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.

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.

2017 Global Real Estate Portal Report

2017 Global Real Estate Portal Report from Mike DelPrete

This presentation is available as a free PDF download from Slideshare.

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.

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.

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)

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

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.

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)

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.

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.

iBuyer Market Update: Opendoor and OfferPad in Phoenix

iBuyer Market Update: Opendoor and OfferPad in Phoenix from Mike DelPrete

Are you researching iBuyers like Opendoor and on the hunt for data? Do you work at a consulting or venture capital firm? Check out the iBuyer Analysis Pack.

Purplebricks' FY17 Annual Results: 5 Key Observations

Purplebricks' FY17 Annual Results: 5 Key Observations from Mike DelPrete

Zillow: Killing the golden goose?

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). 

Source: Properazzi

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:

1. 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.
2. Revenue diversification. The less reliant the site is on revenue from agents, the better able it will be to withstand a revenue hit.
3. 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.
4. 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.

Purplebricks shows good momentum in Australia; appeals towards lower end of market

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.

Traditional vs Tech: How the U.K.’s biggest real estate incumbent is reacting to digital disruption

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.

Background

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 reacts

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?

Conclusions

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.

Zillow: Is profitability in sight?

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.

10x and the largest technological improvements of all time

I was first introduced to the concept of 10x in Peter Thiel’s 2014 book, Zero to One. He says, “As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.”

I believe it is not just technology, but the entire customer proposition that needs to be 10x better than the status quo. In my article on the topic, The 2 Principles of Startup Success, I incorporate Clayton Christensen's concept of “jobs to be done,” which gives us a simple premise: Truly innovative or disruptive products and services offer at least a 10x improvement over how things are currently done.

Using this framework to think about new ventures is incredible helpful to entrepreneurs, start-ups, and large corporations. You should always be thinking about the value you can deliver to your customers.

The concept of 10x -- or exponential value -- is powerful. To better understand the principle in practice, we’re going to take a look at a number of 10x innovations over the past 200 years, and look for the biggest breakthrough.

Recent 10x technological improvements

Let’s start our tour with some recent technological improvements that most everyone is familiar with. The first, classic example, is the iPod.

Before the iPod came along, mobile listeners might have 15-20 songs in their pocket. The iPod gave them 1,000 songs, a 50x improvement.

When Amazon.com came along, it offered a book selection larger than 10x than that of a traditional bookstore. The Amazon Kindle continues the trend by offering a package that greatly improves the book buying and reading experience.

Given the huge selection, instant gratification purchase process, and exponential storage benefits, the Kindle offers at least a 10x improvement over the alternative -- if not more.

Tinder, the swiping dating app, is a way to meet new people. Compared to the alternative method of going to a bar to meet people (or through work, or through common friends, or through local activities, etc), Tinder makes the process dramatically easier.

Not only does Tinder offer more than a 10x improvement in throughput (the amount of people you can meet or swipe through with significantly less effort), its design also eliminates the fear of rejection, making the entire experience 10x easier and more efficient.

Another classic example of disruption, Uber offers an exponentially improved process to get from point A to point B. When the alternative is catching a taxi, Uber offers certainty, cost savings (usually), and a frictionless payment process.

The result is a 10x improved experience from start to finish.

It’s no coincidence that each of these examples is a success -- in terms of product-market fit and customer traction. There is a direct correlation between delivering exponential customer value and market traction. If a product or service is truly 10x better than the status quo, customers will flock to it!

10x improvements over the past 200 years

It’s not just the past 15 years that give us examples of 10x improvements. Reaching back a bit further gives us even more massive improvements, showing how today’s technological innovations are quite small in comparison.

It’s not a happy thought, but the development of the atomic bomb represented an exponential increase in destructive firepower.

During World War II, a typical U.S. bomber would carry around 6 tons of TNT, and bombing missions would include hundreds of these bombers. With the advent of the first atomic bomb, a single bomber could deliver up to 20,000 tons of TNT. That’s a massive 3,300x increase in destructive firepower per plane, and a 200x-300x reduction in aircraft.

The invention of railroads ushered in an era where transport costs and transit times for people and goods dropped exponentially.

Railroads made transport drastically less expensive (100x cheaper) while improving the overall customer experience and travel time -- not just incremental improvements, but exponential as well.

Likewise, the advent of air travel continued to dramatically decrease travel times.

While railroads shifted travel times from months to days, air travel moved the basis from days to hours.

If we look at transatlantic crossing times over the past 150 years we can see how long it took a passenger to travel from London to New York. Dramatic improvements in boat technology slashed travel times from 15 to four days, but it’s still not a 10x improvement. Those were incremental improvements. It wasn’t until air travel that a true 10x improvement in travel time came, reducing transit time from days to hours.

The biggest exponential improvement?

When it comes to massive 10x improvements over the status quo, there’s a clear winner from my research. This technology (and the businesses that popped up supporting it) improved communication times up to 25,000x.

The winner? The wireless telegraph.

The wireless telegraph ushered in an exponential improvement in communications, and changed the world. No longer did it take weeks for news to travel around the world. Now it happened in a matter of minutes.

Looking to the future: SpaceX

The last example is my favorite: SpaceX. In a world of incremental technological improvements and relatively frivolous tech products, SpaceX represents a return to the heady days of the 19th and 20th century, when inventions really did change our world.

The promise of SpaceX rests in its 10x value proposition through use of reusable rockets. It’s aim of a 100x reduction in payload costs to orbit is a game changer, both as a business and for us as a species. If successful, it will put space within reach for generations to come. That’s why SpaceX is such a big deal.

