Affinity marketing: danger or opportunity?

While not a new arrival on the real estate scene, the trade-off between revenue per transaction and volume of transactions is an all-too-frequent bottom-line choice for brokers and agents operating in today's marketplace.

by Chris Heagerty, crb, crp, gri   We can look back over the history of real estate and identify sweeping changes that influenced our industry, like the introduction of referral fees in the 1960s. Another such force gaining steam currently is affinity marketing, the practice of offering special discounted services, items, or other benefits to consumers who are linked by a common bond (or affinity). In return for the discount, the provider of the service receives a volume of business from the affinity group.

The phenomenon is not a new practice in this age of consumerism and, in fact, has been present in other industries for some time. Not until the mid 1990s, though, did the practice infiltrate the real estate industry on a wide scale. The proliferation of affinity marketing is currently being driven by third-party companies and broker referral networks that approach affinity groups and then align strategic partners to deliver the services.

Stirring things up

The introduction of affinity marketing to real estate has not been without substantial controversy. Offering a discount for real estate services threatens broker survival, continuing the erosion of the bottom line. In addition, the direction of a large volume of consumers to a particular broker by virtue of the broker's alignment as a strategic partner is at odds with the industry norm, where the capture of a market segment has traditionally been tied to directed advertising and service.

The proliferation of affinity groups appears inevitable. When the affinity is as large and numerous as the man on the street, the movement enters the realm of major evolutionary force.

Initially, the affinity phenomenon hit larger urban market areas. The infiltration to smaller urban and rural markets is now gaining momentum as the affinity concept spreads to the financial services industry and gains acceptance in mainstream American business. Brokers without some affiliation with a larger entity (through franchise, membership in a referral network, or other large group) will feel most vulnerable to having a significant portion of the market made inaccessible to them. This coincides with another industry trend: the reduction of the number of small and medium-sized firms from the market. Trends like these exert further pressure on smaller brokers to affiliate with a larger entity or osmose through merger or acquisition into a larger firm.

Agents and brokers must weigh pros and cons

Broker reaction to the phenomenon has been mixed. The broker bottom line has been under siege for decades, and paying additional referral fees and offering discounted services further fuels this trend. Yet, the delivery of a volume market segment is the great seducer. In addition, if a broker does not agree to the terms and conditions set forth by an affinity group, they will take their business elsewhere.

The agent in the field who has diligently cultivated a sphere of influence or farm territory may regard the placement of affinity clientele as an invasion of hard-won business. Business lost to a competitor solely because of a strategic alliance violates the agent's bottom line. Attaching a referral fee to a client who is already the agent's customer, simply because that client belongs to a certain group, also chips away at the bottom line.

Only through volume placement and the delivery of new business does affinity marketing become palatable. However, the assignment of new business by a broker to an individual agent will be diluted among the whole eligible agent base, so the volume opportunity for many agents is diminished.

Consumers lured by savings

For the consumer who might or might not have an established relationship with a particular broker or agent, the reasons to work with the chosen affiliate broker are compelling. In some cases, consumers receive a direct financial rebate. In other instances, a transferee's employee benefit package, which is subsidized by the referral fees collected from the broker or other affiliate, is directly tied to the employee's use of the affiliated company. It is a rare consumer who can afford to reject the financial rebate or discount, or dismiss an employee benefit package. Previous loyalties or considerations of superior service may take a back seat to such compelling reasons.

To the chosen go the clients

The power to decide who will receive the business of a particular affinity group and who will not is formidable and rests with the selection of the strategic partners (service providers). While the decision to affiliate with one broker over another should be determined by the quality of the service to be delivered, the practical considerations of placing that business can overwhelm service considerations. Thus, there is pressure to place the business with network brokers already in place or with larger brokers who might dominate a particular market area by virtue of size.

Naturally, size and service are not mutually exclusive. The affiliations formed with the third-party or affinity group and the primary provider of the service may not always take into consideration a broker's ability to provide quality service. The risk exists that the consumer could sacrifice service for discount. Unaffiliated brokers face a dwindling of their market, as a portion of the market they previously could win by conventional means is redirected to strategic partners. The selection of the strategic partners wields with it considerable power over the participating broker.

