Introduction
Zillow is a leading rental and real estate online marketplace for consumers who want to sell, buy, find a reliable agent, or shop for mortgages. The company has been keen on providing various services to buyers, sellers, and agents in the real estate market. In this paper, the researcher seeks to focus on analyzing various strategies that this organization has been using to achieve success. The paper provides a detailed background analysis of the company and products that it offers. The discussion then focuses on a pricing strategy that Zillow uses and how it affects market trends in the industry (Moretti, 2019). Analysis of the profitability of the firm is conducted to understand if its pricing strategies are effective. The researcher also reviews the level of competition in this industry and how it is coping with it. The primary goal is to determine if practices that the company has embraced are sustainable in the highly competitive real estate market.
Background
Zillow is an online real estate marketplace that provides a wide range of products to its customers. Rich Barton and Lloyd Frank founded this company in 2006 when they realized that the real estate sector in the United States was affected by limited information for those who wanted to buy or sell their products (Loukissas & Bowker, 2019). They developed a website and a business model to enable different players in this industry to have access to accurate information within the sector so that they could make informed decisions and get value for their investments. Headquartered in Russell Investments Center Seattle, Washington, in the United States, the company has spread its operations to Canada because of the growing demand for its products.
In its business model, the primary product that the firm was offering to its client was information. Buyers, sellers, and agents within the real estate market could access information they needed to make relevant decisions about their sales or purchases (Maheshwari, 2019). As the number of regular visitors continued to increase, it offered its online platform to advertising agencies, which paid it to promote their real estate products. It then introduced Zillow rental manager tool, which allowed tenants to pay their rental fees in their online platforms using credit or debit cards. The company charges tenants a small commission to use this payment platform. It introduced a new product where it partners with real estate brokers for referrals whenever their online visitors made inquiries about real estate products on sale. This firm earns commissions from these referrals.
Zillow introduced Zestimate to help its clients to understand the actual value of products they plan to purchase. They introduced this service to ensure that buyers and sellers in the real estate industry have accurate information when dealing with agents. A buyer will be aware of the estimated value of the product available in the market. They will also have an accurate estimation of the market price of the product. The new tool has attracted more traffic to the firm’s website, which translates to improved revenue in terms of advertising and referrals. Zillow faces stiff competition from other companies offering similar products. Some of the major competitors in the market include Realtor.com, Trulia, LoopNet, RealtyTrac, Appartments.com, and Rent.com. These are companies offering similar products in the same online platform. It is critical to note that there are other competitors using the traditional-brick-and-mortar model that also pose direct challenges to the expansion of this firm.
Main Analysis I: Pricing
Pricing is one of the most important factors that define the ability of a company to achieve market growth, especially when operating in an industry where the level of competition is high. Moretti (2019) explains that there are factors that the management of an organization has to consider when setting the price of its products. The primary rule is that the price that it sets should be within the capacity of the targeted customers to pay. After considering this cardinal factor, the management must understand the fact that sometimes customers associate the price of the product they purchase with the quality that is offered. There is always the belief that products priced highly often have better quality than those with low prices. Increasing the price reduces the number of customers willing and capable of purchasing a given good or service. On the other hand, lowering the price may not necessarily attract more customers because they may have doubts about the quality offered. Companies have to develop a delicate balance between the two extremes and ensure that their pricing meets various requirements and expectations in the market.
Zillow has been keen on setting the right price for its products to attract and retain customers in this highly competitive market. The pricing strategy of this firm seeks to ensure that as many customers as possible can afford to pay, but in a way that they do not question the quality of the product. The company always considers the pricing of its main rivals, especially Realtor.com, Appartment.com, and Rent.com which have remained popular within the local market in the United States. Zillow has various products, and in each case, it uses unique pricing strategies based on the customers targeted and strategies that rival firms use. It has a different pricing strategies for its advertising platform, charges commissions on Zillow rental manager tool, and fees on its Zillow flex. It is necessary to discuss these strategies used in each case.
Pricing in its Advertising Platforms
The main revenue source for Zillow comes from advertising fees. The company has created an online platform that buyers, sellers, renters, and agents within the real estate industry visit regularly when they are seeking various products. As such, these are potential customers willing to make financial commitments (Moretti, 2019). It is a perfect platform for real estate companies keen on reaching out to potential clients. The firm uses this platform to allow these organizations to advertise their products on these platforms. It offers premium and regular advertising to these customers. Clients who purchase premium advertising products pay a fee which is higher than the market average and have their products placed strategically on the company’s website and for a longer period.
Zillow charges $60 per lead on premium adverts. Those who purchase regular advertising products pay average market price. These customers pay $20 per every lead that is generated from the website (Maheshwari, 2019). The company is also working with newspapers to advertise various real estate products. It takes a percentage of the total revenue that the newspaper earns from the advert. The cost often varies depending on various factors. In 2011, Zillow entered into a partnership with Yahoo! Real Estate, forming the largest online real estate advertising network in North America (Erdmann, 2019). As the dominant player, it becomes easy to define market trends in terms of pricing.
