Over the past week, real estate has been dominated by news of Zillow Group’s Instant Offers. The new program, which allows prospective home sellers to receive instant offers on their homes, has been covered across the industry, with the reaction – as one would expect – largely negative.
A thought-provoking article in VentureBeat rhetorically wondered whether Zillow could “Uber-ize” the hundred-billion-dollar real estate brokerage business. The author claims that Zillow is well-positioned to disrupt the industry and capture an even larger share of the brokerage market.
All up, there’s an immense amount of interest related to Zillow disrupting or displacing the traditional real estate industry structure. It’s a huge opportunity, but one fraught with risk.
I’m going to approach this situation from two angles: my own time as head of strategy for a publicly-listed, multi-billion dollar business, and what the data tells us.
Instant Offers: offensive, defensive, or opportunistic?
The key strategic question in all of this is whether Instant Offers is an offensive, defensive, or opportunistic move by Zillow?
If Instant Offers is an offensive move and amounts to Zillow’s first salvo against the real estate industry, it’s a strange one. It’s just too far removed from the endgame of displacing real estate agents. The risk doesn’t match up with the reward.
Or, perhaps it’s a defensive move against the rapid rise of Opendoor and its growing list of national competitors. With Opendoor raising over $300 million U.S. and valued at more than $1 billion U.S., it’s difficult to ignore. But, even a disruptive operation such as Opendoor still needs to sell houses, and those houses will appear on Zillow. And with a two-percent market share in the Phoenix market, it still has niche appeal – not exactly an existential threat to Zillow.
So, the most likely answer is that Instant Offers is an opportunistic move by Zillow. It wants to capitalize on the growing consumer demand for instant home offers, and sees it as a potential new revenue stream, whereby it can collect and monetize seller leads.
This fits well with Zillow’s existing business model: It continues to operate as a marketplace, monetizes leads, and sells those leads to real estate agents. It’s a natural extension, rather than a radical disruption.
Real estate websites versus agents
Real estate websites around the globe have the same problem: a love-hate relationship with their biggest customers – real estate agents. The top sites are fighting a constant battle to extract more money from their customers through regular price rises and value-added services.
On the other hand, real estate agents pay the sites for advertising, exposure, and leads, because of the clear return on investment, but do so begrudgingly and with a sense of fear. Most agents are afraid of these sites gaining too much power, continually raising prices, and perhaps even replacing them with an online-only offering.
So, while real estate sites are best positioned to disrupt the real estate industry by displacing agents, they’re also the least likely to do so, because agents are their biggest customers and source of revenue.
Case in point: The Trade Me Property price rise. While I was at Trade Me, New Zealand’s dominant horizontal, we initiated a modest price rise for agents. It was a change from an all-you-can-eat model with a flat subscription fee towards a pay-per-listing fee. It was not well-received.
Real estate agents across New Zealand were angry. They did not take kindly to a price rise and organized themselves around our rival and No. 2 on the market, the industry-owned RealEstate.co.nz. The impact was a material narrowing of the traffic gap between both sites – arguably the most important performance indicator for a real estate website (see Network Effects for more on that).
Trade Me Property’s traffic lead went from five times to three times the traffic of the No. 2 rival, a huge drop. Increasing prices for real estate agents – let alone disrupting them – isn’t easy.
(Zillow’s traffic is approximately three times higher than its top competitor in the U.S., namely Realtor.com.)
I believe there are a number of critical preconditions for a real estate website to truly disrupt real estate agents:
- A monopoly on traffic. Ideally, there is no major No. 2, but if there is, the top site needs to have a massive traffic advantage.
- Revenue diversification. The less reliant the site is on revenue from agents, the better able it will be to withstand a revenue hit.
- A strong brand. It should be well-known in the market and be seen as a leader in the field, the equal of any strong brokerage.
- Online tools to disintermediate brokers. A site needs to offer all the tools and capabilities that a brokerage offers, including CRM, document signing and management, marketing and promotional tools, lead capture and management, and inventory management.
