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#465284 - 06/23/19 12:32 AM There are 5 forces competing for your profits
realtyrocket Offline
Junior Member

Registered: 06/23/19
Posts: 1
Loc: Massachusetts
I've been thinking a lot lately about the 5 Forces framework developed by renowned Harvard professor Michael Porter.

For anybody who is unfamilar, this is a time-tested concept that describes 5 specific forces that are constantly competing for your profits in any industry where you conduct business.

I thought it was interesting to break it down specifically for real estate agents. Here's my take on things...your comments and thoughts are appreciated!

--------------------------------------

1st Force: Competitive Rivalry

This force examines how intense the competition is in the marketplace. When competition is high, compromises are made, like reducing commission and offering more value to clients for less.

Some markets, often large cities (Las Vegas comes to mind), are extremely competitive, creating a scenario where an agent in that location will have to deal strongly with the 1st Force.


2nd Force: Bargaining Power of Suppliers

This force analyzes how much power your suppliers have over your business.

In the case of real estate, this mostly comes down to marketing, especially digital marketing. Suppliers are companies like Google and FB that can increase the cost of advertising on their platforms, and adjust the terms to be more favorable for them, lowering your profits.

When you use third party pixels and tracking software like a FB Pixel or Google Analytics, you're essentially renting your contacts back from your suppliers in the form of an opportunity to advertise on their platforms. They're the powerful business partners you never knew you had!

Every advertising channel (supplier) has costs associated with it. The only "free" advertising is referrals and word-of-mouth, which may not provide much business for a new agent. Thus, newer agents will have to deal with the 2nd Force more strongly than a well established agent who generates quite a bit of leads from previous clients and name recognition.


3rd Force: Bargaining Power of Clients

Demanding clients will force your commissions down or demand more attention and value from you, costing you profits.

In a market where there are loads of clients and not so many agents, agents have the power. But in a market where inventory/clients are low and there is a high saturation of agents, clients have the power.

The dream is to only work with clients who are lovely to deal with and who also agree to the highest commissions possible. This rarely happens, but it's what we are shooting for.

The more prospective clients you have access to, the greater your opportunity to create this scenario and the lower the impact the 3rd Force will have on your business.


4th Force: Threat of New Entrants

This force examines the difficulty for new professionals to join your industry. Your market share is at risk of being depleted if it's easy for competition to join the marketplace.

The barrier of entry for new agents is relatively low, making the 4th Force strong in most places, especially in very competitive markets.

Every new agent needs clients to survive. Clients that work with a new agent are ones that are NOT working with you.

The more agents in your market, the less likely you are to capture the market share you are seeking, thus you are pressured more strongly by the 1st Force to make compromises.


5th Force: Threat of Substitutes

This force studies how easy it is for clients to switch from your services to a different service altogether... i.e. FSBO, Zillow, etc.

Fortunately, 87% of new home buyers still worked with an agent in 2018. This most likely has to do with the complexity of real estate and the sheer importance of such a pivotal life event.

As technology continues to improve, there's more pressure on agents to demonstrate their value against new systems that seek to take their place.

--------------------------------------

I'd love to hear people's thoughts on this. I have been revisiting various business ventures and viewing them through the lens of the 5 Forces and it's interesting to learn how some industries are affected more strongly by different forces than others.

Looking forward to hearing your thoughts and comments!

Chris Morin
RealtyRocket.io

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#465557 - 07/28/19 06:21 PM Re: There are 5 forces competing for your profits [Re: realtyrocket]
Luna Offline
Member

Registered: 08/23/18
Posts: 19
Loc: Europe
Thank you for the summary, it might help some beginners to think through their strategies! smile

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