Seller versus broker: Timing of promotion
Gwin, Carl R
Sellers and brokers may differ in preferred timing of costly promotion. Sellers with holding costs are anxious to sell. Sellers with showing costs want a slower approach. The findings indicate that a standard listing contract where the broker chooses promotion timing can be efficient if sellers have no significant holding or showing costs. The efficient listing contract provisions are delineated for duration and fee structure for sellers who have holding and/or showing costs.
As a broker, how do you decide when to initiate costly promotion to protect your interests while still serving the seller? As a seller, how do you know if the broker is timing promotional activity to sell your property in your best interests? These issues are central to a broker-seller relationship, yet little research has been directed toward the timing of promotion.
This study addresses potential conflicts between a seller and a broker on the timing of real estate promotions. The broker may prefer to stagger costly promotion over the life of a listing contract hoping that minimal promotion will attract a buyer. The broker can then collect her commission and spend little on marketing. But does this match well with the seller’s interests? On the one hand, anxious sellers may want brokers to aggressively market their property so that it can be sold as soon as possible. In this case, the broker is seen as spending too little too late. On the other hand, sellers with high showing costs may prefer minimal promotion, hoping that only high likelihood buyers will be attracted. In this case, the broker is seen as spending too much too quickly. So what is the appropriate course of action for the broker?
The contribution of this article is to discuss two factors that impact the optimal timing for promotion by brokers and sellers: the nature of the marketing strategy and the type of seller. A search model is presented that explores promotion as a means for a one-time increase in the arrival rate of buyers. In contrast to previous literature where increased broker effort permanently increases the probability of sale, the benefit of a promotional event declines as time passes. The model further incorporates seller holding costs and costs of showing. Finally, the conditions are specified for when the broker chooses the most efficient timing for promotion and when it may be necessary for the seller and broker to negotiate the timing of the promotion prior to signing a contract.
Article 1 of the NAR’s code requires that: “When representing a buyer, seller, landlord, tenant, or other client as a broker, REALTORS pledge themselves to protect and promote the interests of their client.” The real estate broker is supposed to only take actions that benefit the principal. However, brokers may prefer to take actions that benefit themselves.
The Nature of the Marketing Strategy
To date, the literature has used search models to study agency problems in the marketing of real estate that fit well with a “push strategy.” In traditional marketing, manufacturers use retailers, distributors and/or agents to “push” a product to the end user through promotions and incentives directed at the agent to induce more extensive selling activities. Similarly, a broker uses a push strategy when the focus is to try and sell a property through personal contacts with potential buyers as well as a network of other brokers. In this case, the broker contacts other brokers to show the property, encourages current clients to view the property, etc.,-all activities that push the property to potential buyers who may or may not be seeking that specific type of property. A key assumption of the previous literature is that increases in broker effort result in an increased probability of a match between a buyer and a seller throughout the life of the listing contract.
In contrast, promotion is typically a “pull strategy.” The goal of promotion is to attract, or “pull,” additional people into the pool of potential buyers for the property. In traditional marketing, pull strategies often involve an advertising campaign that makes potential buyers aware of and interested in the product. For most products and services, advertising is used to build awareness and loyalty for a brand. The effect of any one advertisement decreases over time, which is why most companies have ongoing campaigns for the life of the brand. Real estate differs from this model in one fundamental aspect: a property is a one-time sale to one buyer. Promotion is not used to build awareness and loyalty for a property since a property disappears from the market as soon as it is sold. Once the dollars are spent, the advertisement has run, and the pulled consumers view and reject (or buy) the property, the effect of the promotion is over. This effect of promotion is distinctly different from the broker’s effort as described in the literature. While increased broker effort always increases the probability of sale, promotion (e.g., a listing in the Multiple Listing Service (MLS), a spot in a real estate guide or an ad in the local newspaper) adds a temporary base of potential buyers. As a result, promotion, or pull, activities require a modified approach to the standard search model.
Research on the Impact of Broker Effort (Push). The problem of whether a standard listing contract motivates desired broker effort is referred to as moral hazard with hidden actions in game theory. In a game of moral hazard with hidden actions, players start with symmetric information and agree to a contract. Subsequently, one player can take some action that cannot be observed by the uninformed players. For example, after listing with a real estate broker, the seller faces a moral hazard problem for the individual cannot observe the effort level of the broker. The seller may benefit from additional broker effort (sell the real estate at a higher price or more quickly). However, additional effort can be costly to the broker. The broker may be better off avoiding costly effort. A conflict may arise between the seller’s best interests and the broker’s preference to avoid work or additional expenses.
