Learning from Failure: Lesson One.

So I closed the restaurant after a year. We had grown sales about 20% over the year and were continuing to grow in sales and margin every month, while controlling costs and growing margin, but we were still another year from turning a profit. Because of the down turn in real estate, the pressures from my core business (real estate and real estate related technology) I felt I needed to really focus my attention on them. Continuing to subsidize a restaurant during the housing downturn would have brought our company’s cash reserves to dangerously low levels. So, I sucked it up, and made the tough decision to close. It was bittersweet. I enjoyed the restaurant. I enjoyed meeting the people. I enjoyed the staff. And I enjoyed the food and the wine. What did I learn? One thing I learned is that restaurants are really two businesses rolled into one. In other words, you can operate one part perfectly and still have a problem with the other. It’s a balancing act, but it’s a business. So what are these two parts or businesses?

First, a restaurant is a manufacturing business. In a restaurant, your product is first and foremost, your cuisine. To execute well, you must not only have good food, but you must be able to prepare it within budget. As a fine dining restaurant, the rule of thumb is for food cost to be between 27-35% of sales. By carefully choosing to offer a very limited menu, and by only offering entrees that would provide us with a good gross margin, we managed to keep our food cost under 22%. It is very similar in real estate business, however, instead of manufacturing a product, your “product” is your brokerage services.

Like a restaurant is careful to choose its menu, it is important that an agent choose his service offerings carefully, or he may do lots of transactions but not generate any revenue. I have agents in my company that do lots of transactions but at very low price point, resulting in lots of work and very little money. Or, there are those agents that somehow feel that spending a day doing a BPO (broker price opinion) for a bank for $50 to $75 is somehow a good idea. What niche you focus on is very critical, after all, your time is all you have to sell. Similarly, you may gross a lot of commission dollars, but if your operating costs are too high, you may flow a lot of money and yet not make any.

Many agents today find themselves with good commission cash flow and yet no real income because their marketing and advertising costs are so far out of line. Recently I was asked to speak at a local Association of REALTORS� in Roanoke, Virginia. I had an agent in one session that grossed well over six figures last year. But he spent nearly 30% on advertising, when he should have been able spend 10% and actually generate more business, had he done it properly. More importantly, he was very frustrated because while he was grossing a lot of money, he wasn’t bringing it to the bottom line.

In my next installment, I’ll show you how real estate, just like a restaurant, is also a marketing business. More to come…

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