We now know that Zillow does not aspire or want to become a broker, a franchise or a FSBO site.
Nope, Zillow has become Zillow.
Uber is not a cab company. Uber is Uber, providing end-to-end global transportation services. Facebook is Facebook, providing intimate connections for everyone everywhere in the world. Amazon is Amazon, selling everything to everyone. And Google is Google (or Alphabet, if you prefer), providing international information and advertising services.
Zillow is Zillow, providing consumer real estate services and attempting to provide qualified customers to the best agents — emphasize best. Zillow’s leaders don’t want to put the company in the traditional boxes — a franchise, a broker or FSBO site — and why would they? Their business model looks like it may be better, just like Uber’s on-demand service trumps cab companies; Google’s AdWords outsmarts The New York Times; and Amazon’s click-to-buy overwhelms anything Macy’s may try.
Top agents powering revenue
The jury is still out on the company’s ultimate success, but any lingering mystery about Zillow’s plans came into focus yesterday when it announced that its revenue growth was being powered by top agents and teams spending lots of money on the platform.
Why are they investing in Zillow? Because it is slowly becoming less about ad buying: These top-producing agents are working the Zillow system with the new tools to get qualified customers. Rather than wasting time and money to do it themselves, these agents know it’s faster and ultimately more profitable to use the portal.
Let’s be clear, though: Zillow is getting there by spending lots of money. The company reported bigger losses yesterday than expected. It still has not crossed the growth-to-profit chasm. But its strategy has become more clear.
A pivot?
I’m not certain, but I think this was a pivot for Zillow. Chasing every agent on the planet required a messy call center and customer support, which is a headache for any company and does not scale. Google, Amazon and Facebook don’t have call centers; they do not even have a customer-support phone line that can be found on their sites or apps.
Zillow is trying to build a system for agent success, from leads to conversion. Real estate success has always been about systems. It explains the Keller Williams juggernaut and Tom and Mike Ferry’s success — and many others before them. Independent agents need a road map, and the successful ones follow it, day in and day out, and make lots of money doing so.
Now, Zillow is putting the final pieces of that system into place, better conversion tools and “transactional” elements, the closing (dotloop and Zillow’s new agent app) — making life easier for the consumer and the super agents who serve them. You can easily imagine a Zillow end-to-end technology experience used by the customer and the agent.
The pivot to “super agents” is not surprising, consider the long-standing 80-20 rule in real estate. These top-paying agents — often teams — spend $60,000 a year or more on the Zillow platform and are driving the company’s revenue growth.
And they are now the focus of company resources. CEO Spencer Rascoff said these super agents are often teams who respond better and faster to leads, increasing their ROI (return on investment).
“There is a significant change underway in the real estate industry which Zillow Group is accelerating, and that is a shift from the part-time agent who dabbles and is a hobbyist” to the tech-savvy real estate team leader, Rascoff said yesterday in an investor call.
This was also an admission of failure, as its agent count strategy was not working out as planned for Zillow. Again, nothing new for the real estate industry.
Familiar pattern, different player
The pattern is familiar.
Just like Uber persuaded the best drivers to move from cab companies to its dispatching transportation app; just like Google persuaded newspaper advertisers to use Adsense and just like Amazon persuaded suppliers to sell all their stuff on Amazon.
All those examples provide massive and qualified customers. With a mighty consumer traffic funnel, Zillow has grown its leads to Premier Agents 36 percent year over year. In turn, Zillow’s average monthly revenue per advertiser was $402 in the third quarter, up 20 percent from $334 in Q3 2014.
But again, it still loses money.
Either the jury is out because Zillow doesn’t know how to eliminate the loss, or they are choosing to operate at a loss, confident they can raise prices later once they have lock in and market share.
Zillow’s leaders might be doing this because they know that it’s a long game, like Amazon. Amazon has missed earnings 9 times out of the last 19 quarters.
Zillow is building the default for the real estate market, like Amazon is the default for ecommerce and Google is the default for search and Uber is the default for taxis. When you are the default option, you get scale and lock in that is highly defensible and sets up confidence in long-term return from future cash.
Now, the company is building tools and systems on top of qualified customers to attract the best agents who are eager to deploy the Zillow system. The massive funnel is slowly morphing into a customer delivery system. It’s not there yet, but that is the Zillow scheme.
“We have many, many leads and we need them to go to great agents who will convert them to commission checks at a 5, 10, 15 percent conversion rate,” Rascoff said. That is not for lazy, low-producing agents.
Why steer away from the broker business model?
And why did Zillow choose, once and for all, not to become a broker? Because, like Uber, Google and Facebook, it may have a better business model. It is a hybrid business model that turns to tried-and-tested industry practices but flips other parts of the old-school model on its head.
Compare it to the broker business model. For Zillow: only the best agents, no commission-splitting tension, no contingent liability and no brick-and-mortar real estate. Moreover, Zillow gets paid upfront and is not dependent on the closing for its payday. It does not pay MLS or association dues, and unlike the big real estate franchises who still cannot get an IDX feed, Zillow has most of the listings.
Which is why some industry leaders understandably argue that the company is getting a free ride.
As it works to improve the conversion rate and pours on more tools, it can easily raise prices for these super agents without any push-back — because the agents will make more money, Zillow will have all of the ROI numbers and will know when it can raise prices and by how much.
Culture is critical
The final shoe to drop is Zillow learning that culture is critical to its success with these super agents — it is part of any good real estate system.
If you followed the recent Premier Agent event in Las Vegas, it felt like a combination of a Tom Ferry event mixed in with KW’s Mega Camp. A little bit of sing-along, pump it up, “I am part of the Zillow sisterhood,” rah, rah, rah — along with guru-like Zillow leader presentations and hands on workshops.
For years, Rascoff has remained steadfast that Zillow is a media company. While advertising is certainly a part of Zillow’s flywheel, Zillow is marrying the old and new worlds, the technology with old-school business practices, in hopes of creating the next big real estate company. Not a broker, not a franchise and not a FSBO site, but a Zillow.
For now, not a profitable Zillow, but just like Facebook and Amazon, seemingly undeterred by losses.
Zillow could still fail and pivot again. It happens all of the time with technology companies.
But for now, the industry must figure out where it fits in with Zillow’s pivot. For some, the answer is easy, for others it’s a mind-bending Rubik’s Cube. More on that later.
Onward!
Editor’s note: This story has been updated.