Purplebricks results show promising trends

Earlier today Purplebricks announced their interim results for the six months ended 31 October 2016. How exciting!

The chart below could effectively be called "scaling." It shows how Purplebricks managed to more than double their revenue during this time period without increasing their fixed and variable costs. While cost of sales increased linearly with revenues (think the payments to their local property experts for securing a listing), their admin expenses and sales and marketing costs stayed the same.

This shows the business model successfully scaling by reaching more customers per advertising dollar. 

You can see the equally stunning growth in listings (aka instructions aka someone paying Purplebricks to sell their home) below. 

Wow! We're talking more than doubling customers and more than doubling revenues. 

Even more so when you consider the average customer acquisition cost (how much money the business needs to spend to get a new customer). In the same period last year, that number was worryingly close to the fee Purplebricks charged customers (£849 vs. £825), making it impossible to turn a profit.

But wait, look!

Those customer acquisition costs have dropped - significantly - to around £350. That is the most interesting bit of information in this update, given it is a very robust answer to the question, "Can this model make money?"

This interim update is quite remarkable in that it shows further proof the Purplebricks business model works. While initial costs greatly exceeded revenues as the company built scale, what we're seeing now is proper scaling.

There is still the open question of how effective Purplebricks is at selling houses (as opposed to listing them), but I won't wade into that here (here's looking at you, Jefferies). But for now, I'm quite impressed with the results and what it shows for the prospects of not just Purplebricks, but the entire industry.

Note: inexplicably, many of the numbers above are not explicitly mentioned in the results. However, it's easy enough to figure out given the stated revenues, average revenues per customer, and a few assumptions.

Disruption is coming and it absolutely is Purplebricks

Last week an article was published on Realestatebusiness.com.au titled, “Disruption is coming but it ain’t Purplebricks.” The sub-headline is the attention-grabbing, “The real estate industry is set for a shake-up, but if you think it’s in the form of agencies such as Purplebricks, you are mistaken.”

The headline and the article prompted me to respond, because Purplebricks is absolutely the type of disruption that is coming to the real estate industry.

To be clear, I’m writing from a neutral position. I was previously the head of strategy at Trade Me, New Zealand’s top portal. I have no ties to Purplebricks whatsoever, but I’ve spent the past 9 months looking at new models around the world in real estate that are getting traction.

What disruption looks like

The author makes it sounds like disruption always comes in the same package: big, digital, and transformational. Uber is used as an example, and it’s a good one. Uber is incredibly disruptive! They’ve used technology - coupled with a new business model - to transform how people get from point A to point B.

But let’s not confuse a $15 cab ride with a $500,000 home sale.

These are completely different events in someone’s life, occurring at completely different frequencies and at different scales. Disruption is going to look different for each.

You can trace the concept of disruptive innovation back to Clayton Christensen’s seminal book, The Innovator’s Dilemma. The story I remember most clearly is big disruption in the steel industry, and it’s not a big, whiz-bang, transformational change. It’s about making rebar (steel bars) cheaper than the big guys. That’s where disruption starts.

Why Purplebricks is disruptive

The Purplebricks business model offers the same service as a traditional real estate agent at a fraction of the cost (roughly a 60%-70% savings). To support that model, they’re also changing the way the service is delivered, through a combination of “Local Property Experts,” technology tools, and online support.

While the jury is still out on the effectiveness of this model and if it really delivers for consumers, it is incorrect to claim that a new model changing the way real estate is transacted at a fraction of the cost isn’t disruptive.

This is what disruption looks like in real estate, and this is why everyone should be paying attention.

It’s not going to be an app to sell your home. It’s not AI, algorithms, or automation. That’s not what disruptive innovation is going to look like in real estate.

Technology might be able to radically change other businesses where the transaction costs are lower and frequency is higher, but it’s unlikely in real estate. Consumers still want a hand to hold and an expert to guide them.

Disruption is going to come from a company that offers a superior experience at a superior price. And when it comes, it will resonate with consumers and gain significant traction in the marketplace.

Purplebricks and the fixed-fee providers in the UK currently account for 5% market share. That’s tens of thousands of transactions every year - a very big deal! If you want evidence of disruption, just read about the UK’s largest estate agency closing 59 branches, or this choice quote, “The cuts come as online-focused rivals such as Purplebricks are building market share…”

If that isn’t disruption, I’m not sure what is.

Which brings me back to my point: don’t dismiss a new entrant because they don’t fit your idea of what a disruptive player looks like. Even if a new model doesn’t look like Uber, it can still shake up the incumbents.

Yes, disruption is coming to real estate. And it will look a lot like Purplebricks.