The power of 10x

Not every new venture can be a 10x improvement over the status quo. These technological and experience improvements are few and far between. But the quality of thinking is something that can and should be brought to every company and every new venture.

Whether you’re a startup founder or a technology executive, think about the last three products you released for your customers. What was the additional value you delivered?

Chances are that it can be measured in tenths -- a 1.1x or 1.2x improvement.

The more incremental and exponential value that you can provide to your customers, the more successful your venture will be. Not everything can be 10x, but it shouldn’t stop the thinking. So never stop asking: How can we offer an experience that is 10 times better than the status quo?

Growth in new markets: An analysis of Opendoor, Knock, and OfferPad

Last December we conducted a wide-ranging analysis of Opendoor, the real estate startup that purchases homes directly from sellers. A look at of thousands of MLS records formed the basis of that piece, showing trends and extrapolating insights from the data.

At the time there were a number of unanswered questions we wanted to dig into: how much money does Opendoor make per transaction, how big could the model really get in the U.S., and does Opendoor have a sustainable competitive advantage against competitors?

Four months later I’m once again looking at the data, with these questions on my mind:

• What does Opendoor’s traction look like in its (relatively) new markets, Dallas and Las Vegas?
• Are there any notable changes in Opendoor’s fundamental business operations and metrics?
• Opendoor has two well-funded competitors in the market, Knock and OfferPad. How are they doing?

After looking at the data, there are three main observations:

• Dallas, Opendoor’s second market, is doing remarkably well. The transaction volumes there reached parity with Phoenix after only six months.
• Las Vegas, Opendoor’s third market, is off to a slow start. Key metrics suggest Opendoor is still finding its sweet spot in that market.
• Knock, Opendoor’s Atlanta-based competitor, is very early stage and has yet to ramp up in any significant fashion.

A snapshot of current volumes

Last time we looked at the data (at the end of November 2016), transaction volumes in Phoenix were going strong, Dallas was on a promising upswing, and Las Vegas was still small.

Since then, overall transaction volumes have surged from around 200 home sales per month to over 300 sales per month in February. In other words, in February, Opendoor was selling ten houses each day (including weekends) across all three markets. Not bad!

This growth appears to be driven by sustained volumes in Phoenix and very strong growth in Dallas -- putting that market on par with Phoenix after only six months.

Opendoor does Dallas

Let me be clear: I’m impressed with the growth in Dallas. When I’m evaluating new businesses and new business models (see my article, The Two Principles of Startup Success), I always look for business model validation (does this work in one market?) and then the ability to scale (can this be replicated in another market?).

Opendoor’s success in Dallas is a resounding answer to that question. Yes, the business can scale beyond one market. This is a noteworthy achievement for the firm.

Like Phoenix, the average selling price in Dallas is well-clustered. During the past three months, Opendoor’s median sale price in Phoenix was $210,000, compared to $212,000 in Dallas.

This suggests that, like Phoenix, Opendoor has found its sweet spot in the Dallas market. It deals with houses in a narrow and specified value range and (generally) does not deviate from that.

Opendoor credits its success to the team in Dallas and their focus on providing customers an experience they love. “We're seeing that customer love translate to growing word of mouth, and a growing business there,” said JD Ross, one of Opendoor’s co-founders.

What about Las Vegas?

I’m so glad you asked. Opendoor started listing and selling homes in Las Vegas at about the same time as in Dallas, last September. But growth has been slow ever since.

The sale price is not as well-clustered as in Dallas and Phoenix. There’s quite a spread of prices that Opendoor sells its homes for.

The median sale price in Las Vegas is also materially higher than Opendoor’s other markets, sitting at $322,000 (compared to $210,000 and $212,000 in Phoenix and Dallas). It’s not a factor of higher house prices in Las Vegas, either. According to Zillow, the median home price in Las Vegas is $209,000 and the median listing price is $247,000 -- which is on par with Phoenix and Dallas.

In Phoenix and Dallas, Opendoor is selling homes for roughly the market’s median home price. But in Las Vegas, it’s considerably higher.

Opendoor has been selling homes for six months in Las Vegas; perhaps its median sale price started high but has been falling to normal levels over time? Nope.

There’s a noticeable oddity in the Las Vegas market, with slow growth, a less-clustered sale price, and a sale price that’s higher than normal. Why?

It’s because Opendoor’s approach to the Las Vegas market is different. “In Vegas we've been focused on partnerships, and haven't pushed to expand to the broader market there yet,” says JD.

This is a different approach than Opendoor has taken in its other markets, with correspondingly different results.

Opendoor has partnered with Lennar (a new home builder) to offer the Lennar Trade Up program for Las Vegas homeowners. It’s a way for homeowners to “trade in” their existing homes to Opendoor as part of a package to buy a new home from Lennar.

This is a different approach than Opendoor has taken in its other markets, with correspondingly different results. My guess is that it’s a lower-cost option for the firm that effectively outsources lead generation to a partner while allowing Opendoor to focus efforts elsewhere. In other words, it’s a test, which is exactly what a you’d expect from a young, growing company.

Knock, Knock

Since the last analysis, two well-funded competitors have entered the U.S. market: Atlanta-based Knock and Phoenix-based OfferPad. Both announced that they raised over $30 million each in January of this year.

Knock is live in Atlanta and currently trading with tiny volumes; we’re talking about one home sold each of the past two months. It also has a very small number of new listings each month, anywhere between one and six over the past four months.

