Category — Competition

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From a project we’re working on. You are not alone.

Guy Kawasaki has a very interesting post on his blog regarding start-up spending costs.

The CEO of Redfin, an online real estate company has opened up his books with a detailed expose of their operating expenses.

Yes, their model is different than the typical real estate shop where everyone is an independent contractor paying a vig to the man.

But the takeaway here is how much do you spend each month on your business in comparison? What metrics do you measure? These guys are spending VC money so they have an obligation to track their finances to the last penny and have a keen understanding of where growth is coming from and where ROI is generated.

Who do you answer to? Now that we’ve entered the 4th quarter of ‘07 how are you doing this year?

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Glenn Kelman, CEO of Redfin writes:
Part I: Numbers Startups face one primary challenge: To never run out of cash. So when projecting costs, we heeded Guy’s advice that “the three most powerful words you can utter at a board meeting are, ‘We beat projections.’” This convinced us to develop the worst possible financial model that could still be used to raise money.We’re glad we did. True underachievers, we’ve performed at or just a bit better than this worst-possible plan almost every month, raising revenue projections only when forced to in December 2006. We’ve been able to stick to our plan mostly because absurd assumptions in opposite directions cancelled one another out. As the real estate market tanks, we may not be so lucky in the future.When first putting together our financial model, we looked online to calibrate spending assumptions. So many people have blown venture capital, we thought, there must be a manual somewhere on how to do it, at what rate, avoiding which follies. We couldn’t find anything. So we took some wild guesses and figured we’d see how they turned out. And now two years later to the day that we built our first model, here are the projections and actual results. Hopefully, you can learn from our experiences.
Rent, Per Employee, Per Month
Redfin Model: $250. Actual Redfin Cost (Last Month): $336Our actual costs are high because we just moved last month into an office with room to grow, which seems to happen every eighteen months. When people were sitting in hallways at the old space, we were paying about $200 per employee, per month. Class B space on well-traveled mass transit lines is roughly $20 per square foot per year in Seattle, $30 in the Bay Area. You need 165-200 square feet per person or more.At the extremes, Adobe supposedly allocates 435 square feet per person while Yahoo! allocates 220 square feet per person. The startup cult of cramming people into small spaces is counter-productive: people are what’s really expensive, not space. The cost Redfin really didn’t anticipate was for tenant improvements which you mostly have to fund yourself when signing sub-three-year leases. In September, we spent more than $100,000 to add private offices for our engineers on the hope that our current office will last us longer. It was probably too much money.Initial Per-Employee Equipment Cost
Redfin Model: $6,500. Actual Redfin Cost: $5,700Computers, 20” monitors, Ikea desk, decent chair, VOIP telephone, and cell phones for field employees. Our first phone system came from Craigslist, and we had to upgrade after a year.

Monthly Benefits, Per-Employee
Redfin Model: $600. Actual Redfin Cost: $471

Redfin benefits are competitive, but many employees are Seattle-based. Costs are 10% higher in California.

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Steamboat recently was home to a regional Rock, Paper, Scissors tournament. Who knew there was such a thing? The nature of the game got me thinking about real estate companies. In Rock, Paper, Scissors is there really any strategy in picking one “device” over another? Not really. Often we end up picking a device for our throw that makes us feel good not because it has any greater chance of beating the other player. I tend to pick a rock because it “feels” like it has a better chance of winning but in reality, it doesn’t.

Is the same thing true for real estate companies?

If one takes a close look at Re/Max, Century 21 and Prudential are there really any concrete easily identifiable differences that a typical home buyer or seller will notice and more importantly value?

If one takes a close look at Re/Max, Century 21 and Prudential are there really any concrete easily identifiable differences that a typical home buyer or seller will notice and more importantly value? I don’t see them. They each have a slightly different message and slightly different position but I’m not sure consumers can really tell the difference. I could see how in a game of Rock, Paper, Scissors where Re/Max, Century 21, and Prudential are substituted we’d be faced with the same dilemma. Which to pick because each has about the same value? Which company has the resources and people to sell my home within my time frame and for the highest price? I know the differences between Schwab and Merrill or Mercedes and Kia or even Lowes Hotels and Hilton and I’ll make my decision based on my understanding of those differences.

Does the Re/Max balloon, a marketing idea hatched in 1978, really convey anything to the consumer today?

I see huge opportunities for small real estate companies not saddled by national marketing and branding to create new value by engineering their business in providing superior differences and value compared to the big guys. Does the gold jacket really matter to the consumer today? Does the Re/Max balloon, a marketing idea hatched in 1978, really convey anything to the consumer today? No & No. So I say to the small real estate company - GET BUSY! You have a huge opportunity while the big lumbering real estate companies stumble around.

