Purplebricks USA: One Month In

Purplebricks, the online agent that has seen massive success while battering the incumbents in the U.K. market, launched in the U.S. about one month ago. Let’s take a deeper look at its launch, its tactics, the numbers, and its next targets.

The Model

The business model in the U.S. is similar to the U.K. and Australia (where Purplebricks also operates): Purplebricks charges a listing fee of $3,200, plus the typical compensation paid to buyer’s brokers (typically between two and three percent). Sellers must pay the fee either upfront or at closing, regardless of whether their home sells.

Purplebricks also works with homebuyers, paying a $1,000 rebate out of the buy-side commission toward closing costs.

The Customer Proposition

Pre-launch, the customer proposition for the U.S. market was the key question for me. Given that in the U.K. there are only listing agents and no buyers agents that Purplebricks needs to work with, the customer proposition is simple and straightforward: agents are bad, and Purplebricks is the alternative.

That approach would not fly in the U.S. market because it would end up alienating the industry and the important role of buyers agents in bringing prospective buyers to properties for sale.

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So, Purplebricks launched its U.S. campaign (check out the commercials) with a slightly diluted message focused on two key themes: saving money, and a simpler, faster process. Time will tell if the message resonates with consumers in the same, effective way it has worked successfully in the U.K. market.

Like in the U.K., the key to the model is spending big money to raise consumer awareness and generate leads. This spend is not simply online, but typically overweight with above-the-line campaigns on TV and radio. As you can see from the recruiting message below, Purplebricks are planning to spend nearly $2 million per month on advertising -- quite a large number for one market!

The Numbers

It’s only been one month. Every new business starts small, and each new real estate agency starts with one transaction. The numbers are small, but it’s important to set them as the foundation for future growth.

At the core of Purplebricks’ business are the local property agents, called Local Real Estate Experts in the U.S. After one month in the market, Purplebricks currently has 24 licensed agents operating in the launch market in Los Angeles, California. This compares to over 650 local property experts in the U.K., and over 100 in Australia.

After one month of operation, Purplebricks U.S. currently has 12 listings, nine of which are for sale, and three of which are pending. Of its 24 agents, nine agents have one active listing each. Sixteen agents currently have no listings.

Yes, in isolation 12 is a small number, but remember that this is a new business. Getting a new listing every 2.5 days isn’t bad for a new entrant in its first month. But let’s see how it grows from here.

Next Targets

What’s next for Purplebricks in its expansion across the U.S.? A Californian expansion, namely San Diego, Fresno, and Sacramento.

 
 

What to Watch?

Going forward, these are the key strategic areas to watch:

  • The numbers: listing volumes and number of agents. This is the ultimate metric to gauge whether the huge investment ($60 million) in U.S. expansion is paying off.

  • Customer proposition: keeping a close eye on the marketing message to consumers, to see if it's resonating or needs to adapt to the U.S. consumer.

It’s still very, very early days for Purplebricks in the U.S. market. But take them seriously: Purplebricks is a large, serious, international player with plenty of momentum and experience, with deep pockets. It may not revolutionize the real estate market overnight, but it will have an impact.

Why investing in OnTheMarket is a horrible idea

I’ll cut right to the chase: OnTheMarket, the online property portal challenging Rightmove and Zoopla, does not offer more value to consumers compared to the existing alternatives. It serves no purpose and investing in such a business would be a horrible idea.

The power of network effects

The fully understand the case against OnTheMarket, we need to start with the concept of network effects. Simply put, network effects is the phenomenon whereby a service becomes more valuable when more people use it (Facebook is a great example).

Online marketplaces such as Rightmove and eBay are classic examples of businesses that benefit from network effects. The more people that use them -- buyers and sellers -- the more valuable the service becomes. If you’re selling something, you want to advertise to the biggest audience possible. And if you’re looking to buy something, you want access to the largest selection possible (think Amazon).