Knock either does not have the price discipline we’ve seen work so successfully for Opendoor, or is not yet enforcing it.

The median sale price for Knock’s ten listings that sold is $290,000. But underneath that, if we look across all listing prices, you can see they’re not clustered at all. The home values are all over the show, meaning Knock either does not have the price discipline we’ve seen work so successfully for Opendoor, or is not yet enforcing it.

There are several key takeaways in looking at Knock:

• This is a difficult business to be in. Raising money doesn’t give you market share. It takes time, skill, and good operations to build scale.
• Knock is super early stage. Its transaction volumes suggest it is still tinkering with its core operations and proving it can make the model work before attempting to scale up.
• Price discipline is important. It may be tempting to deal with higher-value homes where the fees are correspondingly higher, but Opendoor has shown us where the sweet spot for this model really is.

OfferPad, on the other hand, is a more mature business with better traction -- at least in the Phoenix market. With the help of friends at ATTOM Data Solutions, a real estate data company that aggregates data directly from property records (as opposed to my usual MLS sources), I was able to gather a snapshot of relative traction for both businesses in Phoenix.

It's worth a deeper dive into OfferPad, its model, and relative merits. But that will have to wait until another time.

A look at Opendoor’s operations: anything interesting?

To wrap everything up I took a quick look at Opendoor’s core business metrics to see how things are tracking.

To begin with, the much-talked-about home value appreciation has stayed the same with a median average of 5.4% (looking at 43 recent sales). That’s the difference between what Opendoor buys a home for and eventually sells it for -- about $11,000.

And listen: That’s the difference between the buy and sell price. Opendoor takes on a number of costs associated with sprucing up, holding, and selling a house. So don’t confuse that number with profit; it’s not.

If you prefer small dots to blue bars, below is another way to visualise the same data.

The average days on market in Phoenix has seen a slight improvement, moving down to a median average of 41 days from 47 days in the last analysis. That’s a 12% improvement, which if I were running the business I would have as a key metric. It’s a small improvement -- but when time is money -- a welcome one!

Opendoor also has a new logo.

It will be interesting to watch Opendoor’s progress from here. With Phoenix and Dallas firing well, will it expand to a handful of new markets, or is Las Vegas the next area of focus? When it enters new markets, will it follow the partnership model? And will Opendoor launch in Atlanta before Knock puts the foot down on the accelerator?

Are you researching iBuyers like Opendoor and on the hunt for data? Do you work at a consulting or venture capital firm? Check out the iBuyer Analysis Pack.

easyProperty: lessons in how not to build a business

On March 29, easyProperty released its full year 2016 financials to the U.K.’s Companies House. While a few days early, it turns out that it wasn’t an April Fool’s Day joke. The numbers announced begged to be looked at further.

EasyProperty, launched in 2015, is a hybrid online estate agency in the U.K. It has a similar business model to Purplebricks and eMoov, which aim to sell houses for a low, fixed fee instead of a percentage-based commission, and thus disrupt the traditional real estate agency and brokerage model.

EasyProperty has raised just shy of of £40 million since inception, making it one of the best-funded entrants in the field (second only to Purplebricks).

What drew me to this story is the sheer amount of money raised and subsequently spent. According to its filings, easyProperty had a full year loss of £11.4 million in 2016, having lost £6.8 million the year before.

And what did that money buy? A staggeringly small £874,000 in revenue for 2016.

How did easyProperty manage to spend so much money and achieve such little market traction? It’s a crowded space, but there are a number of other players making significant gains. To me, this is a lesson in how not to build a business.

The Purplebricks comparison

Let’s look at Purplebricks for a comparison. It’s a direct competitor as a hybrid online estate agency, also a start-up, and because it’s publically listed has financials we can analyze (which I did so here, looking at how Purplebricks has successfully scaled).

Let’s start with an overview using the most recent data available. For easyProperty, this is its full year 2016 results. For Purplebricks, we have its half-year 2017 results, announced last December.

While the time periods don’t match up, it’s clear to see the disparity between spend and traction.

What’s striking is not how much money easyProperty is spending, but how little return it’s getting for that spend. Back when the business launched, Mr. Ellice, the CEO, is quoted as saying the company expects to be listing 4,000 to 5,000 properties each month by 2016. Two years later, the reality is around 80 properties per month.

There are a few interesting ways to slice this data. First, let’s look at the total cost per listing. This is what each business is spending per listing. Clearly there will be economies of scale and it should be nonlinear, but looking at the metric is illuminating!

EasyProperty is spending around £12,000 for each of its listings, compared to around £1,000 at Purplebricks. That’s not a great return for the massive sums being spent.

At a higher level, we can also look at how much easyProperty is spending for each £1 in revenue. Spoiler alert: it’s not pretty.

So while Purplebricks is spending around £1 for every £1 in revenue (breakeven), easyProperty is spending £14 for every £1 in revenue. That’s an outrageously bad return on investment.

If easyProperty had simply given away 1,000 listings at its list price of £825 each, it would have cost the firm less than 1/10th of what it ended up spending in 2016.

Technology is not a key differentiator

There’s a choice quote in the director’s report: “The directors consider the level of technology within the business to be more sophisticated than its competitors in its capacity to be able to create and maintain product catalogues across multiple verticals and territories, including product variations, variable pricing and packages that may or may not have optional elements.”

I fundamentally disagree with the premise that technology is a key differentiator or represents a sustainable competitive advantage in this space. I’ve researched and spoken to dozens of leaders in this field around the world, and I’ve yet to find a correlation between an amazing technology platform and market traction.

