Zillow’s Reliance on Multiple Network Effects
Zillow has initiated a disruption of the real estate online sales market by winning the network effects game. Will it continue to grow and innovate or be disrupted?
Zillow, an online real estate database founded in 2006 and listed on NASDAQ just five years after its founding, has recorded exceptional double digit revenue and user base growth over the past few years, and is expected to continue growing in the future. The company was able to achieve this success through building on the extensive network effects associated with its platform across multiple players (buyers, sellers, and agents). To further expand its platform, Zillow Group acquired eight companies over the past few years to complement its offering and increase its user base.
The company’s value proposition is to empower home buyers by offering them more options and increasing the transparency of an industry that is characterized by fragmentation, lack of transparency, and localization. In the traditional home buying process, home buyers search for houses through agents that understand the market and have connections that allow them to offer the buyer house options that meet their criteria and allow them to tap into non-listed options. This results in a suboptimal choice for buyers as the pool of houses they look into largely depends on the initial pool the agent looks through. On the contrary, Zillow offers customers the ability to look into over 100 million houses that are on or off the market to have a good understanding of the availability and find houses that perfectly meet their requirements even if they are not available for sale. This allows for a large increase in transparency and offers buyers the potential to increase their overall satisfaction with the home buying process.
At the time of Zillow’s market entry, Realtor.com was the main real estate online player, which aggregates information on listings from the multiple listing services (MLS) database. MLS listings include houses that are currently offered for sale, offer limited market information as the database excludes offline listings, and are not frequently updated, resulting in increased information asymmetry. On the contrary, Zillow’s unique business model enabled it to disrupt the market through sourcing information directly from agents that add up-to-date listing data, allowing it to use agents as sources of information to enhance its database. To add more value to buyers, Zillow included multiple features that offer buyers information including Zestimates, which are estimates of house prices based on transactions and other market information from its listings, as well as market data including recent transactions, history of each house, and forecasts of future value appreciation of the house. This exhibits the first network effect: as more listings are provided on the website, more buyers visit the website, resulting in more agents joining Zillow.
Moreover, Zillow positioned itself as a channel for agents to market their houses, allowing it to avoid direct competition with real estate agents. As agents joined the platform, they were able to market their listings to the millions of visitors, increasing their ability to sell houses. Additionally, agents that did not join the platform were left out of the potential to increase their sales potential, causing the second network effect: when more agents join the platform, other agents are pressured to join in order to take advantage of the increased sales and stay competitive in the real estate agency market.
Overall, Zillow has been successful in increasing its customer base and revenues and growing organically and inorganically, but the real estate online sales market is large and attractive. This means that remaining competitive requires creating customer stickiness and continuing to improve its offering to protect itself from market entrants, which will be many. Over the past, the company has been acquiring some of its competitors to partially avoid competition. This strategy might not always work. Zillow should continue to innovate by enhancing buyers’ optionality and freedom, while at the same time finding creative solutions to maximize buyers’ satisfaction with the house they choose to buy. Currently, buyers screen for options manually. Zillow should instead match their preferences automatically to houses that could be of interest to them, which would significantly decrease the amount of time invested by buyers to look for houses and increase their overall level of satisfaction from the purchase.
Student comments on Zillow’s Reliance on Multiple Network Effects
Sara – this is such a great, clear example of both direct and indirect network effects! What’s tricky in this market is the high degree of multi-homing: a real estate agent can easily post a listing to a number of different websites that offer this same service, and buyers will likely search multiple websites as they’re considering a home purchase. So you make a good point that they need to increase customer stickiness or the only way they will be able to win is continuing to acquire all of their competitors (e.g., Trulia for $2.5B in February) which can get expensive! One way websites like this reduce multi-homing is by charging a membership fee to view data or post listings, but that might reduce the indirect network effects since there would be less activity on the site. I also wonder how much they are spending on user interface, which seems to be one predominate way these marketplaces compete for user engagement.
Very interesting article… Impressive how such a new company took over a well established player like realtor.com.. Do you have any insights on what prevented realtor.com form offering a similar model as Zillow (inputs from agents + zestimates equivalent) ???
Very interesting Sara. I was wondering about the role of Zillow or any other platform in the industry. As you point out correctly, real estate agents have governed this market for centuries, taking a relevant cut for something that with the appearance of a market place like Zillow doesn’t seem to hold anymore. But still it appears that they’ve managed to hop on the platform as if they were “app developers” when they really aren’t. Do you think that Zillow could claim more value if it manages to move them out of the market? But if you do it, how do you keep feeding your platform with new homes?
I have been a user of Zillow and have been impressed by their growth over the last decade. In 2014, it acquired a competitor Trulia for $3.5 billion. Zillow and Trulia started with very similar value proposition and product offerings. I wonder what Zillow has done successfully to beat Trulia and be the winner in the space.
I’m not a Zillow user, but familiar with the site and have found what they’ve done in democratizing housing data particularly innovative with Zestimates and such. The real estate agent’s staying power has proven tricky, as you mention – and Zillow has done well but the majority of the profit pool seems to remain with them. I wonder if a multi-sided platform is possible if the real estate agents can’t be displaced. I.e., is there a role for contractors to play on this platform once a house has been purchased and the buyer wants renovations done… things like that which could incorporate more parties, create value for all users in designing a more complete home-buying ecosystem, and ultimately enable Zillow to capture more value as well. We’ll see!
Still longing for the day when purchasing a home doesn’t require an agent–but sites like Zillow, et al, only re-entrench agents, so not holding my breath.
An interesting read. As you pointed out, Zillow is a good example which shows that ensuring transparency and customization can be the effective first step to create direct network effect. In addition, I think Zillow has strengthened its network effect by making its user experience seamless via, for instance, bundling various real estate and financial services. I’d like to know if this model is sustainable against the volatility of the real estate sector.