Revenue diversification and risk
Most real estate platforms capture their revenue from agents. Whether spending their own money to promote themselves or buy leads or spending their vendor’s money to advertise a property, the agent controls the purse strings.
In the case of Zillow, around 70 percent of its revenue comes from real estate agents. While not surprising, it’s still a big number that reflects a poor level of diversification. Furthermore, as we can see below, that number as a percent hasn’t changed over the past four years. Zillow does not look like a business trying to diversify its revenue.
Zillow fully believes it is at the beginning of its journey, not the end. It sees plenty of runway left to grow its revenue even higher as more spend goes online. And the numbers prove it: revenue grew 31 percent from FY 2015 into FY 2016, higher than any of its global peers.
In other words: Zillow is making a ton of money with its current business model and sees plenty of growth left. Why put that at risk and kill the goose that lays the golden eggs?
We can also see that Zillow’s revenue share from agents is on par with its global peers. Most of the major players illustrated above receive between 65 percent and 75 percent of revenue from agents.
Zoopla, the single exception, has taken a proactive strategy to diversify its revenue streams away from agents. In 2015, it acquired uSwitch, a price comparison business, for £160 million and the acquisitions have continued at a brisk pace since then, all in an effort to expand along the value chain and become a one-stop-shop for consumers and real estate professionals.
As opposed to Zillow, Zoopla looks like a business that is diversifying its revenue streams. With that clear strategy in place, revenue diversification has followed.
Of all the major real estate websites in the world, Zoopla is best positioned from a revenue diversification standpoint to disrupt the industry.
Given what we know about its strategy and what the data shows us, I consider it unlikely that Zillow is making moves against the industry. The existing business is just too lucrative with plenty of growth left to put it all at risk.
Rather, Instant Offers is about giving consumers choice, expanding the existing lead marketplace, and a new source of revenue with seller leads. It’s also just a test.
Zillow is not well-positioned to make a big move against the industry. Its revenue is not diversified and there is a strong No. 2 on the market.
Regardless, Instant Offers should be instantly interesting to all of the major real estate websites around the world. It’s capitalizing on a pro-consumer offering that can make these sites more valuable to consumers around the world. I guarantee many – myself included – will be watching this test with great interest.
This article was originally posted on the AIM Group, where I am a senior consultant and principal.
Purplebricks launched in Australia in August 2016. Last week's trading update piqued my interest in its market traction in Australia, which led to several interesting observations. All data is publicly available from the top property portal in Australia, realestate.com.au.
To begin, let's look at overall market traction. The chart below shows the number of houses sold each month (as reported on the portal).
There is clear, continued growth in its two launch markets, while NSW is off to a promising start. The overall numbers are still low, but there's a promising and unmistakable upward trend in all markets.
Purplebricks currently list 26 LPEs (Local Property Experts) in Queensland, 20 in Victoria, and 12 in NSW. Given the monthly sales figures above, we can calculate an approximation of many properties each LPE is selling per month.
NSW is quite new, so it makes sense that the ratio is lowest there. But in the two, slightly more mature markets, you can see that each LPE is selling between two and two-and-a-half properties each month.
At the time of writing, there are 346 properties listed for sale in Queensland, 196 in Victoria, and 83 in NSW. Given the same LPE numbers, we can plot out the total number of current listings relative to LPEs.
There are a number of factors that could influence these numbers. It could be a reflection of average time on market; perhaps there are more listings per LPE in Queensland because it takes longer for properties to sell. Or it could be a reflection of timing; it may take several weeks for a new LPE in NSW to become fully productive with acquiring new listings.
The real magic will be in seeing how these ratios change over time, so stay tuned!
Looking at the listed sale prices of just under 500 properties gives us a look at what segment of the market the Purplebricks proposition appeals to. The chart below shows clear clustering in Queensland, where Purplebrick's median sale price is $493,000, below the overall market median home value of $655,000.