Early studies examine the effectiveness of standard listing contracts in motivating unobservable broker effort. The incentive effects of flat-fee and percentage commissions are explicitly examined in Zorn and Larsen (1986). They recognize that a moral hazard problem may arise in the choice of price and broker effort. The authors show that both the percentage-commission and flat-fee systems induce the broker to search less intensively than the amount desired by the property owner.
Knoll (1988) recognizes that sellers may face an opportunity cost of property ownership that varies directly with the price of the property. As such, the gain from selling the property sooner varies in proportion to the sale price, and this gain motivates the desire for a higher level of brokerage services to increase the probability of sale. Knoll’s observation enables him to provide justification for the prevalence of percentage commissions.
Miceli (1989) recognizes that most agency agreements specify a limited duration for which the listing is valid. In a dynamic setting, Miceli argues that the duration of an exclusive listing contract can be used to overcome moral hazard. The limit on the length of the listing contract may more closely align the broker’s interests with those of the principal.
Anglin and Arnott (1991) note that observed real estate brokerage listing contracts are much simpler than the incentive contracts that would seem to be optimal from principal/agent theory. Geltner, Kluger and Miller (1992) examine this issue with a simulation analysis to gauge the magnitude of the discrepancy between existing and optimal contracts. They determine that time-incentive listing contracts produce negligible gains over the standard fixed-percentage listing contract.
Prior research has focused primarily on the implications of the broker-seller contract with regard to the push effort put forth by the agent to sell the property. The key factors identified in these studies include consideration of the best timing for the sale, the price of the property and the appropriate incentive for the broker. This study expands this research by looking at the key considerations for a pull promotion strategy.
Considerations for a Model on Promotion (Pull). The model focuses on the impact of promotion, not that of broker effort, on the pool of potential buyers and therefore the probability of sale of the property. Unlike push models of moral hazard with hidden actions, a pull model must be based on observable promotion. An obvious solution is for sellers to simply force the broker to choose the desired timing of promotion. The puzzle this study will try to explain is why this solution is rarely used in practice. Note that standard listing contracts are far more common than that suggested by agency theory (see also Anglin and Arnott, 1991). The prevalence of standard listing contracts with the occasional limitation on contract duration seems inconsistent with the potential issue on the timing of promotion. This study seeks to resolve this inconsistency.
A key consideration in a promotion strategy is how broadly the broker and seller want to define the target market. By nature of the push strategy involved in broker effort, people actively involved in buying a house are the base for the potential buyers. In contrast, promotion may reach more or less interested buyers, depending on the specific promotion used. On one end of the continuum is a mass marketing approach where a firm sells the same product to the whole market, not acknowledging the different needs of buyers. In this approach, almost everyone is considered a member of the target market (Tellis, 1998). A mass marketing strategy pulls in a large pool of potential buyers through wide-reaching media; however, the likelihood of purchase may be low since most of this pool may not be actively in the market for any property, much less the specific property promoted. Examples of this type of promotion in real estate include television and newspaper listings.
At the other end of the continuum is niche marketing where the target market is narrowly defined based on the unique needs and wants for the product. In niche marketing, a firm sells a unique product to a small segment of the market (Tellis, 1998). A niche promotion strategy attracts a smaller pool of potential buyers, yet the probability of purchase is much higher since the product is matched to their specific needs. As a result, niche marketing is often more profitable since it allows the firm to concentrate on a single segment of interested customers, focusing all promotion dollars on the segment most likely to buy the specific property (Churchill and Peter, 1998). The MLS and open houses for other brokers are examples of a niche promotional activity.
Three characteristics of the real estate industry make it particularly appropriate for niche marketing. First, it is highly fragmented, with a lot of brokers and a wide range of properties on the market at any one time. When markets are fragmented, firms are more likely to shift toward niche marketing than mass marketing (Kotler and Armstrong, 1996). Second, potential customers for the real estate industry may have a wide range of actual interest in and intention to purchase a product. The real estate broker does not want to attract consumers with a low need for the product (i.e., just lookers) through her promotion.