Commissions on Zillow Rental Manager Tool
Zillow Rental Manager was a tool that was introduced to help both tenants and landlords. The tool screens tenants to determine if they have had issues in terms of payment, indecency, or any other legal or moral problems in places they had rented before (Maheshwari, 2019). The information helps landlords to make the decision of whether to lease their property to such individuals. The same platforms offer tenants opportunity to pay their rents using their credit and debit cards. Zillow charges the tenants a small commission for using these services. The cost depends on a wide range of factors based on the agreement between the customer and the company on the additional services that should be offered.
Fees on Zillow Flex
Zillow Flex was a new product that the company introduced to help real estate brokers. In this case, brokers are not required to pay the mandatory $60 for premium advert or $20 for regular advert in every referral they get from Zillow. Instead, they are expected to make a payment of the percentage of the profit they make after closing the transaction. It was based on the knowledge that most of the referrals do not translate to sales. As such, it would be more realistic for brokers to pay a commission to the firm after a successful sale of a product as a result of referrals from Zillow.
How these Pricing Strategies Relate to those Learned From the Course
The pricing strategies that Zillow uses reflect the knowledge gained from the course. During the course, it was evident that firms often define their pricing strategies based on whether customers are sophisticated or myopic. Bateson (2016) states that “Myopic consumers are those who base their purchase decision on the price they see today, not recognizing that their choices today affect prices they are offered tomorrow” (p. 45). When dealing with these clients, such as individual tenants, the company charges a flat rate price based on their individual expectations. When dealing with sophisticated customers such as large entities and smart brokers, the firm is willing to negotiate its prices in a way that protects its interests as well as those of the clients.
Main Analysis II: Profitability
When a firm chooses a given strategy of pricing its products, one of the guiding principles is always the profitability. The chosen strategy should enable it to meet all costs of delivering a product and allow it to make profits that can enable it to sustain its operations and facilitate growth. The discussion above shows that Zillow uses various strategies to define its pricing depending on the nature of customers it is handling and the product. In this section, it is necessary to analyze the profitability of the firm based on these strategies.
Profitability from the Pricing in its Advertising Platforms
The strategy that the company uses to earn income from its advertising platform has proven to be very effective. It is its primary source of revenue and has proven to be profitable to the firm for over the last decade. The firm earns attractive profits from the advertisement platform because the cost is relatively low. For the financial year that ended in December, 30, 2016, the gross profit of the company was $ 774,998,000. In the following financial year that ended in December 30, 2017, the organization’s profits increased to $ 991,591,000. The same trend of increasing profitability was witnessed in the following year that ended in December 30, 2018 when it made a gross profit of $1,179,964,000. For the financial year that ended in December 30, 2019, Zillow’s profit increased to $ 1,310,816,000 (Maheshwari, 2019). The consistent increase in the profitability of the company is an indication that it is using the right strategies to achieve its strategic goals.
The advertising platforms that it offers to its customers made the largest contribution to these annual profits that it has been making. Understanding the potentially different types of customers is critical for the organization. For instance, some of the adverts are made directly through the website of the company by individual customers. Zillow earns higher profits from such direct adverts. However, when an advert is placed by a newspaper or any other advertising agency, they have to share the profits made. Such pricing strategies are meant to provide right incentives for organizational clients who place advertisements more regularly. The strategy makes sense because it allows the firm to make relatively small but regular profits from these advertising agencies, creating a mutually beneficial relationship.
Profitability from the Commissions on Zillow Rental Manager Tool
In its Zillow rental manager tool, this firm charges a commission, a strategy that has also proven to be profitable. In this platform, it provides a platform where tenants can pay their rent to their landlords conveniently without the need to visit their bank’s branches. In return, they pay Zillow a commission for facilitating the payment. The process is convenient for most of these customers. The cost of facilitating such online payments is significantly low compared to the commission that the company gets. Other than the technical experts managing the online transactions and activities at the premises of the organization, there is no need to have an additional staff visiting these rental facilities. The reduced cost of operations increases profits that it gets in the market (Ba & Yang, 2016). This platform and the strategy have helped increase the firm’s profitability.
Zillow has a made it possible for some of its customers (tenants) to pay their rent through other alternatives if they want to avoid paying the commission to the firm. They can make direct payments to the bank but still rely on the platform to get regular updates about information they need. The strategy provides incentives for customers who are cautious about their expenditure (Moretti, 2019). The strategy makes sense because it increases the rate of traffic in its website. As the number of regular online visitors increase, the company is able to charge higher prices for its advertising products because of the increased audience.
