James Galloway, General Manager Marketing, Myer Stores Ltd., 246 Bourke Street, Melbourne 3000. Email: agalloway@bigpond.com
Stewart Adam, Senior Lecturer, School of Marketing, RMIT University, Level 14, 239 Bourke Street, Melbourne 3000. Email: stewart.adam@rmit.edu.au
This paper examines the notion of value transformation in the residential real estate market in Australia stemming from use of the Internet (Net), or more specifically the graphical face to the Net - the World Wide Web (Web).
The paper discusses such aspects as:
It is suggested that the impact on intermediaries in this market is likely to centre on category killer real estate portals. These portals will initially adopt a productivity increase model (Hanson 2000) and gain competitive advantage from lower operating costs. It is suggested that the per transaction revenue at such Websites is likely to be lower initially. It is further suggested that while some portals may adopt a revenue growth model, the main gain will not come from an expanded geographic market, nor from growing the local market, but rather from productivity increases and service augmentation. The paper postulates that intermediaries may also forego some sources of income augmentation, such as property search and consultancy fees, in addition to commissions on the sale of loan and insurance products. These changes are likely to occur due to the emergence of category killer real estate portal Websites offering content and software which enables them to add value by offering more than the limited services offered by traditional real estate agents. Such a range of online services will include help to enable consumers to decide on communities to live in, as well as financing options and assistance with offering price, among many other customer benefits.
A review of business literature indicates that management's view of business is changing due to technological convergence centred on Internet Protocol (IP) technology. Michael Porter's (1985) notion of the value chain now seems antiquated with its proposition that technology development is a support activity. Treacy and Weirsema's (1993) research illustrated that leading companies have narrowed their focus to "delivering superior customer value in line with one of three value disciplines - operational excellence, customer intimacy, or product leadership. They have become champions in one of these disciplines, while meeting industry standards on the other two" (p.84). This is not to say that some companies cannot master more than one value discipline. Amazon.com [HREF 1] could be cited as a dot.com business which offers superior customer value due to operational excellence and customer intimacy, both of which result from its mastery of IP and database technology. For such online businesses, customer intimacy is reflected in what the Internet industry colloquially terms 'stickiness' while both customer intimacy and operational excellence are reflected in the business' ability to enable the customer to become part of the process. Treacy and Weirsema's (1993) view of successful businesses has in turn led to Hagel III and Singer's (1999) perspective on how value is added by the modern business, as illustrated in Figure 1. In the latter authors' view, there are three value-adding parts to any business: product innovation; infrastructure management; and customer relationship management. They point out that today we find one or more of these components carried out by others.
It is contended here that the Net enables such unbundling by many businesses. This is also reflected in the notion that the Net performs three value-adding functions for business, depending on where the individual industry (or company) lies on the Web adoption timescale, a notion put forward by Adam and Deans (1999). These authors postulate that firms start out by using the Net primarily for marketing communication, then proceed to use the Net as a marketing channel to transaction with customers and finally use the Net in customer relationship management (CRM) (Adam 1998; Adam and Deans 1999). We would add here that this is also dependent on where the individual business lies on the continuum between being 'pure dot.com' and 'pure bricks and mortar' (Adam and Clark 2000).
The following section details such aspects as the distinction that must be drawn between business-to-business (B2B) and business-to-consumer (B2C) marketing in the online environment. The paper examines aspects of online property marketing in Australia before drawing conclusions concerning category killer real estate Websites. The term category killer is drawn from retailing in the physical world where large single category retailers such as Toys'R'Us are so described. The paper examines the following aspects of online real estate marketing:
In the five years that business has used the Internet, or more particularly the Web, most of the use for commercial transaction purposes has occurred in the business-to-business (B2B) arena. Some 65% of B2B transactions were electronic in 1997, however the Net accounted for only a small proportion at that time (Adam 1998). That situation has now changed, partly due to efforts by the National Office for the Information Economy (NOIE) to promote the concept of and real benefits to business of e-commerce (online transactions). NOIE predicts that the information economy will add some 2.7 to Australia's GDP by 2007 (Van Wyngen 1999). Business also acknowledges that there may be improvement based and/or revenue based benefits to using the Net in the B2B environment (Hanson 2000)
In the business-to-consumer (B2C) market, the Web has been used with products where fulfilment logistics was already in place such as the retailing of CDs, software and books. This is also the case in B2C marketing of products that are essentially information or 'bits', such as software, banking, travel, ticketing to sporting and other events, not to mention products that are region-specific and therefore more difficult to obtain. Buying Australian wine in Japan falls into this latter category. However, the Web can also be successfully used for communicating, distributing and forming relationships for firms marketing products in high involvement categories that involve joint decision making around significant life events. Companies in the motor vehicle category such as Auto- By-Tel [HREF 2], Carpoint [HREF 3], CarMax [HREF 4] and AutoNation [HREF 5] are proving this point. So too are WeddingChannel [HREF 6] and TheKnot [HREF 7] in a different but equally high involvement product category more oriented toward females.