Likewise, sale prices in Victoria are also well clustered around a slightly higher median sale price of $530,000, compared to the overall market median home value of $826,000.
As is clearly evident from the two charts above, the median home values in both Queensland and Victoria are higher than Purplebricks' median sale price. A reasonable conclusion would be that the Purplebricks offering and proposition currently appeals to the (slightly) lower end of the market in Australia.
Is it true that owners with high value homes are still more comfortable using a traditional real estate agent (even though they could proportionally save more on commissions by using a service such as Purplebricks), or is it still early days with Purplebricks building trust in a new market?
Regardless, it's clear that the proposition is resonating with a growing number of consumers. Next stop: The U.S. market.
Written in collaboration with Eddie Holmes, partner at PropTech Consult.
It’s indisputable that digital transformation is occurring in real estate and changing the way people buy and sell houses. Nowhere around the world is this more evident than in the U.K., where upstart online agencies like Purplebricks have captured market share and are growing fast.
Often, we spend most of our time looking at the disruptors. But for every disrupter, there are those being disrupted. In this case that’s Countrywide, the U.K.’s largest estate agency group.
Countrywide’s stock price is down over 50 percent during the past 12 months, shedding hundreds of millions of pounds in value.
But the firm hasn’t stayed still; in 2016 it launched its own online offering, which is now rolling out across its massive network. But while credit should be given for moving early and quickly, Countrywide’s strategy raises serious questions around the viability of the offering and if it was, in fact, designed to fail.
Countrywide is the largest estate agency group in the U.K. Founded in 1986 following the acquisition of two estate agencies by Hambros, the company grew through sustained acquisitions of businesses such as Nationwide and John D Wood estate agents.
Today it employs 11,300 personnel across 1,500 branches under 47 high street brands.
Trading as a property services business, rather than simply an estate agency, Countrywide provides a range of services to homebuyers, sellers, renters and landlords.
Countrywide has been the hardest hit estate agency incumbent in the U.K.
The perfect storm of macro economic factors affecting the housing market combined with the rising competition from online agencies has brought immense pressure on its business.
This has come about in the context of an organization that was not known for the robustness or depth of their technology systems before the market dynamics changed.
Purplebricks is the largest of a new breed of online agencies. Its proposition to homeowners is a low, fixed-fee, combined with smart technology to save consumers thousands of pounds when selling their home.
Together, these firms have captured 6 percent of the market in the U.K., and continue to grow.
To illustrate their different fortunes and trajectories, the chart below shows share price changes over the past 16 months for Countrywide (orange) and Purplebricks (blue):
Countrywide’s stock price has taken a hammering. Meanwhile, Purplebricks’ market cap is greater than the two largest listed estate agency groups in the U.K. combined, showing a clear picture of where the investment community sees the future of the industry.
If the investment community was bearish on the entire real estate market, Purplebricks’ market cap would be much lower. But the reality of the markets shows a clear preference toward where the future lies.
This market pressure is affecting all estate agency groups in the U.K. The chart below shows how three of the largest players have seen their revenues and profits impacted over the past 12 months. Countrywide is not alone, but it has been the hardest hit:
We’re at a pivotal point for the entire industry and for Countrywide in particular. This is a business in decline, and the line between death spiral and a rebirth is razor thin. The chart below shows the Countrywide story as only numbers can do: flat revenues and decimated profits.
Anthony Codling, an analyst at the investment banking group Jefferies — which has previously acted for Countrywide — sums up his position: “Although Countrywide may be down, it is not out and if what doesn’t kill us makes us stronger, we expect the group to emerge strongly from the storm once it has run its course.”
But it is still unknown if this will kill Countrywide. Only time — and its strategy to combat the rising tide of online agencies — will tell.
Countrywide’s strategy became clear in 2015 and has two main pillars under the title “Building Our Future.”
- Launch an online hybrid competitor of its own (the multichannel approach)
- Rationalize the existing business by closing branches and consolidating brands
These efforts resulted in the pilot launch of its new, online offering in May 2016, and the closing of 200 branches and four brands in 2016 (leaving Countrywide with 991 branches and 47 brands).
