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The Innovator’s Dilemma In Real Estate: Beware Of That Redfin Swimming Just Below You

Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. ()

August 1st, 2007 · 22 Comments

Redfin is the company everybody in the traditional real estate industry loves to hate. “They’ll go bankrupt just like all discount firms do when the market turns bad.” “Can you believe how they force listing agents to do all the work?” “Their agents don’t have a clue about the market!”

Deride Redfin if you want, be skeptical of its business model, take potshots at Glenn Kelman all you want…but whatever you do, don’t dismiss Redfin out of hand, at least not before hearing what this man has to say.


Clayton Christensen is a professor at Harvard Business School who has become well-known for his research into how technology disrupts industries. His theory, put forth in his books The Innovator’s Dilemma and The Innovator’s Solution posits that new entrants into an industry often take advantage of a disruptive technology to enter the marketplace at the lower end, catering to the low-margin customers that the established players aren’t that interested in serving. He gives examples in many industries, including financial services (Charles Schwab came into the brokerage business catering for the budget stock investor), steel manufacturing (mini-mill technology), and hard drives.

While Redfin is by no means the first entrant in the discount brokerage space, it is arguably the one that has generated the most attention. Redfin’s technology — its slick real estate search site, its semi-automated offer-writing system — may not appear too disruptive, but its technology and associated business model have struck a chord with a growing market segment that is disenchanted with the traditional real estate industry, and, not coincidentally, the industry has returned the favor. That market segment — initially diehard do-it-yourself’ers who just don’t see the value of schlepping around town with a real estate agent — is one the traditional industry isn’t too fond of catering for, on the assumption that if we let clients out on their own, they might discover it’s not that difficult to plan an afternoon’s home-shopping around an open house schedule, and then they might question our overall value. For the most part, the traditionalists aren’t too sad to see this type of client defect to Redfin. “They think they know everything, they don’t see the value of a Realtor, and then they want part of my commission!”

What is common about the customers of these new lower-end entrants in any industry is that they’re not interested in a gold-plated product or service — they want something “good enough” and cheap.

If the new entrant succeeds, it starts to take market share from the incumbents, who finally wake up — often too late — and discover that the “cheap, undesirable” part of the market is both larger and more lucrative than they previously thought.

Even more interesting is that as the new entrant grows, its clients’ needs often change over time — to the point where the new entrant now also provides more of a “traditional” experience. Think back to Charles Schwab: its early customers were drawn in by the prospect of significantly less expensive stock brokerage services. The Charles Schwab of today still provides that, but also provides a higher-touch, higher-cost service, akin to that of the Merrill Lynches.

Might this happen to Redfin? Nobody knows…but if they are successful in what they’re doing, don’t be surprised if five years from now Redfin offers not only a discount real estate experience, but also a full-service one.

How can established companies lessen the risk of a low-cost competitor coming in at the lower end, then working its up the value chain? One of Christensen’s suggestions is as audacious as it is — for most companies — implausible: spin off a separate lower-cost business unit to learn about the lower end of the market.

So, how about a “Coldwell Banker Lite” offering? Want a full-service, full-fee experience? You can use the Coldwell Banker you’ve always known. Thinking of using a discount service, but unsure about Redfin’s brand? Then you can go to the Coldwell Banker Lite offering. Either way, Coldwell Banker can serve you. From the company’s point of view, they’ve retained a client; sure, it’s a low-margin client — for now. But five years down the road, the customer’s good experience may lead him back to the Coldwell Banker name, and perhaps this time using the full-service, high-margin option.

Skeptical of Redfin? That’s fine — but just don’t write them off until you look at the uncanny resemblances between our industry today and the industries Christensen describes in his books.

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Tags: Alternative business models · Clayton Christensen · Coldwell Banker · Glenn Kelman · Redfin · The Innovator's Dilemma · The Innovator's Solution

22 responses so far ↓

  • 1 Diane Aurit // Aug 1, 2007 at 11:51 am

    Great insight, but even better graphics!

    Seriously, this reminds me of way back when Zip Realty was first launched by some much younger Berkeley grads. At first their agents were on salary only as I recall. But, as I recall, they realized they needed to act a bit more like real estate agents and found a happy medium of some sort. Redfin may very well do the same thing. Instead of “Coldwell Banker Lite” how about “Subprime Coldwell Banker”? I understand that adjective is going to be available very soon.

  • 2 Bobby Bragg // Aug 2, 2007 at 7:15 am

    Great blog. I found out about it at Inman Conference. Kevin, you have been great as a panelist and moderator and I think the Menlo Park real estate community has a true treasure. This guy understands more parts of the RE transactions and industry than most CEOs. I will be an avid reader from hereforward.

  • 3 Sandy // Aug 2, 2007 at 10:11 am

    Hi Kevin–great post. I agree with everything you said. I actually had a talk with my broker last year about this very thing because I CANNOT understand why the traditional real estate industry refuses to understand that the earth is moving under our feet and we are going to have to move with it. Change is inevitable and you can either choose to survive by innovation and adaptation, or you can choose to become obsolete.

  • 4 Mike Kennedy // Aug 2, 2007 at 12:50 pm

    Great analysis. The 60 Minutes piece on them was a real eye opener to every agent in our office. Everyone thinks this industry will stay the same but look at how much change we’ve experienced over the past 10 years. Look at how much technology has been integrated into a traditional real estate office over the past 10 years - email, websites, digital cameras, etc. There is obviously a lot more change to come.

  • 5 Frank- FranklyBlog // Aug 4, 2007 at 9:15 pm

    Hey Kevin,
    I also found you on InmanTV. Good stuff.