These and other firms have proven that success relies on having a strategic purpose for developing a Web presence and committing funds to Website development and maintenance. The lack of strategic purpose behind business development of Websites has been commented on in studies by Deans and McKinney (1997) and Adam and Deans (1999). The strategic use of the Web necessitates the development of a different business model to the one traditionally employed by 'pure bricks and mortar' business. It is contended that the online model is based on a different value proposition: that value transformation is also due to the fact that the medium has multiple roles, as well as the fact that, as already mentioned, the benefits from Web usage may be productivity based and /or revenue growth based. Adoption of the revenue growth model is particularly evident in North American B2C marketing where online business spends on average some 75% of revenue on marketing effort versus some 13% by businesses operating solely in the physical world. This translates into revenue growth oriented e*tailers directing 68% of sales, and some $25 per order in the case of the online bookseller and newly transformed aggregating landlord, Amazon.com, into marketing effort [HREF 1] (Grover 1999). It is debatable whether or not this can be sustained from a cashflow perspective.
There are opportunities for those members of the real estate industry that develop a
Web based business model and opportunity costs for those that do not. While the real
estate industry in Australia appears to be slower to adopt an online business model,
transformation of the real estate industry is nevertheless taking place in both Australia
and the United States, with resulting redistribution of value among industry stakeholders.
While it is too early to determine the ultimate winners and losers, scale economies inherent in category killer retailers both offline and online, means that this retailing model is set to dominate across a number of product categories, including real estate. These category killers offer the most comprehensive selection of properties, or in retailing terms offer the dominant assortment. The real estate category killer business model involves a total online solution encompassing financial, legal, building and maintenance among other augmentations of the basic service. This business model is set to significantly affect all members of the current value chain:
The extent to which this potential becomes a reality is largely dependent on the level of acceptance of the new opportunities by consumers, the ability of real estate agents and the providers of ancillary services to adapt to the new business model, and the ability of technology to deliver sufficient speed and bandwidth to make the consumer experience satisfying [HREF 10].
The residential property market shows little homogeneity. Each property differs in location, amenity, features, size, shape and price. Consumers and sellers also come in all shapes and sizes. Some people seek rental properties, others want to purchase. Moreover, the terms, timing and needs of each customer varies. Agents also vary in so many ways. Some may be market nichers operating in a local geographic area at a single location. Others may be members of larger chains operating across national and international markets. Some participate in multiple listing or cooperative listing services, while others do not.
One issue that is faced by all participants is the fact that the search process is time-consuming and costly. The situation varies for other members and becomes even more complex when the seller or renter is trying to co-ordinate activities around a move to the next property:
The current market model sees most of the expert knowledge regarding market practice and prices vested in real estate agents. The sellers, buyers and renters are relatively poorly equipped with information or experience, for what is most often the biggest financial transaction of their lives. Any information they do have must actively be sought from a range of disparate sources which is time-consuming and often frustrating.
Even the process of inspecting the properties themselves can be highly inefficient for all involved. The joint decision-making nature of the purchase and the limited access afforded through the current open house inspection system prolongs the search time and adds to the costs involved for both buyers and sellers. In addition, agents find that the current practice offers little opportunity to collect information from potential buyers or to screen "lookers" from genuine buyers.
This offline value-adding is graphically depicted in Figure 2.
The Net (Web) has a clearly established role with consumers in allowing them to gather purchase related information and to do this more quickly [HREF 11]. A 1998 US Merkelmedia Corporation study showed that research was the activity occupying most user time on the Net (43%) (Strauss and Frost 1999, p. 63).
With increasing numbers of Australian homes connected the Net (up 57% from 1998 to 1999 and now standing at 22% of all homes), and a balancing of the previous early adopter bias towards higher income earning males to increasing participation by mid to lower income households and women , the Web is becoming a more accessible and widely used medium (ABS, 1999). Even though only 5% of Australians had purchased online by the end of 1999, the search capabilities of the Web alone should see greater use of the Web for online property inspections and auctions.
