Late last week, Rob and I connected and, once again, he gave me some feedback on my work. His latest recommendation is that I familiarize myself more with the current broker landscape. His June 2018 Red Dot on Zillow, Redfin and Realogy is where I have begun taking a deep dive.
While I don’t expect to impart any particular housing wisdom to you all, I might be able to draw a parallel between my experience in tech. In doing this, I might be able to add some value. Here it goes.
Zillow is following in Amazon’s footsteps to dominate the residential real estate market. The two most obvious connections are Amazon and Zillow’s focus on developing low margin, high volume transactions, and their ability to make the purchasing process easy enough for their consumers to keep coming back. In doing that, they end up creating huge monetary upside over time. Obviously, e-commerce and real estate are completely different markets, but, after looking into it, I think they both are similar from a business model perspective.
Website Traffic Now, Money Later
Zillow just wants a high volume of traffic and transactions. To give you a bit more color as to what I am talking about, in 2018, then Zillow CEO, Spencer Rascoff, time and time again stated in his earnings report how much Zillow is focused on “market-making opportunities.” In other words, he would be willing to lose money in the short term to drive as much traffic to Zillow’s website as possible. This is what makes the entire iBuyer model work. As Rob writes in his Red Dot, “Rascoff sees Zillow making $3,500 on a $250,000 home, a puny 1.4% profit.” But, when you can expect to make that profit margin for around 275,000 transactions, all of a sudden you’re sitting on a billion dollars. When you look at it that way, it makes perfect sense to be trying to make those types of margins. Rob even said he, “would guess that there’s a very good chance that Zillow could lose money on homes year after year, and more than make that back.” In other words, the money will come if you keep people going to the website.
Similarly, Bezos is now famous for offering Amazon Prime when he knew that every one of his Prime members would initially lose the company money. Over time, with enough volume, however, Bezos also knew that these would become his most loyal and high-paying customers. This is exactly how it panned out. As of today, over 82% of Americans have Amazon Prime and the initiative certainly has padded Amazon’s bottom line. I see that as a similar business model to what Zillow is going after.
Make It Easy to Spend Money
Zillow does everything it can to make the home buying process simple and easy. Did you know that the biggest factor in a buyer seeing a home is whether or not the agent responds? Zillow has taken specific actions to alleviate that pain point for their customers. “A 2011 NAR study found that 46% of online leads go completely unanswered. An additional 23% of online leads received a response after 8 hours (or more) had passed – an eternity in today’s web-based economy.” In other words, Zillow is building extremely valuable brand loyalty by proactively providing a better consumer experience than what the rest of the market provides. In doing this, they manage to not only capture the large percentage of the market that goes unnoticed but, more importantly, become the first option for those same customers 5-10 years down the road when they are looking to move again. By being proactive about assisting interested buyers with information asap, they convert them into lifelong Zillow users.
When Amazon was trying to grow its brand and build lasting customer relationships in the early days, it did something similar. It copyrighted the “1-click” buy system and made it easier than ever for customers to use Amazon’s service. Back then, Amazon was the only e-commerce business in 1999 to store customer credentials in their servers and enable customers to buy their products with one click. That made the buying experience so easy for customers that Amazon kept coming back and associated Amazon as a great service they would keep using. In other words, they developed incredible customer loyalty by making their experience better than the rest. Those consumers kept coming back thanks to the “1-click” buy system.
While they aren’t filing for patents, Zillow is eliminating a large pain point in the home buying process and converting those customers into loyal repeat buyers. Similar to Amazon, they are reaping the rewards of that strategy. Since February of 2020, their stock has sky rocketed!
Will Zillow Become a Monopoly?
Ultimately, Zillow is going to try and maximize its control of the entire home buying and selling process. If they can be the iBuyer and seller while also growing their online traffic and brand loyalty, they could very well become a monopoly. Similar to Amazon, it could then leverage its dominance in residential to expand beyond. Wouldn’t it be funny if Zillow started doing so well that they diversified into a cloud services company to compete with AWS? Are you worried about Zillow or any other players in residential real estate becoming a monopoly? Do you agree with my comparison of Zillow to Amazon? Leave a comment!
In any case, as I continue to learn more and more about real estate, the big players, and how it all works, I hope to keep drawing parallels like what you see above. I hope you find it as interesting as I did.