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.