There are a number of additional benefits offered by Web use in property marketing. There is the potential to provide content rich information about products, conduct complex personalised searches, initiate proactive real time contact with customers via email and conduct real time online auctions. Improving connectivity and bandwidth offers further content enhancements such as full motion video which will make online home inspections a fast and practical reality. Moreover, connectivity by wireless application protocol (WAP) devices is set to follow adoption rates for current cell phones and personal digital assistants and should also lead to greater use of the Web in property marketing.
The opportunities offered by online business models has been seized upon by a variety of players in real estate marketing, both current participants in the real estate industry and new entrants with net specific business models. There is yet to emerge a single world best in this regard. The process of evolution is set to continue as technology changes, users' requirements change and industry dynamics change, thus making online real estate marketing a journey and not a destination. The recent Australian success of Realestate.com.au [HREF 12], ranked 43rd of all sites [HREF 13], and the proliferation of sites in the US, indicates that Web consumers are adopting the innovations introduced to date. It is suggested that the impetus for Web based real estate activity will come from home and car sellers moving online to aggressively embrace services like HomeAdvisor [HREF 14] and Auto-By-Tel. These service providers give consumers power through information [HREF 15].
There are many potential models for online real estate agents. However, it is already apparent that only some will prosper. These alternative approaches to the use of the Web in real estate marketing that are discussed in this section:
- Website support for 'bricks and mortar' intermediaries;
- Real estate listings on 'Pure Navigator' sites;
- Industry led 'Aggregator' sites; and
- Independent third party real estate portals.
Where a real estate agent is small in terms of turnover, employee numbers and is not a business comprised of multiple shopfronts, it most probably has limited resources. Such an intermediary would not develop a separate Website of competitive quality with sufficient depth in its listings to be broadly attractive to purchasers or sellers. This model is likely to exist only in specific niche markets (such as selling apartments in Noosa Heads) if such agents are to remain in business.
The most popular individual real estate agent site is McGrath Partners [HREF 16] with only 3.7% of real estate visits and falling visitor numbers. Currently, the most popular branded real estate group site in Australia is the much larger LJ Hooker [HREF 17] with 14% of total Australian real estate traffic and rating as number 46 of all Australian Websites visited, according to Top100.com.au.
Evans and Wurster (1999) see navigation on the Web as a separate business model. They use the term 'pure navigators' to describe such Websites as Yahoo! [HREF 18] Real Estate and Fairfax Classifieds [HREF 19]. Real estate listing services are generally offered as part of a pure navigator's existing classified advertisements section and mostly lack focus, richness of content and the expert services offered by specialised real estate sites. In addition, there are relatively few listings particularly in comparison with the larger US based multi-list sites.
We might term shopping malls 'aggregators'. Malls operate in the online environment in the same way they do in the physical world, ensuring there is traffic past smaller shopfronts on the way to larger shopfronts. Such malls also offer the possibility of augmenting basic real estate offerings with services such as legal, valuations, architects, trades, retail, removals referrals and associated advice.
Realnet [HREF 20], operated by the Real Estate Institutes of Queensland, Western Australia, Northern Territory, New Zealand and the Estate Agents Co-operative of New South Wales, is an example of such an aggregator site. Realnet is promoted as Australia's largest property database on the Internet with 32,000 properties for sale and links to participating agents. Despite its size, it only has 0.63% of real estate visits and this percentage is falling [HREF 13]. Realnet is similar to Realtor.com [HREF 21] in the US, which is partially owned by the National Association of Realtors. This site has been criticised as being biased towards agents at the expense of buyers even though it does not offer online loan applications so as to appease agents who want to earn income from client loan referrals [HREF 12].
Another such site is Australian property portal Realestate.com. Established in February 1998 by Netwide Solutions, a company specialising in providing technology based solutions to real estate agents and fifty two percent owned by Macquarie Bank. This site is exclusively endorsed by the Real Estate Institute of New South Wales and has leading Sydney Real Estate Agent John McGrath in a non executive Board position. This is currently the number one Australian Internet real estate site with 21% of real estate traffic and number 28 of all Australian sites [HREF 12].
Given the importance to purchasers and renters of objective and independent advice from a one stop shop, which includes access to a full range of ancillary services, the development of such sites may be hamstrung by channel conflicts. These channel conflicts may therefore limit listings of ancillary products to those from particular agents or suppliers, rather than those that customers may need to see or buy from.
One example of such a portal is the Australian property portal Property.com.au [HREF 22] owned and operated by listed media company PMP Communications, publishers of New Idea and TV Week. PMP's motivation is clearly to capture the online revenues flowing from traditional media to online advertising of real estate. However, unlike stakeholders in their Australian rival Realestate.com.au, Property.com.au has a greater opportunity to offer objective advice and a range of ancillary financial services products from a variety of suppliers.