Businesses that have the benefit of network effects -- again, marketplaces and social networks are the best examples -- are incredibly difficult to displace. Because even if a new entrant’s product is objectively better, a smaller audience of potential buyers and sellers equals an inferior proposition. If you’re holding a garage sale, would you rather sell to an audience of 100 people or 1,000 people?

Providing value to users

As I’ve previously written in The 2 Principles of Startup Success, a new venture needs to provide more value to users than the other available options. If we use Clayton Christensen’s framework of “jobs to be done” as a basis (booking a flight, hailing a cab, keeping track of customers, or buying groceries), then the value of the new needs to exceed the value of the current.

 
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Value can be defined many ways: cost, utility, and convenience are fairly standard measures. The value is what the user perceives and experiences on an individual basis, not what the provider thinks. Value originates with the user, not the new venture.

If you must explain your value, it’s not as great as you think.

If the value of the new is relatively close to the value of the current, you enter what I call “The Grind.” This is the unenviable position where you need to convince customers of the value you provide. As Jeff Jarvis eloquently states in What Would Google Do?, if you must explain your value, it’s not as great as you think.

The customer proposition of property portals

The value that property portals provide to consumers is straightforward:

  • For buyers: access to the largest inventory of properties for sale (tracked as the total number of listings)

  • For sellers: advertise your property to the largest collection of potential buyers (tracked as the total number of visitors)

Why OnTheMarket is a horrible investment?

Critically, OnTheMarket is a bad investment because it doesn’t provide value to users. There is no compelling reason for consumers to use the product compared to the existing alternatives (Rightmove and Zoopla).

Exhibit #1: OnTheMarket has a fraction of the total number of properties for sale

According to excellent research conducted by Exane BNP Paribas, OnTheMarket has around 5,700 agency customers, which is a fraction of the existing players (see the graph below). In fact, this number is down from 6,300 customers when last reported in 2016.

 
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Earlier research conducted by MyOnlineEstateAgent showed that OnTheMarket had around 36 percent of the listings of Rightmove and 50 percent of the listings of Zoopla.

 
 

Looking at one region today, Bristol, shows 2,945 listings on Rightmove, 1,940 listings on Zoopla, and 659 on OnTheMarket. The market leaders have between 3x and 4.5x the total number of listings as compared to OnTheMarket, a non-trivial difference!

So: OnTheMarket has considerably fewer for sale listings than the existing alternatives.

Exhibit #2: OnTheMarket does not have the most visitors

In 2016, this story on EstateAgentToday discussed the relative traffic numbers of the major property portals. In it, OnTheMarket.com reported April traffic of 7.25 million visits, compared to Zoopla attracting close to 50 million average monthly visits to its website and mobile apps, while Rightmove receives more than 120 million visits each month.

In other words, the market leader, Rightmove, has over 16 times the traffic -- also known as potential buyers -- than OnTheMarket. Where would you want to advertise your home for sale?

The following charts from Similarweb show the same story (albeit with slightly different numbers, as web tracking is more an art form rather than a science). The market leaders have anywhere from 10 to 20 times the traffic of OnTheMarket -- and it’s not changing.

Web Site Visitors: Rightmove (orange) vs. OnTheMarket (blue)

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Web Site Visitors: Zoopla (blue) vs. OnTheMarket (orange)

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So: OnTheMarket has exponentially fewer visitors (potential buyers) than the existing alternatives.

Exhibit #3: OnTheMarket’s user interface doesn’t offer any advantages over the alternatives

In the same EstateAgentToday article linked previously, OnTheMarket’s CEO commented: “We have provided consumers with an alternative search platform which is clean, clear and responsive… There are no third party adverts cluttering the pages and the properties are displayed in the best possible light.”

He posits that the user interface of OnTheMarket provides a superior experience compared of the alternatives. Let’s take a look.

I’ll let you make your own judgement call, but from my perspective the user interfaces are basically identical: clean, simple and intuitive. I don’t see a massive value-add in what OnTheMarket is providing. If OnTheMarket was providing a superior experience, perhaps we would expect its web traffic to be increasing?

According to OnTheMarket, another value add they offer consumers is the ability to set up property alerts to be automatically notified of new listings. But both Rightmove and Zoopla also offer this functionality.

