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Analysis: Is Purplebricks’s exit the death of fixed fees?

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Analysis: Is Purplebricks’s exit the death of fixed fees?

Purplebricks

Just three years after launching in Australia, real estate chain Purplebricks has signalled that it will exit the local market. Is this a signal that fixed-fee structures are simply an unsustainable business model for services industries?

Purplebricks launched in Australia only two and a half years ago, with the aim of disrupting the Australian real estate industry by offering customers a fixed fee to sell their properties, rather than the traditional commission charged as a percentage of the sale price.

But as Purplebricks Group CEO Vic Darvey said in his announcement of the planned exit, “unfortunately, we have been unable to make the progress in the Australian market that we’ve wanted”.

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That was despite the company’s Australian boss, Neil Tavender, only a month earlier affirming Purplebricks’s commitment to the Australian market.

“While the local market has softened, the fixed-fee model continues to be an attractive proposition for sellers wanting to maximise their returns,” he had said in early April.

Mr Tavender’s comments were in response to analyst suggestions that the UK-headquartered Purplebricks would need to shelve its underperforming Australian and US operations if it was to survive.

Price and value are different things, estate agents say

After news of the Purplebricks decision broke late on Tuesday (7 May), My Business sister title REB (Real Estate Business) received dozens of comments from real estate agents, many of whom said it serves as proof that fixed-fee sales structures are a flawed business model, at least in Australia, and that price does not necessarily equate to value.

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“It shows that discount agents don’t work. At the same time, agents should always be at the top of their game adding lots of value to both sellers and buyers at all times to justify their fees,” said one.

Others said that the smaller margins often associated with fixed-fee pricing are not enough to sustain a business during downturns, as most Australian property markets are currently experiencing:

“[It is] very difficult to run cut price office when the market slows... agents work harder for longer for a very small percentage compared to traditional agents. Their business model also gets hit in a slowdown, but there is more money to sustain the operation and agents at least can survive on less sales numbers.”

A third suggested that Australian consumers are unwilling to stump up money prior to receiving a service, stating “the market has proven they are not going to pay up front”.

Similar conclusions drawn from Appster collapse

Last year’s collapse of Appster marked another high-profile failure in the Australian market of a fixed-fee service provider. The Melbourne-headquartered global technology developer went into liquidation in December.

At the time, several of its competitors suggested the collapse demonstrated the “dangers of fixed-price services”.

“Appster disrupted the app development market by claiming that fixed-priced development was the only way to go, implying anyone not working this way was in some way ripping off their clients,” reinteractive founder Mikel Lindsaar said.

“While I feel for the founders, I know that the fixed price quote business model they chose to work with is simply unsustainable for any software business and leads to bad outcomes for the company and their clients. They chose a deeply flawed position.”

Meanwhile, Anushka Bandara of developer Elegant Media suggested that monthly subscriptions are a better alternative to fixed-fee structures, generating sustainable income for the business while smoothing out the cost for customers over regular instalments.

Agent defends fixed-fee model

Not everyone is convinced that the fixed pricing model is an unsustainable one.

Adam Rigby, head of Upside Realty, an Australian fixed-fee real estate business operating in Sydney and Melbourne since August 2017, attributes the local failure of Purplebricks to its business structure rather than its pricing model.

He suggested Purplebricks had been complacent in assuming that its foreign operating model would automatically work in Australia.

“Vendors were liable to pay the full fee regardless of whether the property sold or not. This left no incentive for the business or the agents to actually sell properties. This can work in a booming market, but not in a declining one,” Mr Rigby said.

Fixed pricing ‘absolutely sustainable’, but risks involved

Business advisory specialist Ashley Davidson, executive director at Pitcher Partners, told My Business that fixed pricing can be a sustainable business model, provided the downside risks are properly catered for from the outset.

“The model is absolutely sustainable, whether you use a fixed-fee arrangement or otherwise, but you just need to manage the business accordingly, and manage the relationships accordingly,” said.

Mr Davidson said there are differences between the three main pricing models: fixed fee, hourly rate and commission.

“Obviously the alternative for Purplebricks was a commission-based model. For your lawyers and accountants, that’s pretty unusual for there to be commission involved, although once you get into the corporate finance area then sometimes you do have commission arrangements.”

He said the risk of fixed-fee pricing can be more pronounced in professional services such as legal or accounting, where the degree of work and time involved can differ on a case-by-case basis, making it somewhat different to real estate, where the business model tends to be built around big upside based on good results.

And while fixed pricing has its benefits, predominantly cost certainty for clients as well as revenue per client, the business ultimately holds the risk under this model.

“The analogy of Purplebricks I think is a very interesting one, because I think that’s where they missed that mark – they didn’t understand the cost of what they were doing, they didn’t understand the success needs of the proprietors of the businesses, they didn’t understand the work that was involved, and they carried the can with all the risk, because when property slowed down and the number of jobs slowed down, they had no opportunity to flex,” Mr Davidson said.

He added: “When we survey law firms, we have found that those that are more profitable aren’t those using the fixed-fee model. That doesn’t mean that it’s wrong, that just is what the outcome of the facts are ... it was interesting to us to see that kind of response.”

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Analysis: Is Purplebricks’s exit the death of fixed fees?
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