Value Up Front

I recently joined a few other PWG crew members in attending the introductory meeting for a small business coding event.

The idea behind the event is to engage local independent developers, small businesses, and entrepreneurs with start up ideas by having local businesses describe their biggest industry problems. The developers then group up, decide which problems they'd like to tackle, and come back 6 weeks later with a proposed solution (and a potentially a working prototype).

Winners receive a $1,000 prize and retain the IP for the solution (and may negotiate to engage the company if they choose).

The Setup

One of the companies who attended wants to improve customer service by creating a sort of concierge service for their real estate agents. Agents communicate with prospective buyers in a plethora of ways (phone, text, MLS services, broker portals, broker mobile apps, Zillow, Facebook, Twitter). The problem is that Agents have personal lives and aren't always staying up to date on all these communication pathways. Customers get missed and end up going to other agents and brokers; the poor response time doesn't reflect well on their business.

The idea they brought to the group was to centralize all this information in a single app that would present the agent with one stream of inquiries to deal with. The information would also optionally be available at the broker's office, where leads could be passed on if an agent requested or a response was taking too long.

Essentially, it's a communications and responsibility problem. There is potentially an underlying process that could be changed to address the issue as well as any software solution, but it creates an interesting solution and helps improve customer service.

The takeaway I want to talk about isn't in the details of the solution, yet it is every bit as important.

What's Missing?

These businesses were at the event to talk about their ideas -- their solutions. Because it wasn't topical, how they arrived at their ideas was mostly left unmentioned.

Oftentimes, in the software development world, the discussion begins with an idea for a solution and everything that lead up to the idea is taken for granted. Someone, somewhere, before the customer brought it to us, recognized a problem and came up with this answer that we're being asked to code into reality.

There are a few ways we can deal with this as (honest) developers. We can propose the solution they're asking for, and gussy it up with bells and whistles to justify the number at the bottom of the page. If our number matches with their gut feeling of a price, maybe they'll pull the trigger. If it doesn't, they'll move on to the next guy.

We can provide a "flexible" solution where we attach prices to various features and allow them to build a product to match their budget. If they work with us, they'll select the features they perceive as most valuable, and it will address their problem to the extent that we've identified it.

As an (honest) consultant, I only see one best approach: We start by proving the value.

A critical aspect of vetting a project is understanding and quantifying what one might stand to gain by undertaking it (or what one is losing by not).

If you collect the right stats and find out you're potentially missing out on $1 million in sales each year, is it worth spending $100,000 to capture them? Obviously! If you're only missing $50,000 in sales, the same solution doesn't really apply. But perhaps it was worth the $10k to learn how to monitor missed sales, and realize that you're solving the wrong problem.

It's in that context that I was disappointed with the presentations. These businesses described a product vision (with many features thoroughly thought out) and we were left hanging with regard to ROI!

A Story Problem

Instead of talking about the solutions, let's talk about one of the problems a bit: The company is interested in improving response time to customers. Customers who don't hear back soon enough will reach out to another agent to view the house or simply inquire about another house altogether. At the root, this is a problem of lost sales (increasing revenue).

How do we estimate sales when everything goes as expected?

Each broker likely tracks some sort of base conversion rates for homes shown:

* What percentage of customers who are followed up with view a house?  
* What percentage of customers who view a house put in a bid?  
* What percentage of those seal the deal?  

These probabilities create a quantifiable picture of this particular revenue stream. Every additional customer who enters the process is an additional chance for a payout.

Since geeks like numbers, let's attach some. Let's assume:

* 85% of customers who inquire about a house end up viewing it.
* 15% of customers who view a house place a bid.
* 30% of bids actually buy the house.

.85 * .15 * .30 = .03825 or 3.825% of customers who inquire buy the house.  

According to Zillow, the median sale price for a house in Lincoln, NE is $138,300. Commission is generally 5-6% (assuming they're not split). Let's also assume the company receives a 15% cut of the agent's commission.

A bit more multiplication...
* Sales price of $138,300. * Commission of 5%. * HomeServices takes 15%.

$138,300 * .03825 * .05 * .15 = $39.67

... and we can express (somewhat deceptively) the average value to the company of each customer who inquires about a home for sale.

With that number in place, it's a matter of estimating the how many people are lost due to poor agent response. The quickest way to find this number would be retroactive self-reporting: Ask agents to identify how many people they contacted who had already found another way to a home over a period of time. If politics are involved, ask brokers to collect and anonymize the information, or set up another way to capture it (compare website form submissions with actual visits).

For our purposes, the presenter estimated that 10% of potential customers bounce on a bad experience. Zillow shows 4,620 home sales in the last 12 months. Using our already rough numbers, and assuming the company captured 100% of those, that's 120,784 inquiries.

120,784 * 10% * $39.67 = $479,150 per year in lost revenue.

Just to be clear, we're making a lot of assumptions here and there's no way these numbers match up with reality (or realty).

In the crucial paragraph where we calculate value, I'm taking total home sales in Lincoln and extracting lost revenue.  This is absolutely wrong as it implies that fixing a communications problem would result in 10% more homes being sold in the area.   These homes aren't going unsold -- the sales are merely going to other brokers.

Moreover, in cases where the customer finds another path to see the home they're interested in, agents generally negotiate to split the commission, meaning depending on who the listing agent is, a drop in communications isn't necessarily a 100% loss.

... there's a lot more complexity here that I'm choosing to ignore absent  real data.

Wrap it up already!

If you consider that a proposed solution might bring that 10% down to 3% (thereby capturing 70% of the lost revenue), you can start to make a decision about what level of investment would be appropriate.

Of course, some costs are less calculable:

  • What affect does a disappointed customer have on future customers?
  • Do they tell 10 friends about the bad experience, who then also look elsewhere?
  • Customer response time on its own is a valuable metric.

There are other considerations as well. What if the majority of incidents are at a small number of agents or brokers? Maybe some targeted training or, worst case, replacing agents would alleviate the issues while avoiding development and maintenance costs.

I hope this gives a simple example of why PWG strongly recommends everyone goes through the steps of identifying the value, either on their own or through a thorough program like our Spark Diagnostic.

Cross posted from Jered