Discounting is not a winning strategy

As an industry, we should all understand that discounting fees (below the market average), will have long-term consequences – and these consequences don’t stay within the walls of our businesses. 

We must expect this ‘quick fix’ action to obtain business will eventually convert to unsatisfactory service levels; ultimately, it will directly impact the entire industry as others follow the lead and race you to rock bottom.

If you fail to plan and protect the numbers in your business, you are planning to fail.

If you start your business journey, or try and grow your business, based on a strategy to discount or – worse – offer free services, I can guarantee you, it will not be sustainable over time.

All that you will achieve is to create for yourself a low-paying job with so much more pressure and stress than you could have ever experienced as an employee. 

It might seem like the easy option, especially if you are starting out with a small portfolio and low overheads.

However, you will learn the hard way that the most important element to a successful property management business is maintaining the fees you set without discounting or devaluing what you do.

You should always keep in mind that every time you lower the commission percentage, you are decreasing the asset value of your business.

Do the numbers

Let’s use a very basic financial analysis as an example: 

The average income per property (based on a national survey conducted by LPMA a few years back), across hundreds of agencies charging various management fees, was around $1500 per year. 

Based on this income per property, to cover the cost of just one average salary, you need to manage 40 properties, and that only covers the wages before all the other employment costs (super, workers compensation, uniform, phone, desk, travel, training, etc.).

Then add on the general business overheads such as subscriptions, premises, advertising, website, marketing material, stationary, office supplies, phone, printing, insurance, accounting, fuel, vehicle maintenance, power, equipment… plus, plus, plus. 

Best practice suggests that the cost of wages should be no more than 35 per cent of the annual income.

As an example, my most recent calculation suggests that our business needs to generate just over $175,000 p.a. to cover the average salary for one person taking into account the overheads.

I know that when I put a bum on a seat, it will cost just over double the salary base to keep them there.

If you use the national average income per property, this equates to around 117 managements per person.

Naturally these numbers will vary based on the average income and the overheads of each business but you should always begin with the end in mind.

If you have a short term vision, a short term budget and no real growth plan, you are likely to reach a tipping point and the scales will soon be out of balance.  

Breaking it down

Forget the percentage and focus on the average income per property.

The reason agents charge fees as a percentage, and the reason they vary from state to state, is because every market is different.

Some markets generate a lower income and some generate a higher income.

What you should work on when setting or reviewing your fees is the average rent within your catchment.

Say for example, your current average rent is $360 and your management fees are 10 per cent.

The income per property is averaging out at $36 per week, or just as an example, your average rent might be $490 and your management fee 7.5 per cent – the management fee income is almost the same per property on average.

You could make it your goal over the next 12 months is to increase your fee to $40 per week, per property on average ($2000 p.a. management fees per property).

This might allow you to review salary packages and retain the best people in the industry. 

If you are not achieving the income you need to achieve your business goals long term, it might be time to increase your percentage fees.

You should also try and maintain a net profit of no less than 25 per cent.

Otherwise the balance may need to change, either the overheads or the income.  

Let’s raise the bar together

I am passionate about this subject and feel that we should be working together to demonstrate our worth as an industry.

I strongly believe we should all be paid a whole lot more for what we do but if we continue to discount as a strategy, we will all pay the price.

Instead, identify your point of difference and make it strong enough to overcome the fee objection. 

We don’t need to use something as primitive and common as having to discount our fees just to win business.

Let’s raise the bar, lift property management to a new level of professionalism, and add value back to our clients and customers.

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Michelle Williams

Michelle Williams is the Managing Director of @home Property Management Solutions and has been named 2 years running in the top 100 Elite Agent industry influencers.