The restructuring of its business didn’t come cheap; £8.1 million of redundancy costs and £15.8 million of property closure costs, plus a £19.6 million goodwill impairment charge.
The investment in the new technology platform was an outsourced build, rumored to cost an additional £6 million, while salary expenses for the year increased £6 million to £366 million.
Clearly, Countrywide is spending significant cash and investing in both pillars of the strategy. It has also executed both pillars simultaneously, which must have caused significant cultural challenges among the workforce at a time when laser focus on the online pilot — instead of restructuring — was critical.
An inconclusive pilot
Countrywide sensibly rolled out its new online offering across three test markets. This allowed it to get to market fast, collect real customer feedback, and (we assume) incorporate that feedback back into the product.
The data below tracks Countrywide’s daily listings via the three brands used to pilot the scheme and shows that overall listings are down versus the previous pre-pilot performance:
Systemic issues with the offering
Countrywide ran its pilot and subsequently launched its online offering under its existing brands and corporate structure. It is positioned as an additional service, rather than as a separate offering, as evidenced from the messaging below.
This means that the new offering — which is being offered at a fraction of the cost of existing services — is operating within the same cost structure, making it difficult to turn a profit.
Marketing this service under the existing Countrywide brands and utilizing existing marketing channels (in the case above, the Entwistle Green website) raises some questions about the purpose of the service.
It is widely accepted that tech-driven businesses typically acquire newcustomers in new ways when compared to their traditional business competitors (for example, through smart digital marketing).
The ultimate goal of pushing services through new channels is to achieve an element of virality in the spread of the product, which reduces the cost of customer acquisition and creates the opportunity for larger profit margins.
However, by using traditional marketing channels under existing brands, Countrywide is not likely to reach new customers in new ways.
Instead, it is only reaching those potential customers who already know their existing brands well enough to find themselves on the website. Therefore it only serves to cannibalize the existing customer base by selling them a lower priced service while simultaneously failing to bring in new customers.
The brand extension problem
In March of this year, Australia’s second biggest real estate group, LJ Hooker, announced that it would launch its own DIY real estate disruptor, Settl. The new brand empowers vendors to sell their homes online, in exchange for paying a low fixed fee. It is a direct response to Purplebricks’ 2016 launch into the Australian market.
The key difference between LJ Hooker’s Settl and Countrywide’s online efforts is one of brand. LJ Hooker is creating a new “fighter” brand, while Countrywide is opting for a brand extension.
A fighter brand is designed to combat low-price competitors while protecting an organization’s premium-price offerings.
Imagine you own a lemonade stand that sells premium lemonade. You’ve been in business for years and are well known for offering premium beverages.
One day a low-cost lemonade stand opens across the road, offering lemonade at a tenth your price.
What LJ Hooker has done with Settl is to tackle the new competitor by opening its own, separate low-cost lemonade stand. To the customer’s eye, there is no connection with the existing LJ Hooker brand or the premium values associated with it.
What is Countrywide attempting to do? Sell low-cost lemonade alongside its premium lemonade, at the same stand. Not only is this confusing to customers, but it cannibalizes its existing premium business.
The history of fighter brands is not hugely positive. However, excellent examples can be seen with Intel’s launch of the Celeron processor to combat the threat of low price AMD chips, and the creation of JetStar by Qantas to see off the threat of low cost rival Virgin Blue.
(For more on fighter brands, see “Should You Launch a Fighter Brand?” on Harvard Business Review.)
By launching a brand extension, Countrywide is missing out on the classic benefits of a fighter brand: eliminating competition, protecting the existing premium offering, and opening up new, lower-end markets for the organization. Countrywide’s approach begs the question: Is the offering truly meant to succeed?
The fact that Countrywide’s online offering is a brand extension that does not offer the benefits of a fighter brand leads to two equally straightforward conclusions.