1. Ignore your website. Don’t update it, keep it stale - 2002 was a good year.
2. Keep doing the same old thing. Innovative thinking is overrated
3. Focus on stationary and what kind of car you drive instead of adding value to clients.
4. Follow up when you feel like it.
5. Put off learning something new till tomorrow.
6. Forget about reinvesting in your business.
7. Keep thinking everything is ok.
8. Continue to use that tired old computer your managing broker gave you.
9. Stay disorganized. You know where everything is.
10. Keep hoping instead of acting. There’s enough to go around.
11. Continue putting off that client satisfaction program.
12. Pick up a remote instead of a book.
13. Continue to rely on the Pilot.
14. Do things that are “good enough.”
15. Focus on today and not worry about tomorrow.
16. Settle.
17. Play another round of golf. (Hey, it’s nice outside!)
18. Ignore your relationships with past clients.
19. Focus your energy where everyone else is focusing their energy.
20. Talk about how great you are.

Funny thing is, your clients, the ones who actually pay you, want just the opposite.

Now that the number of licensed brokers in this market has crossed 400, here’s 2 slides about perspective from a presentation I gave a few days ago.

I suspect that most of the newcomers have a very different picture in their head.

60 Minutes did a great job promoting Redfin last Sunday night and didn’t do much for your business. It was almost a Redfin commercial which is why, I suppose, Redfin has the piece posted on their site. If you missed the piece, you can watch it here.

The takeaway is that other companies are coming into your business trying to capitalize on the fat in your business model. They try to dis-intermediate your value chain by offering a path that either excludes you or severely reduces your role; thus your value.

They try to create a new competitive model that has greater perceived value to the end customer, making you look antiquated and expensive.

It’s Redfin today & someone else tomorrow. Your job should be to reinvent the business yourself. Don’t wait for someone to do it for you. You’re the incumbent, you’ve got the base & you’ve got the lead. E-trade wanted to wipe out Merrill Lynch - they didn’t. But Merrill Lynch had to seriously change their game to stay competitive and is very different today. I encourage you to watch this video to understand what companies like Redfin are doing.

After spending four nights at the Hyatt near Disneyland in Anaheim California, two very different hotel guests became apparent; families & business travelers. These two segments have no overlap, completely different needs and different expectations. Yet we didn’t feel like a family trapped in a business traveler’s hotel and the business travelers’ needs were met as well.

The Hyatt provides a great experience for both customer segments because they understand, anticipate and meet the needs of their different customer segments. This applies to real estate as well. Condo buyers, second home buyers, local sellers, investment clients all have different needs and expectations.

Do you “wing it” or do you have a well planned framework for interacting with these different segments? Do you “wing it” or do you constantly evaluate how each segment is changing and what their expectations are? What’s the competition doing to meet their needs?

In 1980, the Pittsburgh Steelers won the Superbowl with offensive linemen whose average weight was 252lbs.
The 2007 Superbowl winners, the Indianapolis Colts, had offensive linemen weighing in at 306lbs on average.

In the 1968 Presidential Election the average sound bite was 43 seconds.
In 2000 it was 9 seconds.

20 years ago you could run a 30-second television commercial on any of the 3 major networks and be guaranteed to reach a huge portion of the American Population.
Today you need to advertise on 92 channels to reach that same audience.

As a market gets more competitive, winning by the traditional rules gets more and more difficult. Some choose to try harder, some invent new markets and some leave. But it’s the freedom of our markets that decides what works and what doesn’t. Walling off a portion of Steamboat or creating an artificial funnel only certain businesses can pass through (i.e. the formula store) is not the answer to dealing with new retail opportunities as they come online in Steamboat. Competition makes for a better market place, a better consumer experience and a better economy. Could you imagine how ASC would have run Steamboat Mountain if there were no Vail, Aspen, Copper, Whistler etc.? The proposal of a “formula store ordinance” is a step in the wrong direction in that it seeks to regulate business and competition in a very subjective manner.
The organizations who created the additional 90,000 square feet of retail space should be applauded for taking the risk to add such opportunities to the Steamboat marketplace. The market should be an open playing field so those who take the risks to improve Steamboat have an economic incentive to do so.
Development risks such as these are what will keep Steamboat growing in the right direction. Let the free markets decide who stays and who goes, what the leases should be and what gets built. I believe this can be done within the context of preserving the Steamboat experience.

Personally, I would welcome additional opportunities to spend my money in Steamboat. I’ll probably spend less when beautiful retail space remains empty simply because businesses who fit the formula are not allowed.

In the mid-90’s when Dell announced they were going to use the web as their primary channel for sales, other computer makers for the most part ignored it. Around the same time I remember meeting with a prominent full-service investment brokerage, regarding their internet strategy, who completely discounted the internet as a viable channel for investments. Dell was right & the others were wrong. Dell has reigned supreme for almost 10 years and how often do you actually walk into an investment broker’s office?

The size and location of Steamboat provides a bit of insulation to disintermediation changes but all that does is buy you time. Redfin is out there looking to change the game. They’re not going away and even if they did, another would pop up the next day. Your 2nd home clients are going to begin expecting this kind of information, followed by your local clients. You’ve got some extra time - watch this interview with the CEO of Redfin and get busy.