In the United States, Microsoft's Homeadvisor.com [HREF 14] is a similar independent site. Homeadvisor.com has a database of 400,000 home listings compiled from three sources: franchised real estate chains, multilist real estate services and independent real estate agents. In addition, it offers a comparison shopping product for loans from all brands of suppliers, tracks loan rates, has sample contracts and loan forms and a finance glossary. The site also has buyer education and lifestyle content. Partnering with Inman Decision Support for home buying advice, a defect detector, 3,000 FAQ's, Claritas Crime Check and School match to provide content on neighbourhood affordability, demographics, crime rates and school ratings.
These independent portal sites have a strategic and scale advantage. They offer buyers the convenience of depth and breadth of listings. They also offer a comprehensive range of ancillary services coupled with the software and content to help people make informed choices delivered in an objective and independent setting. Their size and position will allow them to build large databases and strong brands making them secure against attack from smaller players. It appears that independent portals will be the successful business model in the long term.
In the Australian residential real estate market, the creation of such sites with breadth and depth of listings across a wide range of agents, areas and locations may be more difficult than in the US. The dominant Australian practice is for agents to have a sole listing for a property (sole agency agreement), which means that only the nominated sole agent can sell or rent the property on behalf of the owner. This situation may be contrasted with the United States situation, where multi-listing is more common. Multi-listing operates on a pooled arrangement whereby participating agents jointly market properties and the successful agent secures the commission. The more open practice of multi-listing draws some of the power from individual agents and will accelerate the development of category killer real estate portals.
Thus, the issue of individual agent power derived from sole agency arrangements will have to be addressed by any party aiming to create a truly nationally dominant site, if that site aims to generate income from agents and owners listing their properties on the site. It may well be that if the 'category killer' portal can reduce transaction costs for sellers and speed the sale process, sellers may be reluctant to grant sole agency and prefer the more open environment of the real estate portal.
If industry use of sole agency arrangements is not changed then it is likely that portal sites will be unable to generate income from listing properties and may need to rely on transaction fees from after market sales and peripheral services. Such services would be augmented by fees from the sellers of financial products (loans and insurances), home furnishings, electronics, trades, architects, and removalists, as well as revenue from targeted in-site classified and display advertising.
Given the discussion thus far, the question arises as to the implications for value transformation in the Australian real estate industry.
A major outcome from the move to online marketing of real estate is the likely redistribution of value between the members of the value chain. However, use of the Web also has the potential to increase the total value for all participants. The extent to which the current participants are able to benefit depends on their ability to adapt to the ways of doing business on the Web. This fact is recognised by leading Sydney real estate agent John McGrath who states: "This isn't a win-lose situation, agents and their customers can both be winners by using this technology. We are all time poor. The Internet saves a lot of leg work for both agents and customers. Prospective buyers can go to the net and actually inspect properties before they even leave the house, thereby narrowing down the number they have to visit" [HREF 23].
Based on the premise that category killer real estate portals will be the dominant model, it is also possible that there will be fewer real estate agents than there are today. The winners will likely make large capital investments, either on their own or as alliance members (OneWorld) or in partnering arrangements, when automating the listing process and speeding their response to buyer, seller and renter queries as well as to new listing leads. The cost of building databases, 'middleware' to enable browser access to information, strong brands and support systems, and to develop financing and insurance services, is likely to reduce the number of industry players to four or five clear leaders.
These large industry players may have as partners the current owners of classified listings such as Fairfax Interactive Networks (F2) [HREF 24] or search engines such as Lycos.com [HREF 25] and portals (Yahoo!), that will share traffic. This view is shared by Robert Bevan of Netwide Solutions who notes that the number of real estate businesses in Australia dropped by 6.5% in the preceding 12 months (since the launch of Realestate.com and Property.com), despite the buoyant Australian residential property market. Bevan comments that "the drop indicated the digital economy was beginning to take its toll on an industry which, to a large extent had resisted change" [HREF 26]. This trend towards mergers and buyouts in Australia appears to be following trends in the United States. As one Executive VP of Marketing and Communications at a major United States Realtor notes, "The Internet represents the final resolution of a trend. We, the industry, have been in the process of merging smaller companies, the Internet will finalise who survives in the market" (Forrester Research 1998).