As I recently wrote in my analysis of eMoov’s technology platform, the winning combination is people + technology. And as the eMoov case study makes clear, technology is only as good as the business behind it.

In other words, the fact that your technology supports packages that “may or may not have optional elements” is not a reason to think the business will succeed against competitors.

With a tech team of 26 developers (compared to eMoov’s tech team of nine), my sense is that easyProperty just needs to get on with it and stop investing millions in its technology platform.

Mo’ Money, Mo’ Problems

There are a number of businesses in this space around the world. The most successful have a great customer proposition and scrappy, driven founders with a burning desire to change the industry.

The director’s report states, “...as is typical for businesses at this stage of their lifecycle it is generating start-up losses as it uses working capital to develop the business.”

I’m not sure that I would describe this situation as “typical.” Purplebricks generated losses to build the business. EasyProperty is just spending a lot of money.

The technology behind an online real estate agency: Lessons from eMoov

Online agencies are one of several new models gaining traction in residential real estate. They smartly combine the traditional expertise of professionals with efficient new technologies to provide a low-cost alternative to traditional real estate agencies and brokerages.

Their rise around the world is slow, but the impact they are having is unmistakably big. The top player in the U.K., Purplebricks, has a market capitalization approaching $1 billion after going public in December 2015. 

Collectively, online agencies have around 5 percent market share in the U.K. and are putting the incumbents under increasing pressure. And the battle in the U.S. is about to heat up with Purplebricks raising $62 million to enter the market in the second half of 2017.

The value proposition of online agencies typically consists of a low fixed-fee and an improved customer experience. Technology plays a key role; online agencies rely on it to empower consumers, bring transparency to the transaction and improve overall efficiency (thus allowing them to charge lower fees).

If technology is a key point of difference, what exactly does it do? What does it look like and how does it add value to the transaction?

Tech is a critical component of an online agency’s value proposition. Here, we’re going to dive deeper, looking at exactly what this tech looks like for a leading online agency, how it adds value and what lessons we can learn.

Case study: eMoov.co.uk

EMoov is one of the leading online agencies in the U.K., having served over 20,000 customers since its founding in 2010. 

EMoov’s technology platform started development in 2013 and is currently on its third iteration, which is one of the big reasons eMoov is appealing as a case study. Not only has the tech platform been in operation for around four years, the team behind it has had a chance to learn and iterate.

Another important factor: The technology is being used at scale. The company lists between 300 and 400 homes each month, and it expects to list nearly 7,000 homes in 2017. This is not technology built in a basement without users — it’s battle-tested in the field and being used to sell homes.

At a high level, the technology platform does two main things:

• It empowers customers in a way that allows transparency and control over the transaction.
• It reduces costs at scale by making eMoov’s internal agents more efficient.

EMoov believes technology plays an important part in real estate by empowering customers and making agents more efficient. But it also believes property professionals are still needed in certain areas, like negotiation.

Ivan Ramirez, eMoov’s CTO, sums up his philosophy: “It was important for us to fully automate certain parts of the journey, like property onboarding, a well as viewings, but we knew that other parts, like offer negotiations and progressions, was an area where we needed to keep the human element present.”

“We still use technology in these areas of the selling process, but it’s more focused on empowering the agent and providing transparency to the customer,” Ramirez added.

A history of iteration

“Historically, technology has been absent from the property transaction, save for search via the portals and agent-facing office management software,” said Russell Quirk, eMoov’s CEO.

Russell thinks that a number of the players in the online agency space, in addition to all of the participants in the traditional sector, grossly underestimate the amount of work required. “It’s a two-year project at a minimum and a massive seven-figure investment,” he adds.

EMoov’s technology has gone through a number of iterations, not all of which have been successful. “We’ve ripped up an entire build and thrown it away and a team with it,” Quirk said. “We adopted a waterfall approach and just didn’t listen to the customers. We focused more on the solution than understanding the problem.”

Now, however, the team is firing on all cylinders and innovating, iterating and deploying new features on a weekly basis.

Ramirez and his team of product managers spend a lot of time in the trenches, shadowing agents dealing with customers, understanding the existing process and looking at customer feedback from support tickets. 

“The goal was to pull out meaningful feedback that would allow us to challenge the existing business processes,” Ramirez said.

“We looked at our internal team’s business processes even further, as well as our customers’ desired journeys, information they wanted to see, and how to present it all in a way that makes sense to them. The way our customers and our internal agents consume and interact with the product is completely different.”

Ramirez believes in a process of continuous improvement and that a product is never complete. 

He’s also implemented a culture of product development that aligns to key business metrics. 

Everything that’s built has an associated metric to be measured against. In his opinion, this is why eMoov is able to operate a business at a low cost while keeping a high level of customer service.

Enhancing the customer journey

“Customers of all ages and demographics embrace being in control and having 24/7 access to their listing and their transaction,” Quirk said. By presenting everything to its customers, eMoov is able to bring a strong degree of transparency to the process.

The property dashboard gives users — both homesellers and eMoov’s agents — a comprehensive look at the property listing. 

Relative listing popularity and key performance metrics from the major listing portals (Rightmove in the U.K.) are shown alongside a snapshot of viewings and potential buyer feedback.

EMoov has attempted to automate the entire process of scheduling viewings. Sellers define the times they are available to show the property to potential buyers. The company’s agents then work within these timeframes to help schedule showings for the seller.

On the other side, potential buyers are presented with an online tool to schedule a viewing, as seen below.

