Zillow Group(NASDAQ: Z) (NASDAQ: ZG) earns revenue by focusing on a variety of customers served by its internet-based real estate business. The company works with buyers, sellers, realtors, contractors, mortgage brokers, renters, and decorators.
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In Feb. 2015, Zillow acquired competitor Trulia and continues to run it as a separately branded website. Both sites are integrated into its advertising-based sales model. Revenue is generated several different ways with the primary driver of customer spend coming under the banner of the Premier Agent program. As of the last quarter, 71% of revenue came from Premier Agents who subscribed to the service and committed additional advertising dollars to the site.
With that much revenue coming from one program, it would make sense for the Foolish investor to understand how the Premier Agent program works and some misconceptions that often come up.
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Targeting each and every real estate agent
Real estate agents are inherently small business owners, though they may work for a real estate broker. They are usually contractors and must budget their money to build their business. Part of that money goes into advertising, as they need to find prospects that they can develop into clients and eventually commissionable sales.
When it comes to generating leads, Zillow has created a valuable solution through its Premier Agent program. Managementrealizes that to be successful, the company must create a virtuous circle between buyers and sellers, who have free access to the Zillow site, and Premier Agents who are looking for clients. It is in Zillow's long-term interest to make sure these Premier Agents are well-versed in all things real estate and can provide exceptional service to their clients. In turn, as more people discover Zillow and have a good experience, the company can look forward to a larger audience attracting even more Premier Agent advertising.
So what does a Premier Agent get for their hard-earned dollars?
Zillow pulls its home listings from multiple listing services and real estate companies, all hosted on the site for free -- the homeowner and listing agent pay nothing.
The Premier Agent program produces revenue for Zillow by allowing real estate agents to advertise their services alongside these listings. They can choose from three different levels of service to fit their budget.
Premier Agents pay a monthly subscription fee and receive a variety of benefits. High among these benefits is an exclusive placement of their picture and contact information for each one of their own listings. No other realtor appears on a Premier Agent listing. This gives the Premier Agent an excellent opportunity to capture leads from potential buyers who view the listing.
Premier Agents also can elect to buy into additional offerings such as zip code-based advertising, which allows a Premier Agent's contact information to appear on listings that are not represented by another Premier Agent. These non-Premier Agent listings show potential buyers a picture and contact information for three Zillow Premier Agents along with the listing agent. Premier Agents pay more for zip codes with higher traffic as they produce more leads. Premier Agents can control their monthly advertising spend by agreeing to purchase a certain number of ad impressions or page views monthly.
Data source: Zillow Group. Chart by author. *Midpoint of forecast.
Other benefits include a Zillow mobile app and CRM system that Premier Agents use to keep track of their client contacts. This system allows for automated responses to client inquiries as well as the ability to have leads dispersed to team members based on a variety of factors such as home price levels or zip codes. A team lead determines how they want the leads handled. Each Premier Agent is also given a customizable turnkey website that they can set up without any technical experience.
Watch the total Premier Agent revenue, not the number of Premier Agents
Wall Street analysts tend to focus on the number of Zillow Premier agents, but this is misleading as many realtors are part of teams where one unique credit card pays all the bills for numerous agents who work on a Premier Agent's team. They divide up the commissions and the leads behind the scenes. The metric to track is the total Premier Agent spend on Zillow, which reflects the total ad spend for the entire team.
Premier Agents are the lifeblood of Zillow's revenue stream. Their aggregate subscription and advertising spend is over 70% of the top line. Stay focused on the growth of this segment to see if the company can continue to monetize its advantage in the marketplace. The more leads Premier Agents can convert to sales and commission dollars, the more advertising budget they will have and want to spend with Zillow.
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Frank DiPietro owns shares of Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.