SubscribeThe Innovator’s Dilemma in Real Estate Redux: Redfin Proves You Can Turn a Profit Even With Lower Commissions
July 19, 2009
In Redfin CEO’s Glenn Kelman’s inimitable “Aw Shucks” writing style, he announced recently that the discount online hybrid brokerage has turned its first monthly profit. While one month certainly a trend does not make, it is an important milestone in the company’s development. If Redfin can make money while a) charging a lot less than its competitors and b) serving a market segment that the traditional industry is wary of … then Redfin’s prospects going forward just got a whole lot brighter.
Exercising my blogger’s prerogative to quote myself, here is what I said some two years ago, applying Harvard professor Clayton Christensen’s thinking on “The Innovator’s Dilemma:”
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.
…
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.
Exercising another of my blogger’s prerogatives — that of making wild generalizations — many of Redfin’s clients are tech-savvy, data-hungry, 30-ish first-time home buyers for whom Redfin’s data-rich site is like crack cocaine … and for whom the company’s 50% buy-side rebate is like, well, crack cocaine on steroids. These folks are do-it-yourselfers who think — rightly so — that much a traditional Realtor’s tasks (educating clients about neighborhoods, taxes, the transaction process, etc.) can be done on their own, in their pajamas, in the comfort of their home office, on their favorite Macbook.
Think about these same folks five to ten years hence … they’ll be wealthy(ier) tech-savvy, data-hungry customers, perhaps with a kid or two in tow … looking to sell their existing home and buy a newer, larger one. They’ll probably be more pressed for time, perhaps less concerned about getting a rebate … and voila! Redfin will be there to hold their hand again, perhaps operating like a traditional brokerage, charging more.
Prediction: Within 2 years, Redfin will launch a “Redfin Deluxe” service which will look and feel an awful lot like a traditional full-service real estate experience, with no or little rebate. If they can make a profit giving back half the commission, imagine their bottom line when they apply those efficiencies to the full-service market!
Other commentary on this event:
- Techcrunch, predictably, painted the event as causing “shudders” in the real estate industry. Even more predictably, the post attracted the usual scrum of Realtor-hating consumers, with Reba Haas pretty much single-handedly keeping them at bay.
- Nearly-the-same-last-name-as-mine Brian Boero of 1000 Watt Consulting notes that Redfin works by concentrating on three things that many traditional brokers ignore: talent, transparency, and technology.
Comments
3 Responses to “The Innovator’s Dilemma in Real Estate Redux: Redfin Proves You Can Turn a Profit Even With Lower Commissions”
Got something to say?
LOVE IT! Maybe one of these years I’ll find a good, progressive brokerage to be with! In the meantime, I’m one heck of a referring agent! Go Redfin.
Totally agree with Pat, I live in the NorthBay we don’t have much Redfin around ‘yet’ but we had a Redfin listing a while ago. We love it: it sold for a lot less. When I help people find a home guess where I first look: for the ‘limited services’ brokerages. Never fails, always below market. We love them as listings!
We also have Help-U-Sell: always interesting that if I show one of their listings and the home owner is home when I show the house, they never know what is going on, always wondering when they will get a lockbox etc etc. and they are asking me?!?
I don’t know but to me it should be that even a ‘limited services brokerage’ be able to take care of stuff like that.
Hi Mirjam,
Thanks for your comments. BTW, it’s Kevin, not Pat, who wrote this article. I know, we look alike — the “Irish Twins” we call ourselves.