The entire process occurs online for the more than 5,000 viewings that eMoov arranges each month. And it’s more efficient; 93 percent of viewing confirmations now occur online automatically. “We’re now doing this with half the staff that we were deploying to do half as many viewings a year ago,” Quirk said. 

Improving team efficiencies

Ramirez subscribes to a Warren Buffett philosophy, which is that successful businesses need to be low-cost operators. “We have been able to significantly decrease the cost of service in the first part of the seller journey by really operationalizing the product in a way that makes every contact that we do have with our customers more efficient,” he adds.

“In an omni-channel approach, this is a must to succeed as you need to be able to service that customer in whichever way they want to be serviced at different stages of the journey,” Ramirez said. “It’s very difficult to force a customer through a rigid interaction, so the product needs to be flexible and empower whomever engages with it.”

As an example, the customer onboarding process is how a new listing gets on the market. It typically consists of the following steps:

1. Provide property details (description, rooms, highlights and so on)
2. Set the selling price
3. Schedule the photographers to come take the photos
4. Set viewing availability
5. ID checks

A year ago, the steps listed above were all done manually. Today, 90 percent of eMoov’s customers do the steps above on their own using the tech product. This “hand-holding” approach has been transformational for its business and significantly tightened the time it takes to list a new home.

The impact on cost is equally material. The team that supports this operation had 15 people, but now the firm only needs nine people to handle nearly double the number of new customers. Historically, productivity has chugged along at less than 60 cases per person, and now the team is up to over 100 cases per person.

EMoov currently has around 50 staff members, of which seven are engineers and two are product people. 

In comparison, there are 11 staff members in offers and progressions and eight in support. It’s this combination of intelligent tech plus experienced property professionals that makes the entire operation efficient and successful.

The platform essentially has a workflow functionality that puts tasks in front of the agent, helping to progress the sale one task at a time. “It takes the thinking out of the progressions job,” Ramirez said. 

The platform also manages the chain on the property being sold, as seen below, giving a holistic view of the entire transaction.

Lessons learned and future plans

Some of eMoov’s biggest wins have been around customer onboarding, automated viewings and collecting feedback. Each of these areas has benefited greatly from technology to streamline and automate the process.

On the flip side, one area that surprised the team was virtual tours. “Virtual tours didn’t add any value to our listings. We didn’t see a faster time to offer; we didn’t see less or more viewings,” Ramirez said. 

When evaluating interesting new technologies, eMoov is in a unique position as it sits across the entire transaction and can see the utility (or lack thereof) of adding new features like tours.

EMoov has identified machine learning, artificial intelligence and chatbots as areas of future, long-term focus. 

Developments in these tech realms can improve service areas like valuations and viewings. 

In the short-term, however, the focus remains on iterating the offers and sales progression components of the platform to improve efficiencies and give customers more control and transparency.

Final thoughts

No matter what your role in the industry is, there are lessons to be learned from what online agencies like eMoov are able to bring to the market. 

Namely, that there’s room to provide homesellers an improved experience. Technology plays an unmistakably important role in enhancing the customer experience of buying and selling real estate.

As someone who looks at a lot of businesses in real estate tech (with a focus on finding winning models), I see a number of key takeaways from the eMoov story:

• The winning formula is technology + people. You need both to succeed.
• Success comes from more than technology and user interface; it’s the team, the methodology, and an ethos of continuous improvement.
• A good tech product is a big investment and long undertaking and can’t be acquired off-the-shelf.
• Ultimately, the product must be good for consumers. It needs to add value and make the transaction easier and more efficient through transparency and automation, 24/7.

Observations on Zillow's 2016 results and the U.S. market

Hey, Zillow! Thanks for reporting your full year financial results for 2016. It provides a great opportunity to update my international property portal analysis and draw out a few observations on the U.S. market.

Let’s start with EBITDA

The first thing we need to understand when talking about Zillow is its EBITDA. As I have written in the past, Zillow reports non-GAAP “Adjusted EBITDA” numbers, which exclude stock-based compensation (SBC) costs. Many large U.S. tech companies now include SBC costs in their numbers, which is the generally accepted part of GAAP (generally accepted accounting principles). It’s also necessary to do this for an apples-to-apples comparison to international property portals.

Zillow’s 2016 Adjusted EBITDA is $144.8 million. Once we include SBC costs of $106 million, that drops down to $37.9 million. If we then include the negative impact of the $130 million litigation settlement with News Corp, we arrive safely in negative territory. But for comparison purposes, we’re going to stick with an EBITDA of $37.9 million; the litigation settlement was truly a one-off.

With 2016 revenues of $846 million and EBITDA of $37.9 million, Zillow has an EBITDA margin of 4.5% (far less than its reported 17% using Adjusted EBITDA numbers). As you can see below, that margin is well-below international peers.

Zillow claims that it can reach 40% EBITDA margins “at scale,” which is on par with its international peers. I suspect that number is using Adjusted EBITDA figures, which would not be an apples-to-apples comparison with the peers above.

I highly doubt that Zillow can go from an EBITDA margin of 4.5%
to an EBITDA margin of 40%. 

Zillow is projecting 2017’s revenues to crack $1 billion with Adjusted EBITDA of around $200 million. Assuming stock-based compensation costs of $110 million, that implies an EBITDA of $90 million and EBITDA margins of 8.7% -- nearly double 2016’s levels.

The chart below shows Zillow’s Adjusted EBITDA and EBITDA margins over the past 4 quarters. There was a big jump into profitability in the third quarter of 2016, which has subsequently levelled off in the fourth quarter.

