Most people would probably say that buying a home is one of the few purchases in life to be done in person, not per click online. Redfin, a web-based real estate company founded in Seattle in 2004, challenges this notion. When a colleague told me that they had bought a house before moving to Texas without ever stepping foot into it, I was instantly intrigued and wanted to understand what a company has to do to create enough trust and value for customers that they would make such a huge purchase decision “blindly.”
To me, the answer lies in direct and indirect network effects. I’m not a homeowner yet but I know that the four key ingredients for buying a home are the buyer, the realtor(s), a seller, and a house to make an offer on (and of course the money or mortgage approval to make it all happen). Redfin uses their cutting edge online platform to connect buyers/sellers with realtors and in doing so creates network effects that create value for all those involved.
- Direct network effects: When you download Redfin’s user-friendly mobile app and type in your neighborhood in the location field, you will instantly see its magic at work. Using GoogleMaps, Redfin’s database populates open houses and other homes for sale in your neighborhood with all the relevant information right at your fingertips. To scale up this side of their platform against Trulia and Zillow, Redfin has been focusing on offering the smoothest user interface and the most reliable, up-to-date information. In fact it is so trustworthy that even competing realtors recommend the Redfin app to their clients. When I started using it to slowly test the waters of buying a home, I was instantly hooked and checked for new updates a few times a day. The more people use Redfin to list their home, the more “addicting” it becomes to use the app. Buyers want to use it to make sure they don’t miss out on any new properties that hit the market, sellers need to use it to make sure they don’t fall behind in attracting potential buyers in their neighborhood. Redfin even uses an algorithm to let users know which homes are “hot” and how likely a home is to sell within a given number of days based on user demand.
- Indirect network effects: The mobile and web-based platform that connects buyers and sellers also introduces real estate agents into the mix to help either side with the home buying transaction. The indirect network effects flow strongly in one direction, that is the more users (i.e., buyers or sellers) Redfin has, the more real estate agents it can attract. To compete with incumbents like Century 21 and scale up its indirect network effects, Redfin thought up an innovative business model in which they hire agents full-time and offer them a fixed salary with bonuses based on customer satisfaction, rather than the traditional commission-based pay structure that can often leave home buyers feeling like their agents have a hidden agenda.
With its extensive online database, disruptive brokerage services, and sleek user experience, Redfin demonstrate how innovation can be a “fresh breath of air” that quickly creates network effects in an otherwise traditional industry that involves multiple stakeholders to make a successful transaction happen.