So: OnTheMarket offers, at best, an undifferentiated product compared to the market leaders, providing no additional value to users.

Why does OnTheMarket exist?

All of this begs the question: why does OnTheMarket exist? According to its CEO, it provides an “alternative search platform” for consumers. Which is really no answer at all.

OnTheMarket launched in 2015 to challenge the duopoly of Rightmove and Zoopla in the U.K. market. It was founded by a broad consortium of traditional real estate agencies who didn’t appreciate the market and pricing power enjoyed by the existing portals.

So: OnTheMarket’s reason for existing is to the benefit of existing estate agency owners and shareholders. Along the way, it forgot that it needs to provide actual, legitimate value to users other than an unnecessary “alternative search platform.”

Is OnTheMarket a good investment?

Rule number one in launching a new venture is to provide actual value to your users. It’s impossible to succeed without that key component.

On the verge of its IPO where it is seeking to raise around 50 million pounds at a valuation of between 200 million and 250 million pounds, you have to wonder who would be foolish enough to invest in the venture.

OnTheMarket provides no additional value to consumers. Investing in a business that serves no purpose and adds no value for its users is a horrible idea.

 

Disclosure: I am not an investor in nor do I have any financial relationship with any of the businesses mentioned in this article. I simply can’t stand bad ideas.

 

 

 

Transparency and bias in the face of disruption

Imagine getting an opinion on the Netflix business model from Blockbuster, or from a firm that worked closely with Blockbuster. Would there be an inherent bias, and would you trust it?

When industry incumbents are rocked by disruption, they fight back. Those who have a vested interest in the status quo will reveal their biases in an effort to fight the future and preserve the past, working to shape public opinion to their advantage.

The battleground we’re reviewing today is the U.K. real estate industry. The particular cast of characters is familiar: Countrywide, the incumbent; Purplebricks, the disruptor, and Jefferies, the investment bank in the middle.

Investment banks and transparency

This article centers on Jefferies, a well-respected investment banking firm that, among other things, provides deep industry knowledge across a number of sectors to investors.

The firm often pops up in media coverage of Purplebricks, the disruptive online estate agency, due to its coverage of the business. Its first detailed analysis of Purplebricks pulls no punches with this opening:

“Whether people buy or sell their homes through Purplebricks, we don't recommend that they buy shares in the company. The numbers in the business model look very attractive, however it is our view that they don’t add up.”

Purplebricks is commonly viewed as the top competitor to Countrywide. Its rise in market share and market cap coincides with the decline at Countrywide (for more, see Traditional vs Tech: How the U.K.’s biggest real estate incumbent is reacting to digital disruption).

When Jefferies is quoted about Purplebricks in the media, it is usually critical, ranging from a blistering attack on Purplebricks’ sales performance and finances to suggesting Purplebricks should be viewed as more of a gamble than a property services firm.

Jefferies also puts out deep analysis notes on particular businesses with recommendations to buy, hold, or sell that business’s stock. Here’s the one that kicked off its coverage of Countrywide in 2013.

Interestingly, Jefferies counts Countrywide, the largest estate agency group in the U.K., as a corporate client; it was named sole broker to Countrywide in June 2013, soon after the firm was refloated by its private equity owners. This fact is never mentioned in any media coverage of Jefferies’ thoughts on Purplebricks, and is contained in the fine print in its reports (page 113 of 117 in the Countrywide report linked above).

This type of conflict of interest is not unique to Jefferies and is well understood (and regulated) in the finance industry. Firms such as Jefferies are legally required to declare any potential conflicts of interest, especially when reports and recommendations are issued for corporate clients.

The potential and reality of bias is well documented across numerous research papers. In “Inside the 'Black Box' of Sell-Side Financial Analysts,” the authors sum up their findings:

“Whereas issuing earnings forecasts and stock recommendations that are well below the consensus increases analysts’ credibility with investing clients, it can also damage analysts’ relationships with managers of the firms they follow.”