A $200 million Adjusted EBITDA in 2017 looks pretty similar to extending the last two quarters out for the entire fiscal year (the blue line in the chart above), with around $50 million of Adjusted EBITDA per quarter. That implies a relatively flat trajectory when it comes to earnings (in other words, expenses will track higher with revenues).

But does it scale?

I’m interested in understanding how well the Zillow business model scales. When I think about scaling, I think hockey stick curves where revenue grows at a faster pace than expenses. Making more money by spending the same amount – that’s scaling. (For more on scaling in real estate, see Purplebricks results show promising trends written by yours truly.) 

The chart below shows historical revenue and expense growth. In 2016, revenue and expenses both grew at 31%. I’ve forecasted 2017 below based on Zillow’s revenue and Adjusted EBITDA guidance, which implies revenue growth of 23% and expense growth of 13%.

If Zillow can pull that off, it shows the business model has the ability to scale. But judging its historical numbers only, the graph is pretty clear – it’s not scaling; expense growth is keeping pace with revenue growth.

If we look at the previous seven quarters, we see another story of revenue growth. There is no accelerating upward trajectory; in fact, growth is slowing down. 

Going macro

I find it helpful to look at revenue potential from a macro level. How much more room is there to grow revenues in the U.S. market?

Let’s look at the average monthly revenue per advertiser (ARPA). The chart below highlights Zillow compared to international peers and suggests a nice uptick in ARPA, placing Zillow in the middle of the international pack. But it also suggests incremental, rather than exponential, room for growth.

Zillow is again middle of the pack when it comes to revenue per employee. This suggests a limited ability for Zillow to monetize on a radically different expense base (in other words, it probably can’t extract much more revenue without adding more expensive headcount).

At a high level, 2016’s results have moved Zillow up in the pack when it comes to overall monetization relative to population size. In the chart below, REA Group, Domain, and Trade Me Property all operate in a vendor-funded market (meaning home sellers pay for marketing costs, not agents). So Zillow is again middle of the pack for peers in the remaining markets. 

At a macro level and compared to its international peers, there is little to suggest that Zillow can achieve an outsize revenue growth going forward. 

Zillow and the U.S. market

To wrap up, there are a few observations that stand out from Zillow’s results and the overall international analysis:

• We can’t use Zillow’s “Adjusted EBITDA” numbers; it doesn’t paint an accurate picture of the business.
• 2017 is the year when Zillow can prove its business model scales. There is very little in the data above to suggest that revenue growth can materially outstrip expense growth.
• Zillow can and will be profitable, but it will be from relatively low margins on a large base. It will be difficult to reach its intended 40% Adjusted EBITDA margins, let alone anything close to that when you include stock-based compensation costs.

The 2 Principles of Startup Success

Launching a startup or new venture takes many things: perseverance, timing, luck, a great team, and a workable business model. Whether it’s launching a new startup from scratch, or a larger corporate launching a new product, success often comes down to two key principles.

I’ve found the following framework to be the fastest and most effective sanity check to establish if a new venture will succeed or fail.

#1 The Principle of Quality: you must provide more perceptible value than the status quo.

Simply put, 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.

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.

The increased value needs to more than offset the activation cost of the new venture. This could be the cost associated with downloading a new app, completing a registration form, driving to a different part of town, or entering credit card details. There is always a cost associated with doing something new, and if a user perceives that the cost is greater than the value they’ll derive, they won’t switch. Pro tip: make your activation costs as low as possible!

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.

Here are a few real-world examples:

• The Facebook phone -- a failure because it didn’t offer enough perceptible value versus people’s existing phones. Users already have the Facebook app.
• Uber -- compared to hailing a taxi, the app provides enhanced value by streamlining payments and real-time trip tracking -- all for (usually) less money.
• Amazon Prime -- shipping is better when it’s free, plus access to thousands of free movies and TV shows is an easily perceptible value. Other retailers don’t offer free movies and TV shows, and Netflix won’t ship you millions of products for free.
• Customer relationship management systems -- new ones typically involve the “UI value fallacy,” which is when you think a new user interface is enough of a value-add for users. It’s not. You need to provide more value to your users and help them do their job. I’ve seen plenty of ugly software packages that are very successful.

#2 The Principle of Quantity: you must have a potential market large enough to be profitable.

Providing value to customers is an important first step, but a business needs enough customers to sustain itself. Generally, the more customers you can serve, the better!

So how large is large enough? It depends on the product or service and the revenue model. Typically, the more qualifiers there are in answer to the question “who are your users?”, the more problems you’ll have.

It’s ok to start with a subset of your market, but it’s the total potential market that matters. 

A good answer sounds like: a product designed for real estate agents.

A poor answer sounds like: a product designed for real estate agents in Minnesota showing luxury homes to Chinese buyers.

It’s ok to start with a subset of your market, but it’s the total potential market that matters. And the total potential market should be large enough to effectively monetize and sustain your business.

Tesla is a great example. Its first car, the Roadster, was an all-electric sports car starting at $109,000. There’s a pretty small market for a vehicle like that. Its next car, the Model S, a luxury sedan starting at $71,500, has a much larger potential market. And its planned Model 3, an economical sedan starting at $35,000, has a very large market indeed.

Tesla’s strategy was to start small, building up the experience and expertise necessary to launch a mass-market electric vehicle.

Here are a few more real-world examples:

• AirBnb -- hundreds of millions of people stay in hotels every year, giving AirBnb a huge potential market of travelers for its service.
• Waterboy -- an app for parents to receive live updates from their children’s sporting games if they can’t attend, in New Zealand. A target market that's too small.
• Spotify -- hundreds of millions of people listen to music every month, on their phones, in their cars, and online -- and are all potential Spotify users.

