The first thing that I ask for when I carry out a business review or meet someone who is thinking of selling their business, is their key performance indicators. It amazes me how many businesses do not know them. Your KPIs can tell you at a glance how your business is doing and where there is the greatest potential for improvement.
For a residential sales business, the main KPIs are:
- The number of valuations
- Your market share
- The conversion of valuations to instructions
- The conversion of instructions to sales
- The fall through rate
- The average fee percentage
- The average selling price
- The profit margin
Different businesses have very different problems. If you only get to see ten per cent of the properties that come to the market in your area, your problem is likely to be poor marketing. You need to look at your online and conventional marketing strategies and compare them to those of your competitors.
In other businesses, the problem is a poor conversion ratio of valuations to instructions. If you only convert 20 per cent of your valuations to instructions, you need to review who does the pitches and how they sell the service.
Another problem is a poor conversion ratio of instructions to sales. Many agents over-value to win the business and if properties are coming onto the market at 20 per cent above their true value, you will need to improve your vendor care systems and spend more time encouraging applicants to view. In most areas, a conversion ratio of at least 80 per cent should be achievable.
The next is a high fall through rate. This has increased significantly due to the Mortgage Market Review and the cancellation rate in some firms is now 40 per cent.
The solution is to insist that buyers see a mortgage broker before their offer is accepted, to ensure that buyers and sellers instruct good solicitors rather than cheap ones and to ensure that sales progressing calls are made to all parties at least once a week by an experienced member of your team (or outsourced).
The next problem is a poor fee percentage. Fees have been falling due to the recovery in the housing market and a shortage of stock. However, if your fee drops from 1.5 to 1.25 per cent, you will have to sell 20 per cent more properties to maintain your fee income.
The final problem is a poor profit margin. Well-run firms achieve a margin of at least 20 per cent and some of the best managed firms achieve 40 per cent. If yours is less, you need to conduct a thorough review of your costs.
In letting, additional KPIs to monitor include:
- The number of re-lets as a percentage of new instructions
- The renewal income as a percentage of new business income
- The average length of a tenancy
- The percentage of let-only landlords versus managed and rent collection landlords.
Many agents are seeing a reduction in the number of re-lets; possibly because tenants staying put for longer, accidental landlords are selling up or landlords being lost to competitors. You need to know what the cause of the problem is so that you can address it. Many agents are finding that renewal income is falling. Landlords have become increasingly resistant to renewal fees and the longer the same tenant stays in the property, the harder it is to obtain the full fee.
Finally, you need to keep an eye on your management income. Quite a few landlords are swapping from full management to let-only contracts to save money; if you allow this to happen, it will have a very detrimental impact upon the profitability and value of your business.
Tiny improvements in these ratios can have a huge impact upon the profitability of your business so you really do need to monitor these ratios on a monthly basis. Once you start, you may find that the problems change from month to month. You might start the year with a shortage of valuations. You run a marketing campaign to address this only to find that the next month, the conversion ratio of valuations to instructions slips. You focus on improving this by quoting more optimistic asking prices and as a consequence, the next month, the instructions to sales ratio falls. You spend a month focusing on getting price reductions and improve the instructions to sales ratio but as a consequence, you spend too little time canvassing for new business so the number of valuations drops off again.
It is only by monitoring these KPIs in this amount of detail on a monthly basis that you will have the information that you need to know where you need to focus your attention in order to maximise the profitability of your business.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than twenty-five years.