Speed is Power

“In this economy?” It’s a phrase I’m hearing over & over again. People and organizations are using this phrase as a blanket statement to say “no,” “stop,” “we can’t.” This phrase has become the catchall to stop the very thing that just might get them out of “this economy.”

I don’t buy it. It’s as if they’re suggesting this economy has a finish line and once we cross that line we’ll be in “that better economy” then we’ll move forward. Meanwhile their competitors are moving ahead. Their competitors are leaning into the problem, creating new value, new connections, making mistakes but learning from them.

We have entered an era where speed is power. Those who can move fast, innovate and answer the needs of the market faster, win. Those stuck in antiquated methods, compromise at every turn, and use the phrase “in this economy?” loose.

Two guys, Steve and Jon, invented the iPod. It took over 265 people to create the Zune.
Which do you want?

Tweet a TV tech question to @Twelpforce and get an answer in seconds from the helpful BestBuy employees.
Where might you buy your next TV?

Need it today? Amazon is offering same day delivery in select cities and Saturday delivery is standard on Prime accounts.
Where will you shop online?

HelloHealth allows you to interact with your doctor Facebook style and get medical answers quickly.
Better than “We’ll see you in a week.”

Speed is power. More so than ever in “this economy.”

Real estate isn’t immune. Buyers want help and information when they want it, where they want it. Companies, possibly your competitors, are rushing in to fill the huge hole left open by lumbering real estate giants stuck in yesterday’s thinking. You can too. You have all the tools, opportunity and leverage to make great things happen in “this economy.”

The internet, new communication channels, social media, print-on-demand, low-cost back office solutions and unlimited outsource opportunities have leveled the playing field for everyone. There’s very little uphill on the internet and 90%+ of your business is there, searching, learning and looking for a real connection to help them through the process.

So the next time you hear the resistance chant of “in this economy?” say “Yes, in this economy. We don’t have a choice.”
(Thanks to Brian Mann for the inspiration.)

Altera Marketing Group - New Media Marketing & Technology

From a project we’re working on. You are not alone.

Altera Marketing Group - New Media Marketing & Technology

The CEO of Redfin, an online real estate company has opened up his books with a detailed expose of their operating expenses.

Yes, their model is different than the typical real estate shop where everyone is an independent contractor paying a vig to the man.

But the takeaway here is how much do you spend each month on your business in comparison? What metrics do you measure? These guys are spending VC money so they have an obligation to track their finances to the last penny and have a keen understanding of where growth is coming from and where ROI is generated.

Who do you answer to? Now that we’ve entered the 4th quarter of ’07 how are you doing this year?

Monthly Benefits, Per-Employee
Redfin Model: $600. Actual Redfin Cost: $471

Redfin benefits are competitive, but many employees are Seattle-based. Costs are 10% higher in California.

Annual Payroll Tax
Redfin Model: 12.5%. Actual Cost: 8.5%

We added 4% here to our plan, just to pad per-employee costs. In ways you can’t anticipate, people cost money. Payroll taxes are the same nationwide. California’s state payroll tax is, for example, negligible.

Quarterly Bonus Payout, as a % of the Total Possible
Redfin Model: 85%. Actual Cost: ~85%

We pay quarterly bonuses, mostly based on customer satisfaction objectives. Maintaining discipline on bonus payouts has been difficult. When business booms, everyone wants to be paid for it, even if you haven’t yet turned a profit.

Annual Payroll Increase for Existing Employees
Redfin Model: 6%. Actual Cost: ——-

We can’t disclose actual costs here, but they were higher than planned. When we set the plan, many employees were being paid below-market rates, which is not uncommon for startups; as a startup raises more capital and people go into their second year of sucking it up, you have to pay the piper at the employees’ annual review.

Percentage of Candidates for Which Redfin Paid a Recruiting Fee
Redfin Model: 35%. Actual Percentage: 20%

If you can’t build an engineering team through your own network, recruiting fees can become a significant expense at an early stage. Most of the folks Redfin paid a recruiting fee to hire still came through our own employees who got a $2,000 bonus for every recruit they bring on board.