And in “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations,” the researchers conclude that:

“ … Stocks that underwriter analysts recommend perform more poorly than “buy” recommendations by unaffiliated brokers prior to, at the time of, and subsequent to the recommendation date. We conclude that the recommendations by underwriter analysts show significant evidence of bias. We show also that the market does not recognize the full extent of this bias.”

Stock recommendations

One way an investment bank or broker provides value to investors is by issuing stock recommendations. These typically come in three flavors: buy, hold, or sell.

The following chart summarizes Jefferies’ stock recommendations in the real estate field for three-and-a-half years between August 2013 and March 2017. The three corporate clients of Jefferies (Countrywide, LSL, and Zoopla) are listed on the left, and three direct competitors of those clients are listed on the right (Rightmove, Foxtons, and Purplebricks). This chart plots the total duration of the recommendations in days. The results are illuminating.

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Jefferies issued twenty separate “buy” recommendations for its corporate clients, spanning over 2,000 days, while issuing none for their direct competitors. It issued five separate “sell / underperform” recommendations that spanned 700 days for direct competitors of its corporate clients.

Meanwhile, the sustained positive stock recommendations for Countrywide and LSL corresponded with massive underperformance (a 71 percent and 52 percent drop in stock price), while the negative stock recommendations for Rightmove and Purplebricks corresponded with a big gain in stock price (60 percent and 88 percent respectively). Investors would have lost a lot of money if they had heeded Jefferies’ advice.

The data, pulled directly from Jefferies and covering 38 data points over that three-and-a-half year period, raises questions about whether Jefferies favors its corporate clients and may indeed be biased in its research.

Jefferies’ recommendations in a wider context

To further understand Jefferies’ position on Countrywide, I’ve added a time-based dimension. The following analysis focuses on a key period between March 2015 and June 2016. It was during this defining 15 months that Countrywide’s prospects slanted noticeably downward while Purplebricks continued to grow and floated on the London Stock Exchange.

The chart below highlights that period of time with the stock recommendations of Jefferies (in red) and seven other investment banks and brokers (in dark blue): Goldman Sachs, Credit Suisse, Panmure Gordon, Numis, Citigroup, Peel Hunt, and Barclays. (The data sourced for these other brokers is from Broker Forecasts and may be incomplete, but tells a clear story).

Countrywide Stock Performance (2013 - 2017)

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During this 15-month period, Jefferies made or reiterated a buy position on Countrywide on five separate occasions.

Citigroup was the only other broker to issue a buy recommendation during this period, but only maintained it for one month. For the other brokers, there were a total of three downgrades and one upgrade (from sell to hold).

While Jefferies maintained a positive outlook on Countrywide during a challenging period, the peer group of investment banks and brokers clearly saw things differently. While seven brokers maintained hold recommendations, Jefferies stands out as the only broker to maintain a positive buy rating during this time -- over 15 critical months.

Why we should care

Everyone has biases. Even Jefferies addresses this in its reports:

“Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report.”

There’s a reason banking firms are heavily regulated and legally required to highlight potential conflicts of interest: transparency. Whether it’s an investor looking for stock advice, a consumer reading the news, or a homeowner considering options to sell their home, they deserve transparency.

Jefferies is often at the center of debates around Purplebricks, with its detailed analysis and public opinions, and is presented as a knowledgeable and objective source. What my analysis shines a light on is not Jefferies’ knowledge of the real estate space (its analysis is comprehensive), but rather its objectivity.

Objectivity is especially important for new, disruptive business models. When evaluating new businesses, the public deserves to be fully aware of where they get their information from. Even seemingly objective sources may be biased.

Jefferies declined to comment for this article.

* * * *

Stock charts courtesy the wonderful Financial Times and stock recommendations pulled from Broker Forecasts. My own personal bias is towards truth and transparency. Neither myself nor any associated entities have any business relationships with any firms mentioned in this article.

I am a senior consultant and principal at AIM Group, and a strategic advisor in the global real estate tech space.

 

Built Not to Last

I want to build a business that won’t last.