Either the entire endeavor is ill-fated due to major strategic positioning issues, or it is simply a lead-gen effort to support the incumbent business. The continued pursuit, at the cost of a £38m rights issue, of the strategy after an inconclusive pilot suggests this is the case.
Countrywide felt forced to do something; online agencies are perceived by the financial markets to be the greatest threat to its existing business. Purplebricks’ continued momentum, market traction, and rising stock price demanded a response from senior management.
There were a number of options available.
Countrywide could have invested in or acquired another online player in the market, it could have launched its own disruptive brand (as LJ Hooker has done with Settl), or it could have launched a new offering internally.
For whatever reason, the choice is the latter. Viewed from the outside, Countrywide now offers a service on par with the online agencies.
It can tell the market and prospective customers that it also offers a low-fee, online offering. However, customers don’t seem to be buying the new service and the markets aren’t buying the strategy.
In reality, the brand extension offering cannot succeed on its own.
At best, it achieves product parity with online agencies, and offers a platform to upsell potential customers to its premium estate agency proposition.
However, it does not suggest that the business has thoroughly understood the challenges that this must create around issues such as incentivization of staff or servicing a totally new service line with the existing infrastructure and cost base.
If Countrywide’s offering was designed to fail — that is, to not succeed as a standalone business or product, but as lead-gen for its existing business — it does not mean it is a bad strategy.
In fact, it may be the best course of action for the large incumbent as it is relatively low risk and keeps its options open. But if the offering was not designed to fail, significant changes are clearly required to give it a chance of success.
What’s interesting in the Zillow Group results for Q1? Here are highlights, with charts and commentary. In a nutshell:
- Zillow continues to edge toward profitability, with overall expenses coming in line with revenue.
- Overall revenue growth is re-accelerating, matched by increased spending on sales and marketing.
- Technology-and-development spend has slowed considerably, contributing to slower overall expense growth.
First: The profitability chestnut. Cutting out all the noise for a moment (including stock-based compensation), let’s focus simply on revenue and expenses.
One of the biggest questions for Zillow is: Can it turn a profit? Zillow has lost millions of dollars during the past few years and has yet to turn a profit, even though it’s on track to generate more than $1 billion U.S. in revenue this year.
So, any signs that give clues to whether Zillow can and will become profitable are quite relevant. Zillow has done a good job over the past three quarters; expenses are finally matching revenue.
Quarterly revenue growth has picked up steam as well, up from a relatively slow Q4. In Q1, revenue was up 8 percent from Q4, and 32 percent from Q1 in FY2016.
In particular, the sales and marketing expense is quite illuminating. While Q1 revenue was up 8 percent from the previous quarter, expenses were up 9 percent overall and the sales and marketing expense was up 18 percent.
In absolute terms, revenue was up $18 million U.S., expenses were up $19.7 million, and sales and marketing $15.8 million.
But, looked at over the past year, the story changes. Compared to the same quarter last year, revenue is up 32 percent, expenses up 10 percent and sales and marketing 7 percent.
Again, looking at year-over-year growth in absolute terms, revenue was up $60 million, expenses $22.6 million and sales and marketing up $6.8 million.
Looking further, we can see a rough proxy of how effective sales and marketing spend is in driving revenue. For the past several quarters, each dollar spent on sales and marketing generates from $2 to $2.50 in revenue. And it’s slowly trending upwards.
There was a big increase in sales and marketing spend in Q1 of FY2017, so relative effectiveness has dropped slightly. But, overall it’s a good direction to be heading in — upward, that is.
Another interesting metric is technology and development spend. It’s finally leveling off. In fact, it’s flat when compared to the previous quarter.
Technology is surely a critical component of Zillow’s consumer and customer proposition, so tech spend will always remain high. But, if you’re anxious for Zillow to turn a profit, the relatively flat growth is an important factor and a good signal.
Overall, it was a good quarter for Zillow. Not simply for the headline revenue growth, but for the drivers behind it, that signal a meaningful turn for the company towards sustained profitability.