The legality of affinity programs is in the infancy of challenge (see Is it legal?). Naturally all of the programs must satisfy the requirements of the Real Estate Settlement Procedures Act and the bounds of state license acts.

Tough decisions

Each broker is now faced with serious decisions regarding how to interface with the affinity phenomenon. Clearly, broker decisions must be nonemotional ones whose pillars are squarely placed among solid business practices. Anger and resentment over the invasion of territory formerly dominated by brokers serve no purpose.

A more important question is how to strategically position one's firm to capitalize on this growing phenomenon. It is ironic that on one level, brokers who embrace the affinity phenomenon become partners in undermining their own bottom line. On another level, though, it is a competitive tool on the path to market dominance. To be sure, it cannot be ignored.

Brokers start their own programs

Relocation/transferee business brings transactions that, for the most part, are not broker-owned and clearly are new business. This business has traditionally carried the referral-fee price tag. However, a decision to proactively embrace affinity marketing could lead a broker, independent of third-party intervention, to design affinity programs that the broker can then market locally. The bottom line is broker-discounted real estate services in exchange for a volume of new business.

A more critical question for the broker is whether it would be possible to entice this local business on the promise of service alone or if the discount is a necessity to capture a volume of this business.

Affinity groups identified in broker-originated programs are limited only by the bounds of the broker's imagination for identifying common threads. Trade associations, large business entities, schools, churches, and graduated classes (e.g., Class of '85) are just a few suggestions of affinity groups who, if marketed to properly, may be willing to steer their real estate business to a particular broker in exchange for discounted fees.

Business from a broker-originated affinity program places the broker in a precarious position with the firm's agents. Many agents are resentful of corporate America dipping into commissions. It is far easier for a broker to explain the necessity of affinity business when the instigator is a far-removed corporate entity. A broker who originates and provides leads to the agents may face a backlash from agents who believe those clients were theirs to start.

A savvy broker will finesse internally the quest for local affinity business. Agents need to understand that the loss of revenue per transaction will result in a volume increase and greater market share, which will entice other non-affinity business.

Too many eggs in one basket?

Brokers should give prime consideration to the client-source mix of the total business. High-percentage dependence on affinity business leaves the broker vulnerable to potential loss if the affinity source elects to change providers. In addition, dependence on affinity business is strong dependence on business with dangerously thin profit margins.

It is imperative in today's marketplace-where consumers make decisions on factors other than the level of service a broker provides-that the broker continually monitor sources of business and allocate marketing efforts in the interests of diversification. The dangers of "all your eggs in one basket" has never been more true than in a world where affinity marketing flourishes.

The consumer side of the equation

Any discussion of affinity programs requires consideration of the consumer. This label infers that the consumer is a generic entity which will behave according to very predictable patterns. Clearly, not all consumers are created equal. For some, the benefit of a discounted program may not be worth a sacrifice of autonomy, service, and strong negotiating clout. A non-affinity agent who brings these skills to the table may, in the long run, bring a far greater net discount in the money saved in the contract and repair negotiation and in the ease brought to the transaction.

An interesting parallel to the use of affinity programs by consumers is the offering of coupon discounts by some retailers. Many consumers, while recognizing that coupons represent obvious savings, may not care to make time to clip. Proctor & Gamble estimates that only 2% of their customers bother to use coupons for their products. Yet, in that 2% is a market segment, a percentage of which would buy a competitor's products were it not for the coupon.

National estimates show that 1% of people who move avail themselves of affinity programs. There is no doubt that the creation and use of affinity programs will continue to grow. As the pool of available programs floods the consumer's field of choices, will the consumer become overwhelmed and simply choose not to make purchasing decisions based on a discount program?

What we can count on at this point is that affinity programs will continue to proliferate. At one point or another, every broker and agent will be touched by this phenomenon. Decisions regarding affinity business are strategic choices that could have far-reaching, bottom-line influence. Put your seat backs up and store your tray tables because we are all in for quite a ride.

Chris Heagerty, crb, crp, gri, is vice president of Henry S. Miller, REALTORS® in Austin.

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Is this Legal?
Read about a recent case in Mississippi.

What's an agent to do?
View tips on how to respond.

Third-party history
Find out how affinity marketing in real estate got started.