The increased size of real estate agents and the move to online interaction with customers has the potential to lower overheads for agents as the following comment illustrates:
"The use of online registration of buyers and sellers will assist in building databases and allow proactive matching of buyers and sellers. This will help speed up the buying cycle and the leads referred will be more likely to be genuinely interested in the property, rather than "tyre kickers". This should save time for agents and dramatically improve their efficiency and turnover. This trend is predicted by John McGrath who notes that "the new technology would see smaller profit margins balanced against greater sales volumes" [HREF 8].
There is also likely to be increased price competition amongst agents as the big portals seek to overcome the sole agency structure of the Australian market by lowering fees and costs to sellers. If the real estate market follows the trend evident in the US online auto sales market, aggressive category killers will slash prices and sacrifice early returns to build their databases. They may move to flat rate fees for agents in lieu of commissions. Once critical mass has been established by the major portals and competition is eliminated, prices may well rise as increased profitability is sought.
The impact on agents is likely to be consolidation of industry participants around major real estate portals which offer lower per transaction revenues in return for lower operating costs and higher turnover. Agents may also forego some of their current sources of additional income such as property search and consultancy fees as well as commissions on the sale of loan and insurance products, as category killer real estate portals increasingly take on the tasks traditionally performed by real estate agents.
The service structure of agents will also need to account for the computer mediated environment. Online customers expect faster response times and are better informed due to their web assisted research. Successful agents will need to structure their service offering to accommodate these expectations of service quality in the online channel. A channel orientation with automated assistance in generating responses which is available 24 hours a day is a likely outcome, rather than the current geographic orientation with manual and often slow responses. Agent will then become reliant on their relationship building skills to differentiate themselves in a more homogeneous market. Being able to 'close a sale' and ability to generate new listings will be paramount in this online scenario.
For both purchasers and vendors, the computer mediated environment has the potential to dramatically change the knowledge and power base from agents to buyers. Category killer sites can offer links to or content from databases containing the price history of the property [HREF 27] and databases containing the block size and title information [HREF 28]. This allows far greater price transparency through the provision of evidentiary values and accurate block values per square metre.
In addition, finance and insurance options can be aggressively evaluated [HREF 29][HREF 30]. Housing loan and stamp duty calculators as well as a range of economic indicators [HREF 20] are already available online. Moreover, prospective buyers can easily contact specifiers such as architects as well as tradespeople for a range of services including inspections prior to purchase [HREF 31][HREF 32]. Prospective purchasers are also able to view the floor plan and pictures of properties online, thus gathering far greater detail on the property than traditional classified advertisements offer. They can even go so far as to take virtual tours [HREF 33]. Buyers can even place bids to purchase online [HREF 34]. Although online purchasing is not yet common in the real estate industry, the growth in online auctions, and reverse auctions, proves that the potential and technical capacity exists [HREF 35]. Moreover the geographic restrictions of traditional real estate marketing are gone forever in the online environment.
As already indicated, online customers also have higher expectations for service quality, including speed of service. This means that not only will the process of buying and selling a house become faster, but the service speed expectations of buyers, sellers and renters will increase to approach real time 24 hour seven day service. As one United States real estate branch manager notes: "Consumers will look for the best Website and speed of response from agents. Real estate agents who do not achieve this will lose" [HREF 36]. This transfer of information means that customers do not have to contact the agent - they chose to. As a consequence, online buyers expect this contact to add value to their search and purchase process.
The Web is already transforming the value chain in the real estate market in Australia and elsewhere. If the Web is seen as a new marketing channel by existing industry members, and they adapt their business model, there is an opportunity for them to derive greater value for all concerned, particularly the end-user (home buyer or renter). Agents and other participants who fail to recognise the commercial opportunities the Web presents, or who underestimate its impact, may well cease to trade.
The increase in information available to the customer and the move to open listings, represents lower transaction costs, or increased productivity, for buyers and sellers alike. Many in the real estate industry are also adopting a revenue growth model - particularly category killer real estate portals. It is suggested that the category killer brand will become a critical part of the marketing landscape in this industry, as has happened in other categories. The suggested outcome is that real estate marketing will become more of an issue of brand marketing and portal Website positioning than property by property listings in the traditional sense of classified advertisements, brochures and print media generally.
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James Galloway and Stewart Adam, © 2000. The authors assign to Southern Cross University and other educational and non-profit institutions a non-exclusive licence to use this document for personal use and in courses of instruction provided that the article is used in full and this copyright statement is reproduced. The authors also grant a non-exclusive licence to Southern Cross University to publish this document in full on the World Wide Web and on CD-ROM and in printed form with the conference papers and for the document to be published on mirrors on the World Wide Web.
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