A key Silicon Valley lesson that all brokers must learn
What exactly is a network effect?
Simply defined, a business enjoys a network effect when every additional customer or user increases the overall value of its product or service.
Many of the largest, most prolific companies in tech and beyond thrive on core network effects that help them grow and benefit from powerful barriers to entry. This is why Silicon Valley venture capital firms covet companies with network effects: they offer exponential promise, and outsized financial return.
Let’s take a look at network-driven growth through an old-school example — the fax machine. A single fax machine is useless, but as each additional fax machine joins the fray, every fax machine gains the ability to send documents to more and more people. Even more people buy fax machines since the value of the fax network is even greater.
Marketplaces such as the NYSE, social networks such as Facebook and even games such as progressive slots leverage a similar effect.
Network effects are also critical in ensuring the defensibility of a business.
Take the battle between iPhone and Android. One of Apple’s most effective weapons in this competition has nothing to do with design, functionality or price: it’s the fact that iMessage and FaceTime are exclusive to iPhones. Since iPhone users can’t switch to Android without severely disrupting their communication habits, the cost to change is high.
The success of professional organizations such as bar associations in the legal field, the survival of design-challenged websites such as Craigslist and even the ubiquity of standards such as 2×4 lumber arise from the defensive nature of network effects.
Why does it matter to my brokerage?
Real estate harbors a basic network effect where every new listing increases the market’s value to buyers, and every buyer increases the market’s value for sellers. As the driver of additional supply and demand, and the facilitator of eventual transactions, brokers and agents are ultimately in control of this network effect, at least for now.
The power of real estate’s network effects isn’t lost to the next generation of tech companies. Looking at the success of recent alt-brokerages and disintermediary startups, one thing is clear: If brokerages aren’t able to lock down their network effects, it’s only a matter of time before someone else will.
Network effects are possible in a brokerage, but 99 percent of brokers aren’t making the connections necessary to take advantage of them. So how can brokers lock down their network effect? More often than not, the key is taking control of and leveraging data. In the real estate market, data reflects the two sides of the market: the supply side through listings and the demand side through buyer data. Because listing data is publicly available, buyer data represents brokers’ real estate network effect battleground.
Buyer data helps brokerages grow and defend as well. By using the data in listing or recruiting conversations, brokerages can attract more sellers and agents, and by providing tech tools that leverage that data for better consumer experiences, it prevents leakage of both customers and agents who depend on that data.
Therefore, brokerages can effect a two-sided strategy when they deploy technology and resources to harvest and control their buyer data. It’s not only an urgent priority in 2017, it’s the only way brokerages can truly future-proof their businesses.