“The economy will come back and things will go back to normal.” (Calm Charlotte real estate agent)
Only the paranoid survive (Best-selling book by former Intel CEO Andrew Grove)
The economy is moving fast. And it’s not just about competing with people in your town or region; Now the competition is global. As the title of the latest book by Pulitzer Prize-winning journalist Thomas Friedman says, the world is Hot, flat and crowded. Leaving aside the “hot” part of the title about global warming, the world is “full” (with a rapidly growing population) and the Internet has made it “flat” (where people can compete with you from anywhere in the world ). This is a scary thing: more people in more places are after your piece of cheese.
So when you stand still, the competition is gaining on you. You will not win in this global economy by doing the things you have always done. In 2007, the National Academy of Sciences said that approximately 85% of the growth of the world economy is due to innovation (ideas), and only 15% comes from other factors such as increased productivity. As Jeff Wacker, the EDS futurist, said: “The bullet that kills you never hits you between the eyes. It always hits you in the temple. You never see it coming, because you’re looking the wrong way.” Innovation comes quickly and without mercy. Capitalism kills.
For more evidence of that, let’s take a look at the Fortune 500 (America’s 500 largest companies). Between 1955 and 1995, the turnover of this list was around 20 companies per year. From 1995 to the present, the turnover is 8% per year and continues to grow. The Fortune 500 in 1995 had only 250 original members in 2008. Companies that continued to innovate stayed relevant, while those that didn’t fell behind.
How did this happen? Well, companies come up with new ideas and can initially sell them for a high markup. However, other companies around the world copy these ideas and make them cheaper and better (by lowering profit margins for the idea creator and lowering prices for consumers). Another way is that some innovations are completely disruptive and change the very face of the industry; Think of the digital camera destroying the Kodak Polaroid and the Apple iPod making the portable CD player obsolete. A better solution arrives one day and may be out of business the next.
So what does this mean for real estate? It means we better find ways to innovate and stay relevant. With most big real estate companies sticking to traditional buying and selling services, they have become susceptible to a game-changing disruptive idea. Consumers are frustrated and want to be able to transact real estate; your business will flow (in a jiffy!) to whoever can do it quickest, best and cheapest. Cost-cutting measures, such as mergers to achieve economies of scale, will keep the big real estate companies solvent for a little longer, but they won’t be relevant or grow.
When the economy and real estate market were booming earlier this decade, new entrants with new business models (RedFin, Zillow, etc.) were offering niche real estate services for less money; this worked because they kept their overhead significantly lower than traditional businesses, allowing them to make a good profit margin (which was also cheaper for consumers = good). Some brokerage firms opted for the discount to compete with them, hoping to offset the loss of profit margin with increased sales. As this played out, sales commissions trended downward. This shouldn’t be alarming; this is the natural activity of our global economy. However, making less money for the same amount of work is puzzling.
But the possibility (and probability!) of a disruptive innovation is potentially much more terrifying. For example, what happens if Google decides that it wants to offer real estate services for free? They are already mapping our listings. What if they send free safe deposit boxes to homeowners and find a way to alleviate their security concerns? Consumers could make their own demos. What if they gave homeowners the ability to list their own homes on Google’s national MLS system? What would this do to our jobs?
This, or something similar, WILL HAPPEN. And it will happen soon. All industries in our global economy are poised to be attacked and reconfigured, especially those deemed to have unjustifiably high profit margins (such as real estate). Nothing is sacred.
That begs the question: How will you stay relevant? How are you making things faster, better, and cheaper for your customers?