Marketshare

I’m working through the old Operations Manual and just read through the section on marketshare.  We used to tell everyone they should get 25% marketshare.  That was the goal.  For everyone.  Did we have members who did that?  Yes, quite a few, actually.

We calculated marketshare by taking a carefully defined geography — the area(s) in which the member intended to do business, into which he or she directed marketing — and discovering what portion of the total number of closed sides done in that area were the member’s.  Further dissection of the marketplace into smaller units, like carrier routes or individual neighborhoods, might reveal that the member had 24% marketshare in this neighborhood and 14% marketshare in that neighborhood and so  on, each adding up to a total share of the target market.  We wanted to see target markets in the 10,000 – 15,000 household range with overall turnover rates in the 4% – 5% range.

The problem with this prescriptive approach is that it does not take in to consideration the vast differences that exist between markets.  Factors like:  the sheer number of competitors working the same area, the density of households, the impact of REOs on one market versus another, urban vs. suburban vs small town vs. rural areas . . . these were not considered.

Suppose your target market is a densely populated urban neighborhood.  You have 15,000 households and could probably walk your entire area in a few hours. Mostly it’s condos in the $200,000 range.  You set your fee at $3,950 and you figure with a 50/50 mix of buyer sides and seller sides, your average fee per closed side will be about $4,500.  You build a first year budget with expenses at about $12,000 a month.  Non-REO Turnover is at 4.2% — that’s 630 sales a year or 1,260 available closed sides.  Break even would be at about 32 closed sides:  a 2.5% marketshare.  This becomes our first milestone:  the point at which you start to look for ways to expand the number of transactions you can do by adding staff or improving systems.  You’d expect to hit that milestone within the first year and to be at 3% -5% marketshare  (36 – 63 closed sides), in your second year — and making a good profit.  Getting into your third year,  you’d want to be hitting  5% – 10% (63 – 126) closed sides.  This is usually where the ‘snowball’ effect takes over and as long as you’re willing to invest in more staff and better systems, an increase in marketshare and profit becomes very attainable, even up to say, 20% or 25%.

Now think about a smaller town, say 13,000 households.  Turnover is much lower:  3% in town and 2.8% in the surrounding county.  Although expenses might be lower and competition less fierce, average sale price and average fee are lower, too:  $3,200 per closed side.  A 10% share here (that’s 42 closed sides) — which was the tipping point in the above example — is just getting by.  It’s a nice job, but to be making money and building a business (not just a nice job), you’d need to be at 20% or more, and your snowball might not start until you were at 30%.

The first office needed 5% – 10% marketshare to be ‘thriving.’  The second needed more than 20%.

You have to think about more than just numbers of closings, too.  You have to consider the cost of doing business in each marketplace, the number of closed sides required to break even and how many it will take to get to a reasonable profit.

To further muddy the waters, you have to consider how you’re calculating marketshare.  We use closed sides.  Period.  That’s our yardstick and it makes sense from a dollars and cents perspective.  However, I met a Re/Max consultant once who told me they calculated marketshare on numbers of agents.  Production didn’t matter at all.  Just bodies.  When you think about it, it makes sense for their model. Re/Max operators make money by renting space and services to agents, so numbers of agents is a good measure for them (I’m not sure it’s the best measure for the consumer).

But even beyond that, marketshare is both static and dynamic.  Your static marketshare is a shapshot of a period of time.  It’s what we used in the examples here:  a one year shapshot  —  of all the closed sides done in your marketplace in the past year, how many did you have?  But your marketshare this month or this quarter is probably very different from your market share 8 months ago or two quarters ago.

Use the static, annual marketshare as your report card, the measure of the success of your business, the metric you use to set your goals.  But continually monitor the dynamic marketshare to make sure you are always progressing toward the next milestone and as an early diagnostic tool for problems in your operation or your marketplace.