In the world around us, many things come to a natural conclusion and end. Then why do we expect businesses—and all of their component parts—to last forever?

Imagine a business founded with an end date. After two years, the stakeholders come together, ask what the company would look like if they founded it today, and then form that company. The new business retains the good elements, sheds the bad, and moves forward with a fully-committed team.

By introducing an end to its constructs and practices, a business forces itself to evolve to the best possible design. It meets customer needs with a proactive, forward-looking operating structure, and not one rooted in the past. 

The problem of inertia

Research shows that most companies allocate the same resources to the same business units year after year. A review of over 1,600 U.S. companies between 1990 and 2005 found that inertia was the norm, with one-third of the businesses allocating capital almost exactly the same as in previous years.[1]

Studies have shown that anchoring—a form of cognitive bias where previous information influences decision making—contributes significantly to organizational inertia.[2] But the problem extends beyond budgets and resource allocation. Business leaders are also anchored to last year’s business practices, org charts, marketing messages, role definitions, technology initiatives and sales practices. That anchoring leads to incremental thinking year after year.

In their 2008 book Nudge, Richard Thaler and Cass Sunstein discuss the idea that choice architecture, or the design of environments in order to influence decisions, leads to both good and bad outcomes. Defaults are the building blocks of this architecture.[3] A default option is the option the chooser will obtain if he or she does nothing.

The push to evolve often goes against the grain of corporate culture, where the default path is maintaining the status quo. Change is uncertain, uncomfortable, and many times unprofitable. As Larry E. Greiner states in “Evolution and Revolution as Organizations Grow,” management problems and principles are rooted in time. Attitudes become more rigid, more outdated, and more difficult to change. While business leaders must be prepared to dismantle inefficient structures, evolution does not occur effortlessly.

More often than not, a businesses default path—the one taken if no decision to the contrary is made—is to continue without change. But what if the default path forced an ending?

The evolutionary concept

Evolution is the process of heritable change over time, whereby advantageous traits are preserved and bad ones rejected.[4] This process occurs over multiple generations—which is key. In nature, this means organisms need to have an end. When applied to the business world, it means business practices and constructs also need to have an end to evolve.

This intense feedback cycle creates an efficient system of improvement over time, which produces the best possible design for the current environmental conditions.

When a new product is launched, business unit created, or team started, it is designed with a start in mind, but rarely an end. By default, it’s assumed that it will carry on forever (or until specific but unspecified action is taken to modify or end it). 

Evolution is a powerful concept that results in improvement over time. Bringing this concept to work in practice requires two key principles:

  • Define an end date up front. Whether it’s a business, business unit, product, marketing plan, sales plan, or a staff position, create an end date at inception and only bring people along who are comfortable with the journey. Something can’t evolve when it continues on indefinitely.
  • Change the default. On the specified date, the default action becomes an ending. It’s not a review, discussion, or theoretical exercise. It ends, and if it’s decided to continue on, a new structure is born. A rebirth occurs with a forced ending, and with this we keep the good, ditch the bad, and end up with the best design possible.

4 ways businesses can put evolution into practice

1. Reinvent the business

The fundamental, key concept in this process is asking the following question: “If we were to start a company that does [whatever the company does] today, how would we do it?” Then start that company. (In the unlikely event that the answer is “exactly how we’re doing it now,” you’re not trying hard enough!)

By definition, the new business will be the one that is best designed and best positioned to succeed in the market at that time. Old practices that don’t work need to be killed, quickly and completely.

SpaceX started as an answer to the question, “If we were to launch a space flight program today, how would we do it?” In a classic illustration of the Innovator’s Dilemma, it led to significantly improved designs, processes, goals, and systems that the incumbents weren’t capable of undertaking—at a significantly lower cost.

2. Hire employees for fixed periods of time

Sports teams hire athletes for a fixed period of time. They do this because an athlete’s skills and the team’s needs vary over time. What works today might not work in three or five years. Are the needs of a business so different? 

It’s unrealistic to think that a business’s needs are going to remain constant for several years. It’s equally unrealistic to think that an employee’s skills, abilities, and desires will also remain constant.