These consumers will take time and effort away from more qualified customers and may be more likely to be price sensitive (Krishnamurthi and Raj, 1985). Third, real estate is a search good that is very expensive and high risk. For this type of purchase, a consumer is more likely to rely on sources of information other than advertising, and therefore, advertising (particularly a mass appeal) may be less effective (Assmus, Farley and Lehmann, 1984). As a result, sources that are perceived to be objective, such as the MLS, are more likely to be effective in reaching the interested buyers. Based on these characteristics, the promotional model proposed assumes that niche marketing will be preferred over mass marketing, at least initially, because it will more efficiently reach the target market. The Type of Seller: Holding Costs versus Showing Costs. Sellers may have different needs that make different strategies more or less appealing. Some sellers may face holding costs. For example, a homeowner who has already moved and purchased a new home still has to make payments on the old home. A more likely scenario is that the homeowner could not qualify for a loan on a new home until the old home is sold. Such sellers are clearly motivated to sell their property as soon as possible. These anxious sellers will encourage their brokers to aggressively market the property, and may take the number of people looking at the property as a signal of the broker’s effort. Brokers, on the other hand, face the costs of promotion. Brokers know that bringing in more marginal buyers not only increases costs in terms of promotion, but also in terms of effort. An important issue for an anxious seller may be the timing with which the broker will commit to costly promotion of the real estate.
Other sellers may face costs of showing the property. Yavas and Colwell (1999) examine a situation in which a seller incurs a cost each time a buyer inspects the real estate. This may be the opportunity cost of time for showing the real estate or may be a more tangible cost such as damage to the real estate while the potential buyer inspects the real estate. Such costs will likely induce the seller to prefer that fewer buyers arrive to inspect the property than the broker would choose. A seller who faces showing costs only wants to attract buyers with an extremely high likelihood of actually making an offer on the property. This type of seller prefers that the broker focus her promotional efforts on a specific segment of potential buyers.
Previous literature has dealt with the question of whether traditional listing contracts give brokers the appropriate incentives to expend costly effort that benefits the seller via a higher selling price or a shorter time on the market. The seller wants to sell quickly at the highest possible price. However, the broker must trade off the gains of a potentially higher commission against the costs. The seller’s wants and the broker’s tradeoff rarely coincide. Many papers address the interaction of selling time with the marketing mix elements of price, place (brokers) and to some degree product (heterogeneous real estate). None have studied the relationship between selling time and the remaining element of the marketing mix, namely promotion.
Our paper makes three important contributions to the real estate literature. First, it differentiates between push and pull strategies in selling a property, developing promotion as a tool for a pull strategy and describing the unique characteristics for promotion in the real estate industry. Second, it describes three segments of sellers for a real estate transaction: patient sellers with significant showing costs, anxious sellers with significant holding costs and sellers with neither significant showing nor holding costs. Finally, it demonstrates the implications for the duration and fee structure of the listing contract based on seller segment and desired promotional timing.
The standard listing contract where the broker chooses the timing of promotion is efficient only if the seller has neither significant holding costs nor showing costs. In this case, the broker makes the efficient tradeoff between the benefits and costs of promotion. However, neither anxious sellers nor sellers with costs of showing the property are served well by standard listing contracts, and it may be necessary for the seller and broker to negotiate the special terms of promotion prior to signing a listing contract.
There are significant opportunities for future research in promotion for the real estate industry. A key issue is how promotion interacts with other elements in the marketing plan. Promotion may impact the perception of the asking price by the buyer and therefore affect subsequent negotiations by signaling that push efforts have been unsuccessful. This seeming lack of success may be attributed to an anxious seller, an inflated selling price or a weakness in demand for that type of property. All of these factors would lead a buyer to lower the offer price. Thus, promotion may help sell the house more quickly, but the final price may be lower than optimum due to a perceived signal by the buyer that the seller is vulnerable in price negotiations. Alternatively, a lower price may result from bringing in marginal buyers who may be more price sensitive. These potential interactions impact the timing of promotion in a real estate transaction.
Further research is also needed about the more effective types of promotion. Certain promotions, such as advertising in local papers, may be more likely to bring in target-market buyers than broader promotions such as promoting through a television listing. Also, in-home promotions such as detailed information sheets that the buyers can take with them may act to extend the life of the promotion with the buyer pool attracted.
Finally, the types of sellers used in the model have not been considered in research on broker effort. Expansion of existing models to consider the implications of the types of sellers on broker effort and contracts provides a potential area for future research.
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An earlier version of this article was presented at the European Real Estate Society Conference, June 2000, Bordeaux, France. The authors thank three anonymous reviewers for their helpful comments and suggestions.
Carl R. Gwin, Seow-Eng Ong and Carol F. Gwin
Carl R. Gwin, Baylor University, Waco, TX 76798-8003 or firstname.lastname@example.org. Seow-Eng Ong, National University of Singapore, Singapore 117566 or seong@nus. edu.sg.
Carol F. Gwin, Baylor University, Waco, TX 76798-8007 or email@example.com.
Copyright American Real Estate Society Jul/Aug 2002
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