https://www.youtube.com/watch?v=4TVHLySAjWc
Today, we will be talking about Zillow, including how it became what it is today, how they make money, and ways they can improve as a business:
Background
The platform was founded by two ex-Expedia guys back in 2005. So that’s the context + mindset they brought to this (making marketplaces). At the time, they had just sold off Expedia, they were looking to buy a house and couldn’t get the info they needed to make informed decisions. So they’re like, “Yo, why not just solve this problem?”
Initially, Zillow started off as a place to just find super-local listings and connect with a real estate agent and a mortgage broker. This is all they were for a long time.
In as early as 2006, they started collecting data from agents on the homes they sold. By 2020 they had data on 110 million homes – selling price, home details, neighborhood deets etc. They use all this to create an estimated home value for any home in the US – called Zestimate. They also use these to programmatically make instant offers on homes that they then flip for a profit (called iBuying). This is a lot of data.
Now, with that being said, just how big is Zillow?
In 2019, the website reached 8+ Bn user visits a year across all it’s online properties. Not only that, it had $2.74 Bn revenues in 2019 — about half of this is from Internet business (46%), about 50% is iBuying, and a little bit is SaaS (Software as a Service) revenue in the Mortgage industry.
Ways Zillow Makes a Profit
How does Zillow make money? Ads, iBuying, and some SaaS.
Ads: When you check out a property on their site and hit Contact to get in touch with an agent, agents pay big money to Zillow to show their face right there, and to get your contact info. Zillow sells your info to them as a “lead”. This makes up 46% of their revenues. Other brokers, property managers etc also pay Zillow to get leads. It’s always free to list your property though, and this is further explained in the attached YouTube video (look above for the link).
iBuying: people want quick cash. To capitalize off of that, Zillow uses Zestimate to quote these people an offer to buy their house below market value, and then flip it for at or slightly above market value. It does this in 22 markets as of now (2019), and, conveniently, it does not come visit your house or demand fixes etc. This process makes up almost 50% of their revenue in 2019. Currently, they are betting big on this to grow to 20Bn in revenues in the next few years. Right now Zillow’s iBuying program still results in a net loss (they didn’t sell as many houses as they bought – I can go into other concerns around iBuying in a separate post if you guys want and I’m making a breakaway video about this, will post when ready).
Mortgage revenue: it does NOT underwrite mortgages. It just does the paperwork for you and then sells your info to brokers. Plus they bought a SaaS product used in the mortgage industry that makes them a little bit.
Ways They Can Improve
Even then, there are several things that Zillow could be better at.
For example, they’re losing their grip and focus on their cash cow. Even today, about half of their revenues and over 90% of their net profits comes from their agents who pay them for leads and ads. This is their cash cow. But ask any realtor and they’ll tell you how much they hate Zillow (I can go deeper into this in a separate post). They need to focus better on the one part of the business that’s making them their profits and is giving them the cash they need to slowly diversify their revenue streams. (I’m making a breakaway video about this, and will post when ready).
Zillow also spends a lot of money ($714 million in sales / marketing costs in 2019) on making sure homebuyers and homesellers visit Zillow to get insights on their properties. And realtors argue Zillow’s data on these properties, including Zillow’s proprietary Zestimate, is outdated and not nearly accurate. This puts realtors in a difficult position with their clients who are getting conflicting information from different sources. Zillow acknowledges the issues with their Zestimate and has mentioned that they’ve updated their algorithms in 2019. The reflected so with an increased spend on technology in 2019.
Not only that, Zillow only updates MLS feeds once a day, whereas the market is so dynamic that properties and availability changes by the minute. Their revenue stream relies on visitors spending time on listings so they can be connected with ‘Premier Agents’ – outdated data directly hurts this and erodes visitor trust when agents have to do bait and switch after being contacted about a property. Going off of that, Zillow drives leads away from the listing agents and towards any agent who pays them more for ad placement. However realtors posit that most of these leads aren’t even quality leads / or qualified leads.
Basically, they charge a lot, do not provide enough value, and create problems by confusing potential customers – making it harder for realtors to earn a living. To pull off making real money from advertising you need to either have a large user base or a super-engaged user base. Zillow has the former – a large base (remember the aforementioned 8Bn user visits a year).
They went a long time relying on just one revenue source – ads. But they knew this can dry up any time, like in a recession; basically, it’s not predictable and it’s not stable. So they are now diversifying. If your primary revenue source is not stable / predictable, think about that too.
Things to Consider
Zillow is able to continuously own more and more of the lifecycle of their user (who’s in the market to either buy, or sell, or rent, or get a mortgage etc) because they have been able to establish a relationship of trust with the users (by using things like Zestimate and other data on the property level that’s hard to discover elsewhere).
Investment in data is paying off big time. It’s important to know which type of data to have and how to use it. Not all data is useful. But when a real business use case is found, data can literally be an inimitable wall that protects your margins and allows you to grow safely.
Thanks for reading,
Deepak Devjani