I assumed colleagues would encourage friends to apply to Redfin without a fee, but for $2,000, people start nagging their cousin’s friend’s wife to apply. We saw an immediate increase in candidates. The occasional party, done on the cheap with kegs and pizza, has also worked well for us.

For Employees Recruited for a Fee, the Recruiting Fee as Percentage of Annual Salary
Redfin Model: 20%. Actual Cost: 4.5%

Because we want top-of-the-stack candidates, we do pay 20% to professional headhunters, but most recruits only required a $2,000 employee referral bonus. We’ve also experimented with in-house recruiters working on an hourly wage, but they tend to focus on managing the hiring process rather than adding candidates to the pipeline.

What really wrecks the budget is a retained search for executives ($30,000 – $50,000), a cost we didn’t even include in our calculations above. A retained search as an agreement to work exclusively with one search firm is reasonable, but we recommend negotiating aggressively to defer most payment until placement.

Incremental Amount Paid to Contractors, as Percentage of Payroll
Redfin Model: 5%. Actual Redfin Costs: 3%

Our contractors have mostly been an in-house recruiter, a graphic designer, and a web programmer; no big-shot consultants.

Monthly Travel Costs, Per Field Employee
Redfin Model: $300. Actual Redfin Costs: $369

The $369 includes mileage for field agents who drive clients to listings as well as travel between our San Francisco and Seattle engineering offices. Your costs may be lower. Or not: on the road, some of us still stay with friends.

Monthly Telephone Costs per Field Employee
Redfin Model: $125. Actual Redfin Costs: $261

We’ve started equipping real estate agents with cellular modems, so costs are unusually high here, too.

Monthly Legal Costs
Redfin Model: $12,500. Actual Redfin Costs: $9,406

The $9,406 per month excludes legal costs for a round of financing, usually about $50,000 for company counsel and investors’ counsel (more late stage, less early stage). We have saved money by dividing the monthly work between a more-expensive tech-focused firm (Orrick, very good) for board resolutions, minutes and stock administration and a general corporate practice (Lasher, also quite good) for employment and real estate law.

We also handle on our own most of the repetitive paperwork like option grants and, perhaps unwisely, vendor contracts. We don’t spend much on patents. Incidentally, we pay a service $14,000 per year to set a quarterly price for our stock options. This is a cost that we didn’t anticipate and didn’t project as part of our legal costs.

Annual Accounting Costs
Redfin Model: $45,000. Actual Redfin Costs: $32,912

Once you’ve raised money, your investors will want a year-end audit of financial statements. This can be done for less money when the business is small and if you keep your books in good order, but we commissioned our first audit only after Redfin had generated over $1 million in revenues. Your accounting expenses will also be a bit higher (and your payroll significantly lower) if you can hire a book-keeper to come in twice a month to pay your bills, which makes sense for the first year or two until you need someone permanent.

All-Company Meeting Cost, Per-Meeting, Per-Employee
Redfin Model: $350. Actual Redfin Cost: $560

Almost half of Redfin works outside of Seattle, so our meeting costs are unusually high. But we can’t avoid meeting at least once a year, which is a significant expense that we forgot to plan for in our original model.
There are of course all sorts of other costs that are unique to our business as an online real estate broker: how much we spend to attract a home-buyer to our site, for example, or what it costs to sell a listing. What you see here are just the costs common to every startup.

And now, looking this over, I worry at every turn that we’ve spent too much money. When I first worked at a venture-backed company, someone told me that Sequoia liked to see entrepreneurs “dive in the toilet for nickels.” I’m not even sure that’s true, but it was an image that always stayed with me. At the time it was actually comforting. I couldn’t do anything else right but, thinking about the toilet and the nickels, I said to myself, “This, I can do.”