As much as possible within the local labor laws, a business should only hire employees for fixed periods of time. At the end of that term, the business should reevaluate the position and the candidate to ensure the best possible fit.

A manager should ask the following key questions:

  • Is the job that needs to be done exactly the same as it was 12 or 24 months ago?
  • Is this position still needed?
  • Is the person the right fit for what we need today? 

3. Rotate senior managers

The CEO—and the entire leadership team in general—sets the tone and pace of the organization. Their leadership will impact the company more than anything else. That’s why they should be replaced on a regular basis (think of it as term limits rather than being fired).

In practice, this means signing all senior managers and executives to fixed-term contracts. At the end of that term—just like a fixed-term employee—the business should reevaluate exactly what’s needed in the position and then conduct interviews to make sure it ends up with the best possible candidate for the job.

A less extreme version of this, especially if a business has great talent it doesn’t want to lose, is to rotate senior managers between different business units. Large companies like GE use this system to force evolutionary thinking while keeping great talent inside a business. The concept also works with employee rotation as a form of retention and renewal. (For more on senior manager rotation, see “Rotate the Core” on the Harvard Business Review web site.)

Huawei, the largest telecommunications equipment manufacturer in the world, has a rotating CEO system. Three deputy chairmen act as the rotating CEO for a tenure of six months each, while sitting on a board of seven with four standing committee members. The system, inspired by U.S. presidential elections, is a great example of evolutionary thinking principles in practice.[5]

4. Implement zero-based budgeting

Zero-based budgeting is a process that allocates funding based on opportunity and necessity rather than history. As opposed to traditional budgeting, no item is automatically included in the next year’s budget by default. It’s a powerful concept that, when properly implemented, can liberate a business from inertia and entrenched thinking.[6]

It is the mindset shift, and not necessarily the methodology, that makes zero-based budgeting an effective tool. It resets the discussion in favor of actively thinking about ways to make things better (forward-looking) rather than asking why it is the way it is (backward-looking).[7] Compared to other cost-cutting measures, the focus is squarely on what activities and resources are needed in the current environment.

Zero-based budgeting is a process that can work in any sized company, at any stage of growth. While it may be challenging to implement, when done correctly it successfully reduces organizational inertia and incremental thinking through a more accurate expenditure of resources. (For more on implementing zero-based budgeting in your organization, see “Five myths (and realities) about zero-based budgeting” on the McKinsey & Company web site.)

Concluding thoughts

New Zealand’s national museum, Te Papa, is ranked as one of the world’s best. It is currently undertaking a renewal program of all of its major exhibitions. It’s not simply an update with incremental change, but a total reimagination where leadership effectively asks, “If we were to have an exhibit about [whatever the current exhibit is] today, how would we do it?” By specifically ending the current exhibits, museum staff are forcing an evolution that is not anchored to the status quo.

The way businesses think about strategic planning leads to incremental thinking and incremental results. Instead of being a passive observer to change and evolving by incrementing, businesses should adopt a more proactive posture and force endings. There are many changes that any sized business can make to effectively force evolution and stay relevant in a changing, fast-paced world. It all starts with defining an end.

 

Footnotes

[1] See Stephen Hall, Dan Lovallo, and Reinier Musters, ”How to put your money where your strategy is,” March 2012.

[2] See Dan Lovallo and Olivier Sibony, “Re-Anchor Your Next Budget Meeting,” March 2012.

[3] See Daniel G. Goldstein, Eric J. Johnson, Andreas Herrmann, and Mark Heitmann, ”Nudge Your Customers Toward Better Choices,” December 2008.

[4] See Ker Than, “What is Darwin's Theory of Evolution?,” May 2015.

[5] See David De Cremer and Tian Tao, “Leadership Innovation: Huawei’s rotating CEO system,” November 2015.

[6] See Zero-Based Budgeting: Zero or Hero?, Deloitte 2015.

[7] See Matt Fitzpatrick and Kyle Hawke, “The return of zero-base budgeting,” August 2015.