

While the industry was busy watching for the lion (read technology companies) to charge over the hill and render brokers as obsolete as rotary phones, a more imminent threat emerged, unnoticed: the institutionalization of business and growth of discounted commissions.

This shift in the source of business has several major implications, not the least of which is that more of our business is discounted. If you pay an affinity group a 30 percent to 40 percent referral fee, you're working for less. And if consumers recognize that the market supports rebates in the form of dollars, airline miles, or other benefits, they’ll ask for discounts whether or not they’re working through an affinity group.

At many companies, discounted business already exceeds 20 percent. In markets where affinity organizations have a strong presence (in the San Antonio area, for example, USAA Insurance helpedclose about 9,000 transactions), as much as 40 percent of some companies’ business is discounted. As these percentages creep up, it'll be increasingly difficult to maintain what we might call full retail price.

In a related change, consumers are shifting their broker selection criteria. As long as consumers perceive that a company's service level is acceptable, selecting a company boils down to the savings or extra goodies offered through an affinity connection or by brokers with packages competing with those of local businesses. All this, despite the good job that salespeople have done with personal marketing to catch the consumer's eye.

But don’t be surprised if affinity groups pick up the service mantra, too, and require special training, certification, and performance measures and standards. Expect affinity groups to manage brokerage service delivery just as third parties did in the 1970s. Not only will we work for less, but others will tell us how to work.

Is the industry's pricing structure changing? Is full-priced brokerage as we know it dead? Probably. We just haven't buried the corpse.

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