1. Focus on headcount. Outside of marketing programs, the basis for all cost in Internet software is headcount. Just figure out whom you’ll hire and how much you’ll pay and you can’t go far wrong.
2. Plan slow, run fast. The most likely scenario is that you won’t be able to hire engineers fast enough, and that revenues will come more slowly too. Investors expect their money to drive artificially accelerated growth rates, but signing up for that sometimes just blows a company up before you’ve had a chance to figure everything out. At least in the financial model, give yourself as much time to grow as you can.
3. Run top-down sanity-checks. To estimate what a company is likely to spend each year, try doubling the average salary and multiplying it by the number of employees. A 100-person company might spend as much as $15 million per year.
4. Forget economies of scale. The biggest whopper is that a business will magically become more efficient as it grows. If you really believe this, just walk into the headquarters of Amazon or eBay. Bureaucracies grow. Salaries float away. Straining to make a model work, I always forget that per-employee costs rise every year.
5. Admit that revenues are a mystery. If you don’t have any revenues yet, you can’t say what they’ll be. The point of a model is to prove you can make money if people buy your product, not to insist that they will. By developing different scenarios based on different levels of demand, you can later calibrate hiring and spending according to which scenario fits reality best.
6. Build from building blocks. Nearly every model is the sum of smaller units. In Redfin’s case, our unit is a market like the San Diego real estate market, which we plan to grow to a certain size in a certain number of months, hopefully returning a certain amount of profit to the overall business. We can then gauge whether the model works by just looking at whether San Diego works, and then asking, “Now what if we had twenty San Diegos?” For another company, it may be a user-created website, with so many page-views and so many ads, or it may be the productivity of a single salesperson, with a million dollars in quota per year.
7. Take out “hope.” Think about what is most likely to happen, so that a bookie would say you’re as likely to out-perform the plan as under-perform it. Generally speaking, “hope” is not a strategy.
8. Flag your assumptions. Rather than burying your assumptions in Excel formulae, call them out in a separate tab of the workbook, so that you have a control panel for adjusting the model. This is especially important if you plan to share your model with potential investors.
9. Hit $100 million in revenues within five years. The premise of most venture investments is the possibility of generating ten-fold returns in five to seven years, which is hard to do if you spend $5 million to build a $25 million company.
10. Keep market-share under 20%. Most startups reach a jillion in projected revenues by assuming that the business grows by leaps and bounds for five years. Since there’s a natural limit on growth, be ready for the question: “What would your market-share be in year five?” If it’s over 20%, take the jillion-dollar projection down a notch. Even a hit like iPod doesn’t have 20% market-share. You’ll be lucky to come close to 20% of any market.

So these are our costs, and that’s our advice. What’s your take? We’d love to see how our costs compare to other startups’; please leave a comment and let us know where your numbers differ from ours, especially in markets outside the U.S. We could also post a sanitized version of our financial model, if enough people ask for it to make it worth the trouble.

(Thanks to Redfin’s Chris Roske, Chris Neitzert, Matt Goyer and Angela Cough for their help with the numbers in this post.)

Altera Marketing Group - New Media Marketing & Technology

Is the same thing true for real estate companies?

If one takes a close look at Re/Max, Century 21 and Prudential are there really any concrete easily identifiable differences that a typical home buyer or seller will notice and more importantly value?

If one takes a close look at Re/Max, Century 21 and Prudential are there really any concrete easily identifiable differences that a typical home buyer or seller will notice and more importantly value? I don’t see them. They each have a slightly different message and slightly different position but I’m not sure consumers can really tell the difference. I could see how in a game of Rock, Paper, Scissors where Re/Max, Century 21, and Prudential are substituted we’d be faced with the same dilemma. Which to pick because each has about the same value? Which company has the resources and people to sell my home within my time frame and for the highest price? I know the differences between Schwab and Merrill or Mercedes and Kia or even Lowes Hotels and Hilton and I’ll make my decision based on my understanding of those differences.