Where does your new venture stand?

When you plot both principles on a simple 2x2 matrix, you can clearly see the sweet spot you want a new venture to operate in.

The matrix above forms a simple framework to help make decisions. If you have several ideas for various new ventures, plot them on the matrix. Aim for ventures that offer the biggest value for the biggest market, and shut down (or rework ideas) that fall into the other quadrants.

Using the 2 principles in practice

Any new venture should be run through the following steps:

• Accurately identify the status quo “job to be done” that the new venture is addressing. How do its potential users currently complete the task at hand? Remember, the analog might be non-technical and offline (ex: project management via post-it notes).
• Roughly determine value. Use intuition, focus groups, or paying customers as the ultimate litmus test. If you’re doing this with a small group, form your opinions individually to avoid groupthink.
• Figure out the potential market size. Are there enough potential users for it to be a worthwhile endeavor? If X users pay Y dollars, is the result big enough?

Always keep these two principles in mind when launching a new venture. Adhering to them won’t guarantee success, but ignoring them almost certainly guarantees failure.

Don’t Talk to Your Customers

I recently had two separate conversations with founders of young companies. Both were talking about strategies to grow their businesses, and my suggestion to each was to stop talking to their customers.

In each case, the business was small and growing, only capturing a small portion of the total addressable market.

As an example, let’s say your company is in the real estate technology space, and you’re selling a software solution to real estate agents. There are 1,000 possible buyers of your technology in your launch market. And perhaps you’ve signed 50 of them up as customers.

Unless you have customers paying you real money, they’re not customers. 

First off, the ultimate test of market acceptance is a paying customer. I don’t care about positive feedback, promises to sign up, or people on free trial accounts. Unless you have customers paying you real money, they’re not customers.

When you talk to your 50 paying customers, you’re talking to people who are already sold on your product. They’ve already evaluated it and have made the decision to use it in their business. Anything you learn about their pain points, the problems you’re solving, or why they like your product is nothing new to you.

If you want to grow, you need to talk to the other 950 people, the people who aren’t customers. You need to understand their specific needs and exactly what it would take to get them as paying customers.

If you only talk to your paying customers, you’re just going to reaffirm your existing assumptions in a very small, unrepresentative sample size. You won’t learn anything new. You’ll get nothing more than a distorted view of the entire 1,000-customer market.

This is a very dangerous position because it reinforces your existing prejudices. You won’t learn and you won’t grow. In fact, with that reinforced view, it may be more difficult for you to adapt your product or business model to appeal to the larger market. This tendency -- called confirmation bias -- is especially difficult for a young founding team to deal with.

I’ve seen a number of businesses fall into this trap. They achieve some small degree of success and sell their product to 50 customers. They only talk to the 50 and reassure themselves that their product is amazing. They spend their time wondering why no one else is buying it, and instead of talking to the 950 to understand their specific needs, they keep running into brick walls when no one wants to buy. They never grow, and end up in the category of zombie businesses; just successful enough not to fail.

So: don’t talk to your customers. If you want your business to grow, find the people that should be buying your product or service but are not, and spend your time talking to them instead!

The problem with bots

Everyone is talking about the rise of chatbots in real estate and they’re all overlooking a key issue: consumer value.

Bots are being heralded as an important trend for 2017. As Chris Rediger writes in Realtor Magazine, bots are “a solution to engaging potential customers in meaningful conversation.” James Dearsley chimes in, saying the “power of the chatbot can be used as an entry point customer engagement tool for agencies.”

Bots are being positioned as a valuable tool for real estate agents. But bots face a problem of value asymmetry: what’s good for a real estate agent is not necessarily good for the consumer.

Defining value

Bots are positioned as a tool to help real estate agents. By automatically nurturing online leads, a bot saves an agent time and energy, and delivers them hot leads on a silver platter! The value goes to the real estate agent.

But what about the consumer?

If bots are going to be successful, we need consumers to actually use them. Why would a home buyer or seller use a bot? What’s the value for them?

Structurely has launched a real estate bot, Holmes, to grow and nurture leads. The web site offers a compelling vision of how this is good for agents, but I question the consumer value. Consider the following screenshot from their web site:

Compared to the search experience on Zillow:

(The “More” option is for updated kitchens.)

It’s the same thing. The value proposition for consumers is identical to conducting a search on a major property portal.

I get that bots can have conversations with potential consumers, but how much value does that actually add? If I’m searching online for a home, I really don’t want to have a conversation about it; I want results.

The trust factor

The second problem with bots—and a critical concept to understanding their eventual usage—is one of trust. Simply put, will consumers trust a bot over a human?

As Andy Soloman states, “Research has reached the point at which IBM Watson can replicate what a physician or GP is saying 90% of the time. As a patient, however, who are you going to trust more? A robot, or a real doctor sitting in front of you telling you what’s wrong?”

Buying a home is a massive transaction in someone’s life. Will consumers trust a bot for something this important? They may use them for a more efficient home search process, but I don’t believe people will ever put a bot—or technology, for that matter—on the same level as a human. That’s why we have engineers in front of our trains and pilots in our cockpits. When it really counts, we trust humans more than machines.

A bot will never replace the role of an agent—an actual human being—in the real estate process.

This leave bots with a narrow focus of utility, primarily around information-gathering and answering questions. But these are two areas where strong alternatives already exist, specifically property portals and real estate agents.

