Are You A “No” Sayer At Heart?, Part 4

November 25, 2009

If you’ve ever studied economics as I have, you may have heard of a principle called the Law Of Diminishing Returns.  According to the Wikipedia page on this law, it “refers to how the marginal production of a factor of production starts to progressively decrease as the factor is increased, in contrast to the increase that would otherwise be normally expected. According to this relationship, in a production system with fixed and variable inputs (say factory size and labor), there will be a point beyond which each additional unit of the variable input (i.e., man-hours) yields smaller and smaller increases in outputs, also reducing each worker’s mean productivity. Conversely, producing one more unit of output will cost increasingly more (owing to the major amount of variable inputs being used, to little effect).”

In simpler terms, this law means just this: the more we use something, the less benefit we’ll get out of it.  Think of a car.  When you first buy it new, you will get lots of benefit out of it.  It’ll look great and perform great.  It’s cost:benefit ratio will be great.  But over time, the car will become less desirable.  It will break down more often, costing you more and more money to operate it.  If you ever have a car accident, your car insurance will go up, and your car may never operate as well again.  Newer, sexier models of cars will be coming out year after year, likely making your car less desirable to you and others, making it’s resale value continually less.  Eventually the cost:benefit ratio of the car will be terrible, and you’ll want to get rid of it and buy a new one.

Let’s apply this Law Of Diminishing Returns to real estate.  Let’s say Maria has sold 20 homes each year for the past 25 years.  That’s 500 homes.  She no longer spends any money on advertising, relying strictly on referrals and past clients.  But let’s assume only half of these people would want to work with Maria again or refer her.  So that’s 250 referral sources, assuming all those people are still alive.  Let’s say she gets 50 referrals per year and she closes half of them.  These past clients are moving once every 5 years.  Here’s how it breaks down:

250 Past Clients – 25 moving per year @ 80% closing rate = 20 listings
+ 50 referrals per year @ 50% closing rate = 25 listings from referrals
==============================================
45 listings

Now we all know that it’s mostly a buyers market in most cases today.  So let’s say that Maria sells 35% of her listed homes.  That’s about 16 sold listings, and she spent $0 on promotion.

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