Profitability from Fees on Zillow Flex
Zillow Flex is another major source of income for this organization and the strategy used in this product has proven to be highly profitable. In other referrals, the company would charge $60 for premium referral or $20 per regular referral irrespective of whether it is translated into sale. However, the firm has partnered with real estate brokers to ensure that they are not charged per referral. Instead, the company charges them per every closed transaction. Although it may take some time before such referrals are translated into successful sales, the company earns more in terms of commission as per the agreements. Zillow shares the commission that the broker gets from the sales.
Zillow Flex has an option for potentially different types of clients unwilling to share the commission they earn from the advertisement. For such customers, they have to choose whether they want regular or premium services. For regular services, they need to pay $20 while those who want premium services pay $60. The pricing strategy provides the right incentives for customers who are established in the industry and only want to expand their market reach. They may be unwilling to share their profits with the company. This strategy makes sense because it creates diversity. It helps to attract more customers with diversified interests in the market.
Main Analysis III: Competition
Competition is one of the strongest forces in the market that define the ability of a firm to achieve success. Erdmann (2019) explains that competition should not be viewed as an obstacle that prohibits a company from achieving the desired level of success. Instead, it should be considered a challenge that propels a firm to continuously improve the quality of products that it offers in the market. The desire of an entity to outsmart its market rivals will propel it to improve its operation strategies to ensure that it delivers high quality products at the lowest price possible. Zillow faces stiff competition in the online real estate market. Its ability to achieve sustainable growth in the market depends on the ability to meet expectations of customers in the same way or in a better way than competitors in the market.
Type of Competition Zillow Faces in the Market
Zillow faces both direct and indirect competition in the real estate market. Direct competition comes from companies offering the same products in the same online platform within the United States and Canada. As Davis (2016) observes, various firms are currently offering a wide range of products in the real estate sector within the online platform. The management of this organization must have unique strategies of dealing with these competitors. It is important to note that competition in this industry also come from brokers using the traditional brick-and-mortar business model of operation. These competitors may not pose a serious threat to Zillow that operates in the online platform. However, they should not be ignored because they occupy a segment of the market in the United States and Canada.
Zillow’s Competitors
Zillow is one of the dominant players in the online real estate marketplaces in the United States and Canada. However, it faces stiff competition from other major online players also keen on expanding and protecting their market share. The primary competitor of this company is Realtor.com. This firm also has significantly large market coverage and it is considered to share the market lead with Zillow. Unlike Zillow, Realtor.com has concentrated its operations within the United States, which is considered a larger and more lucrative market of the two. Rent.com is another formidable competitor within the United States market. It offers similar products to those of Zillow and has a major market share.
Appartments.com has also been growing steadily in the local market and is proving to be attractive among young customers. It offers a wide range of products to the market and sometimes uses pricing as a strategy to win market competition. Other major competitors in this market include Trulia, LoopNet, and RealtyTrac. The industry also has numerous other small firms operating in specific cities and states. Although these competitors often take part of the market share from Zillow, it is important to note that they also help Zillow to improve its product quality and delivery methods (Bowling, 2016). The firm is constantly under pressure to offer quality products at relatively low cost to manage the stiff competition.
Effect of Zillow’s Strategies on the Competitiveness of the Market
Zillow is currently considered the market leader in the online real estate marketplace. As a market leader, every action that it makes will have a direct impact on competitors. Most of the strategies that the company embraces tend to directly affect competition in the market. Some of the strategies make the market more competitive while others make it less competitive. It is important to start by examining strategies that make the market less competitive. Initially, this company was running adverts on its website from individual home sellers. However, it introduced a wide range of products that made the market become highly competitive. First, it developed a working relationship with advertising firms, including advertising agencies such as newspapers, which minimizes the level of competition in the market. According to Chiarella (2019), when rival organizations agree to work as an entity, the level of competition will reduce because they will operate as a monopoly. It means that instead of these newspapers and advertising agencies working as competitors, they become a single entity focused on achieving a specific goal.
The second strategy that the firm has been using to lower competitiveness in the market is acquisition of rivals. From 2011 to 2016, Zillow acquired over 13 companies at a cost of about 4 billion dollars (Hales, 2018). RentJuice, Buyfolio, Diverse Solutions, StreetEasy, Trulia, and Dotloop are some of the major acquisitions that Zillow has made within that period. It is important to note that some of the strategies that Zillow has been using have increased the level of competition in the market. For instance, its decision to lower some of its products’ prices has increased competitiveness in the market. The firm’s diversification strategies have also increased the number of market rivals that it has to face in the market.
Conclusion
Zillow is currently the leading rental and real estate online marketplace in the United States and Canada for home sellers, home buyers, and real estate brokers and agents. Findings of the study show that the company has used various strategies to achieve growth in the market. First, it diversified its product portfolio through a series of mergers and acquisitions. It has also partnered with other players to enable it to reach a wider market both in the United States and Canada. The firm has also introduced various pricing strategies for its different products in the market. The strategy is meant to ensure that every customer can afford to use products of the company. The study shows that Zillow has been keen on reducing competition in the market through acquisition of rival firms.
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