    You might have mention Coldwell Banker as an inside joke, but in case you didn’t, they DID launch a discount branch… Years ago.

    Google Blue Edge Realty. Total commission is 2%!

    My understanding is that this venture failed miserably.

    There is nothing wrong with discounting. I like to say that “I used to discount, but then I got good”

    Frank- Broker FranklyRealty.com

  • 6 Roberta Murphy // Aug 7, 2007 at 5:29 am


    You were an intelligent voice at Real Estate Connect.

    Redfin’s business model is an interesting one, but is encountering serious competition far earlier in its development that Charles Schwab.

    The biggest threat that comes to mind is Iggy’s House, which offers zero percent listing commission. Its brokerage arm, Buy/Side Realty, rebates 75 percent of its commission to the buyer.
    They claim their technology and customer meets or exceeds that of Redfin. And if I am not mistaken, they have penetrated more markets.

    The speed of disruption these days occurs probably 10x faster than it did in the 1980’s. Charles Schwab would have difficulty competing as a startup in today’s market.

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  • 10 The Odysseus Medal Awards, week #1: An exposition of excellence in real estate weblogging | BloodhoundBlog: Real estate marketing and technology blog | Realtors and real estate, mortgages, lending, investments // Aug 13, 2007 at 11:26 am

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  • 11 Dan Green // Aug 13, 2007 at 11:42 am

    Congrats on being the answer to a trivia question: the first winner of the Odysseus Medal.

    Nice work, Kevin.

  • 12 Ron // Aug 13, 2007 at 11:56 am

    Great post! Finally, one that isn’t just “Redfin sucks!” The funny thing about Redfin and disruption is that this kind of thing is so basic and common in high tech. We just assume it will happen, and there are a set of well understood strategies for dealing with it. Pick pretty much any software or hardware market segment, and there will be high end players and also low end players, and over time, the low end players ALWAYS get better and move up the chain. while the high end guys rarely move down the chain. It’s much easier for the low end players to add features than for high end guys to make low end products that are actually different and not just crippled versions of the expensive products. Describing this to anyone in technology would be like saying “you consume oxygen to survive” - it’s just so fundamental. I am sure that Glenn Kelman, coming from Plumtree, understands this fully.

    It’s funny that it’s considered so foreign in real estate.

  • 13 ARDELL // Aug 13, 2007 at 7:08 pm

    Loved Ron’s comment above. But does it mean eventually they will be like Frank? “I used to discount, but then I got good”? Is Ron suggesting Redfin will “climb up the food chain” and eventually become like everyone else?

    I hope not.

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  • 15 Kevin Boer, Realtor, Alain Pinel Realtors // Aug 13, 2007 at 7:29 pm

    Hi Ardell,

    Ron will have to answer for himself, but the way I see it is that if Redfin can find a profitable way to serve its clients at a fraction of its competitors’ cost, and then leverages that experience to move upmarket where it can provide, say, 2X the service it’s used to but charge 3X, then — hey, the VC’s will be mighty happy.

  • 16 Ron // Aug 14, 2007 at 7:46 am

    Hi, Ron here :)

    What I was trying to convey is that it’s more likely that Redfin (or its similar competitors) will successfully add services over time, to serve both the low end (low cost, low service) and up into the middle (moderate cost, moderate services), than Coldwell Banker will successfully remove services to create a low end brokerage.

    On the tech side, this is what happens. The low end guys add features to their “good enough and cheap” products and capture a lot of the middle. The high end guys try to cripple their full feature product to plug a hole on the low end, and it usually doesn’t work.

    I am not an agent, only a buyer of multiple houses, but from what I have read on the ten or so agent blogs I read, it seems likely to me that agents will block efforts to create a real competitor at the low end, in order to protect their commissions. Just like Oracle resisted offering a low end database product for years, IBM resisted offering a low end app server for years, etc. Protect those fat margins. The open source and the $99 products took the low end and then got better, and the Oracle/IBM stuff became high-end full feature niche products. When they tried to cut features and sell more cheaply, the products looked like crippled versions of the complex high end products, not elegant and simple offerings. My guess is that if the full service brokers ever offer a low end product, they will just add a bunch of annoying restrictions so that customers won’t want to use it. Then they say “See, no one wants it.”

    Is this true? I don’t know. But I do know that this is how it works in other markets. For those that think a “Lexus” buyer will never want a Hyundai, recall that Japanese cars used to be seen as junk. Now Lexus is a premier brand. The low end gets better.

    Finally, I assume that the VCs who are funding Redfin and its successors view the RE market the way I described above. I.e. multi billion dollar market that is ripe for someone to change the business model by coming in from below and using technology to offer services and take share. Hey, eToys blew up, but Sequoia made a billion dollars on that investment before it did. And, people now sure do buy a lot of toys via online self service, don’t they? Heck, cars are one of eBay’s biggest categories; who thought people would buy expensive cars over the web?

  • 17 // Aug 14, 2007 at 11:10 pm

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  • 18 derherold // Aug 20, 2007 at 9:11 am

    Very interesting.
    In germany we habe a FSBO-market share of almost 50%.
    A *discount broker solution* could be the entry in this segment.

  • 19 svrpaul // Aug 20, 2007 at 8:33 pm


    Interesting analysis on Redfin that is much more thoughtful then what you normally read. What’s interesting to see is if the $8,000,000 venture capital investment will ever pay off on a model that I don’t think would be particularly too hard to duplicate except for companies bloated in bureacracy.

    In other words, success attracts attention and if you have something that can easily be duplicated, expect others to follow.

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