How bots can be successful

For bots to be successful (which I think they can be), we need to focus on the additional value they can provide to consumers. This value needs to exceed what consumers already get from alternatives.

I’ve previously written about the principle of quality: when launching a new product, you must provide more perceptible value than the status quo.

And remember: if you must explain your value, it’s not as great as you think.

In the case of bots, the value being provided to consumers is, at best, on-par with what they can currently get. In fact, I would argue that in many cases it is sub-par because of the limitations around language processing. I know exactly what I’m getting when I set search criteria on a portal; with a bot, I’m never quite sure it will understand me.

To use another real world analogy, let’s consider automated customer service hotlines. Would you rather navigate a maze of “press 1 for... ” and “tell us how we can help you…”, or would you rather be connected to an actual human being? These hotlines are good for businesses, but are they good for consumers?

I believe in the long-term promise of chatbots. But for bots to provide true utility, we need to change the conversation.

So whether you’re an agent thinking about using a bot in your business, or a tech vendor trying to sell bot technology to real estate agents, please, let’s start talking about how bots are good for consumers, not just agents.

Key insights from a global property portal analysis

I'm big fan of data and an even bigger fan of data visualizations. I track a lot of data on the major property portals around the world. Today, we're going to look at three key insights from that analysis.

If you follow my writing you've seen this first chart before. It shows a financial comparison of the major property portals. This time around, the major change is an effort to present a true apples-to-apples comparison by normalizing EBITDA -- by using generally accepted accounting principles and including share-based compensation as a true cost.

Source: annual reports, company presentation and analyst coverage. All information based on the last full year's results (2015 or 2016).

This has the immediate effect of worsening Zillow Group's 2015 financial results, and making it the only major portal to lose money. But it also leads to the first insight...

Insight #1: Zillow Group is at a turning point

Stock-based compensation (SBC) is the practice of compensating employees with stock instead of cash. According to generally accepted accounting principles, or GAAP, this form of compensation should be included as a cost. But when Zillow Group reports earnings, it does so as "Adjusted EBITDA," which is non-GAAP, and does not include stock-based compensation as a cost. Large technology companies like Amazon and Facebook now admit stock compensation is a normal cost. For a true apples-to-apples financial comparison, we need to include these costs.

The issue is that Zillow Group issues a lot of stock to compensate its employees! Over $105 million in 2015 alone, or 16% of its total revenue. Compared to peers around the globe, that's a big number we can't ignore.

Source: annual reports and company presentations.

We should also consider Zillow's latest quarterly returns for more recent trends. In the chart below you will see its reported EBITDA numbers excluding and including share-based compensation (SBC). It's the difference between profitability and unprofitability.

Source: Zillow Group's quarterly results.

The last three quarters show a promising trend of profitability! Even when including stock-based compensation costs -- which forms a more accurate picture of financial health -- Zillow is finally managing to turn a profit.

In its last full financial year, 2015, Zillow was growing on-par with its global peers (as per below).

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

But if the last three quarters are anything to go by (as per below), we can expect Zillow to pull ahead of the pack in a very meaningful way when it reports its 2016 full-year financial results.

Source: Zillow Group's quarterly results.

The signs are promising for Zillow. Revenue growth is accelerating and it's demonstrating an ability to turn a profit, even when including share-based compensation costs. It's at a turning point and should be watched closely.

Before we leave Zillow for our next insight, it's worth throwing in the following chart on board of director composition.  I believe diversity is fundamentally important.

Source: company annual reports and investor web sites.

Why so blue, Zillow?

Insight #2: REA Group is a true global leader

I often speak about REA Group being a global leader, but the data below shows just how much they're blowing everyone else out of the water. Let's start with the average revenue per advertiser (ARPA) below.

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

This shows just how effectively REA Group is able to monetize its advertiser audience in Australia. But it's not just the absolute ARPA number that is impressive, but the annual growth.

First we're going to look at ARPA growth rates among its global peers. The other major players around the world are growing nicely, with a promising uptick for Zillow Group.

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

But it's not until you add REA Group to the mix that you realise how astronomical its growth is compared to global peers. Not only is ARPA significantly larger, but it's growing at a faster pace.

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

REA Group generates more profit than any other property portal in the world. It's worth a quick shout-out to Rightmove, though, for being an incredibly efficient operation and having the highest profit margin of the major portals. Revenue per employee illustrates this perfectly.

Source: annual results and company presentations. Trade Me Property and Zoopla are educated guesses based on available information and the broad nature of the larger groups.

Insight #3: Property portals are not winner-takes-all

With a clear leading portal in each market, there exists enough room and marketing spend for a viable #2 player to emerge. I've opted to look at total population below because the data is easily available. It's much more difficult to find an accurate number of transactions in each market.

Source: annual results, company presentations and Google. Axel Springer includes Germany, France and Belgium. SeLoger is not broken out separately for France, which would likely result in a much higher number.

REA Group and Domain are the #1 and #2 property portals in Australia, and Rightmove and Zoopla are the #1 and #2 portals in the U.K. The top portals are able to monetize between 1.8 and 2.3 times higher than the runner-up portal in each market. This is reflective of both absolute revenues as well as ARPA.

It's worth noting that Australia and New Zealand (Trade Me Property) operate in a "vendor funded" market, meaning that home sellers -- and not real estate agents -- pay for advertising on the portals.

2017 is going to be an interesting year in the property portal world. Will Zillow Group successfully turn the corner of profitability? Will REA Group's momentum in Australia continue? And how will the #2 players in each market grow?