Does the Re/Max balloon, a marketing idea hatched in 1978, really convey anything to the consumer today?

I see huge opportunities for small real estate companies not saddled by national marketing and branding to create new value by engineering their business in providing superior differences and value compared to the big guys. Does the gold jacket really matter to the consumer today? Does the Re/Max balloon, a marketing idea hatched in 1978, really convey anything to the consumer today? No & No.

So I say to the small real estate company – GET BUSY! You have a huge opportunity while the big lumbering real estate companies stumble around.

Altera Marketing Group - New Media Marketing & Technology

Funny thing is, your clients, the ones who actually pay you, want just the opposite.

Altera Marketing Group - New Media Marketing & Technology

I suspect that most of the newcomers have a very different picture in their head.

Altera Marketing Group - New Media Marketing & Technology

The takeaway is that other companies are coming into your business trying to capitalize on the fat in your business model. They try to dis-intermediate your value chain by offering a path that either excludes you or severely reduces your role; thus your value.

They try to create a new competitive model that has greater perceived value to the end customer, making you look antiquated and expensive.

It’s Redfin today & someone else tomorrow. Your job should be to reinvent the business yourself. Don’t wait for someone to do it for you. You’re the incumbent, you’ve got the base & you’ve got the lead. E-trade wanted to wipe out Merrill Lynch – they didn’t. But Merrill Lynch had to seriously change their game to stay competitive and is very different today. I encourage you to watch this video to understand what companies like Redfin are doing.

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The Hyatt provides a great experience for both customer segments because they understand, anticipate and meet the needs of their different customer segments. This applies to real estate as well. Condo buyers, second home buyers, local sellers, investment clients all have different needs and expectations.

Do you “wing it” or do you have a well planned framework for interacting with these different segments? Do you “wing it” or do you constantly evaluate how each segment is changing and what their expectations are? What’s the competition doing to meet their needs?

Altera Marketing Group - New Media Marketing & Technology

In the 1968 Presidential Election the average sound bite was 43 seconds.
In 2000 it was 9 seconds.

20 years ago you could run a 30-second television commercial on any of the 3 major networks and be guaranteed to reach a huge portion of the American Population.
Today you need to advertise on 92 channels to reach that same audience.

As a market gets more competitive, winning by the traditional rules gets more and more difficult. Some choose to try harder, some invent new markets and some leave. But it’s the freedom of our markets that decides what works and what doesn’t. Walling off a portion of Steamboat or creating an artificial funnel only certain businesses can pass through (i.e. the formula store) is not the answer to dealing with new retail opportunities as they come online in Steamboat. Competition makes for a better market place, a better consumer experience and a better economy. Could you imagine how ASC would have run Steamboat Mountain if there were no Vail, Aspen, Copper, Whistler etc.? The proposal of a “formula store ordinance” is a step in the wrong direction in that it seeks to regulate business and competition in a very subjective manner.
The organizations who created the additional 90,000 square feet of retail space should be applauded for taking the risk to add such opportunities to the Steamboat marketplace. The market should be an open playing field so those who take the risks to improve Steamboat have an economic incentive to do so.
Development risks such as these are what will keep Steamboat growing in the right direction. Let the free markets decide who stays and who goes, what the leases should be and what gets built. I believe this can be done within the context of preserving the Steamboat experience.

Personally, I would welcome additional opportunities to spend my money in Steamboat. I’ll probably spend less when beautiful retail space remains empty simply because businesses who fit the formula are not allowed.

Altera Marketing Group - New Media Marketing & Technology

The size and location of Steamboat provides a bit of insulation to disintermediation changes but all that does is buy you time. Redfin is out there looking to change the game. They’re not going away and even if they did, another would pop up the next day. Your 2nd home clients are going to begin expecting this kind of information, followed by your local clients. You’ve got some extra time – watch this interview with the CEO of Redfin and get busy.

Altera Marketing Group - New Media Marketing & Technology