With Key Performance Indicators, or KPIs, brokerages identify the key metrics that support the most important parts of their business, and then assess target goals for each metric and measure their performance against those targets.
They are an integral component of a well-operated business. KPIs help brokerages focus on their most important operational metrics, assess performance in clear, near real-time ways and give insight into what’s operating well, what needs work, and how the business is doing.
KPIs are an invaluable tool for brokerage leaders. There’s probably no better tool for leadership to achieve their results and stay focused on what they need to.
Because they are so important, T3 Sixty has identified the six critical KPIs related to sales that brokerages should focus on. These six KPIs are specific areas within a brokerage that leadership has the ability to impact, and that is why we identify them as critical. They are:
- Agent count
- Unit count
- Average sales price
- Average commission percentage
- Company dollar retained percentage
- Return on revenue percentage
Like most of the KPIs listed in this article, these numbers do not live in a vacuum. Brokerages need to pair these with a competitive analysis of their market to know where they should set their targets for each one.
More details about each KPI are presented below.
Recruiting new talent into a brokerage is by far the most important KPI. The agent growth KPI will vary for brokerages based on their business model. Traditional commission split models typically have a goal of recruiting two recruits per month, or 24 agents in 12 months. A flat fee model is around five times this amount.
A related component of this KPI is agent churn rate – the number of agents who leave in a given period divided by the total number of agents. Keeping track of how many sales associates come through the front door is extremely important and so is how many leave the organization each year, because brokerages who want to grow, of course, target overall net growth, not replacement.
If a brokerage has 100 agents and loses 20 agents over a 12-month time period, it has a 20 percent churn rate. A churn rate of over 20 percent is a big red flag for a brokerage. It indicates a weak culture, lack of connection or respect between agents and leadership, an uncompetitive compensation structure, not enough support or a mix of these.
Tracking current open (under contract) and closed unit counts versus prior periods and how those compare to the market is also an important metric for brokerages to track.
For example, if the market around a brokerage’s office is up 5 percent in closed units in the second quarter versus the same period a year ago and the brokerage saw an increase of just 3 percent, it is losing ground to its competitors. This indicates that the brokerage needs to adjust its approach to remain competitive.
A related category of this KPI is per person productivity (PPP), which tracks the average units closed for agents at a brokerage. This metric allows brokerages to compare their agents’ performance against those of its competitors. If the brokerage compares favorably to competitors, this can be a compelling message for recruiting and retention discussions; if it falls short, then it is an important area to focus efforts on improving.
Average sales price
Similar to unit count, brokerages should track their average sales price over time and how it compares to the market. Unless a brokerage has a model that specifies its focus on a niche (high price point, for example), the target sweet spot is just above the market’s average closed price. This indicates the brokerage captures a solid mix of not just lower-priced sales, but mid- and upper-level price points as well.
Leadership can proactively target higher price point markets to help increase their brokerage’s average price. This can be done through a primary market initiative as well as recruiting for new and existing agents living and/or working in the brokerage’s target markets.
Average commission percentage
This KPI lets brokerages track the percentage commission they receive compared to aggregate sales price. It allows brokerages to identify if their agents are setting their commissions appropriately. This information can help firms target specific agents and coach them up to improve their commission rates.
Company dollar retained percentage
Subtracting commission dollars paid out to agents by gross commission dollars earned gives brokerage company dollar. Dividing company dollar by gross commission dollars earned gives brokerages a company dollar retained percentage metric. Brokerages use company dollar to fund operations – office space, salaries, marketing, technology and more.
For example, if a brokerage earns $1 million in gross commissions and pays its agents, collectively, $680,000 in commissions, the company has $320,000 in company dollar, which translates into a 32 percent company dollar retained percentage.
In many markets across the U.S., this is high relative to competition, which will make recruiting and retention challenging. Company dollar retained percentage is one of a few KPIs that have a sweet spot; as the percentage goes higher or lower outside of that zone, it moves into areas that brokerages need to address. Understanding this metric allows brokerages to take steps to tune their commission plans to a level competitive to the market, but that still maximizes income.
Return on revenue percentage
This metric gets to the bottom line of operating a brokerage – profit. To get return on revenue (ROR) percentages, brokerages divide net profit by their gross commission income.
For example, if net profit is $400,000 and gross commission measured $4 million in a specific, then return on revenue stands at 10 percent, which, for many brokerages, is a good rate. In general, brokerages should target at least a double-digit ROR percentage; if it falls much below 4 percent, then firms should take aggressive steps to improve it.
There are many moving pieces to running a real estate operation, and if you tried to focus on everything, nothing would get done! By focusing on KPIs, brokerage leaders can make more informed decisions, which will help them run a more successful and profitable organization. Tracking each of these closely allows brokerages to identify and address problems before they become major.
If you need help optimizing your brokerage or implementing KPIs as a meaningful business tool, T3 Sixty has a proven system for you. The T3 Fellows program has a track record of making positive and lasting enhancements to brokerage operations. Visit t3fellows.com or reach out to me, Dean Cottrill, senior vice president of brokerage consulting at T3 Sixty, for more details, at firstname.lastname@example.org.