Mismatched: Open Marketplaces and Referral Networks

Any Internet service is personal, despite the distance and physical disconnect between users and admins, people choose services that speak and work for them on an individual basis. This commentary focuses on the pure distinction between two concepts: an Open Marketplace and a Referral Network as two methods to deliver information. We will speak about why these concepts are so different and why sometimes one works as a much better proposition than the other. We will use UBER and Airbnb as examples of the competing concepts that are outside the real estate space, and then discuss some of the real estate options.

Network Types

Marketplaces have existed for as long as humans have engaged in trade, a place for people to shop for whatever the service, or product they needed at that time. An Open Marketplace does not have barriers, it does not set rates, it does not collect kickbacks, it does not promote pay-to-play bias, or trade consumer leads as a commodity. An Open Marketplace exists to establish a convenient and open process for negotiations between parties.

Modern Referral Networks is a very different form of establishing trade, they largely rely on economies of scale and almost always collect some sort of kickbacks in the process. Economies of scale sometimes even make sense, but ultimately, all referral networks work by suppressing competition, which lowers service quality and increases tolls imposed on all participants.

Airbnb vs. UBER

In this commentary, for ease of use, two popular and highly successful participants are examined, Airbnb and UBER, as a way to distinguish one as a Marketplace and the other as a Referral Network. The reason UBER is used as a Referral Network example is because of its success and because it was able to overcome the flaws of a typical Referral Network with scale. Airbnb is used as a Marketplace example to point out how this company utilizes the strengths of an Open Marketplace concept.

UBER operates a successful Referral Network (it is classified by the State of California, where it was born, as a Transportation Network Company). The Referral Network approach works for UBER because people generally consider cab rides to be a ubiquitous, low-risk process — there is no need to evaluate each individual driver before they show up, the need is to get from A to B safely and at a low cost. UBER does a basic check to pre-qualify drivers and their vehicles to a set standard — this is generally is good enough for consumers not to care who the actual driver is that they will be matched with. This type of approach creates an environment where kickbacks (fees drivers pay to UBER) are transparent and highly distributed, the increased cost is replaced with savings due to economies of scale. While great for consumers, it also places a high burden on drivers, where most drivers work with UBER for only a year before they systematically quit.

Yes, the “blind” referral approach works for ride-hailing, but at the same time, it works poorly for exclusive, high-value services. Connecting consumers with local professionals such as Attorneys, Doctors, Contractors, Designers, Accountants, Financial Planners, and my current favorite, Realtors, takes a lot more than a Referral Network — it takes an Open Marketplace.

Airbnb is a service distinctly different from any other booking service (this statement ignores the possible illegality of short-term rentals and the socio-economic impacts on communities.) Airbnb’s success is largely attributed to an open approach, at first an odd-ball collection of random apartments and flats, now blossomed into a well-maintained marketplace for a variety of local travel accommodations. This process is actually very different from UBER’s Referral Network approach because each location, host, and guest are unique — the value exchanged goes beyond a blind match.

Airbnb also charges a fee from hosts to list their property. The difference is that it is structured as a processing fee where Airbnb does not claim to provide unbiased matches, it simply lists properties for hosts, making it a fee-for-a-service proposition. A successful Open Marketplace separates the quality of information from the revenue.

Both UBER and Airbnb are great examples of novel ideas able to proceed into the market of cabs and short-term rentals with an entirely new opportunity. Still, UBER and Airbnb models are not the same, their inherent differences remain — one was scaled as a Referral Network and the other is an Open Marketplace.

Why an Open Marketplace is not a Referral Network?

Identified below are two major distinctions between Open Marketplace and Referral Network concepts. Each one of these distinctions carries one lowest common denominator: User Experience (UX).

First, Transparency. Consumer choice of service is not just about money — people naturally operate on the principle of utility and competitive overall value. One of the biggest UX disadvantages of a Referral Network is that it tends to provide “blind” results. Generally speaking, UBER blindly matches riders with drivers because riders don’t care, but Airbnb can’t blindly match guests with hosts. Open Marketplaces utilize transparency as their main UX value-added proposition.

Second, Referral Fees and Payment Bias. A Referral Network operates on a pay-to-play bias, the company always steers the consumer toward its own network and away from competitors. UBER overcame this flaw due to relative indifference of who does the driving, but this bias becomes prominent with high-value services. Referral Networks often claim that their service is free to consumers since no checks are written by the consumer directly to the network. The checks, however, are eventually written by the service providers that participate with a Referral Network. This difference is negligible with UBER due to economies of scale, but that is not the case with high-value low-occurrence services, such as real estate transactions.

Open Marketplaces do not operate on the referral fee basis, making them a much more competitive alternative to Referral Networks, ironically, due to organic properties of better network effects. Without referral fees, Open Marketplaces are able to deliver a much broader coverage and scale with open use of Internet technologies.

Today, prominent real estate Referral Network fee examples include: Redfin, 30% kickback; HomeLight, 25% kickback; UpNest, 30% kickback; OpCity/realtor, 30%-35% kickback. For example, HomeLight, claims to match consumers without any bias based on the historical performance of each Realtor, but only rates local Realtors who have agreed to pay the kickback. Open Marketplaces do not possess this flaw, making all results free from this type of pay-to-play bias.

Open Real Estate Marketplace

Over the last year, HomeOpenly has built the first online Open Marketplace for Realtors in the United States, designed to connect Realtors together with consumers based on service levels and price. During the first stages of this massive task, we have included tens of Millions of public property records and countless system updates, all designed to counter a systematic abuse of trust in the industry exhibited by a wide variety of Realtor Referral Networks. The Property Technology (PropTech) industry is still in its infancy, it is historically slow to adopt changes and consumers are generally risk-averse, but this trend is ripe for disruption with an Open Marketplace concept.

HomeOpenly connects for free Real Estate Service Consumers with Real Estate Service Professionals with competitive service terms and flexible rates, including reduced rate and flat rate services. This process allows Real Estate Service Consumers to receive all local competitive representation options for any homes in the United States. Instead of being subjected to Realtor Referral Networks, any Real Estate Service Professional who wishes to offer competitive terms is able to participate with an Open Marketplace concept without any kickbacks.

There are over 2,000,000 Realtors in the United States that are now forced into the position of having to compete with a lot of well-funded flat fee transparent pricing models while having to pay a noncompetitive 25%-45% of their commissions in referral fees. This leaves the majority of Realtors to question their position and security in the market. Referral fees are a real estate practice built as a house of cards on the backs of Realtors stuck between paying referral fees or leaving the business entirely. In such toxic industry environment, HomeOpenly is not just a slightly different idea when compared to Referral Network models — it is designed to completely eradicate pay-to-play bias on a mass scale as it moves to organically establish a truly revolutionary practice in the real estate industry: healthy competition.

Online Real Estate Industry in 2019

The largest online companies in the world are beginning to enter the real estate marketplace, including Facebook Marketplace and Amazon Home Services. It is still unclear just what form these giants will take as they enter the field, but with their massive resources, they are well positioned to dominate.

Facebook Marketplace is a great example of what is possible in 2019 for real estate. Yes, it is still in its infancy and the company is careful not to overstep itself into a massive new opportunity, but it is clear in its intent to keep away from becoming a Referral Network. Amazon Home Services, on the other hand, have opted into UBER route, with a clear focus on a small referral fee basis for basic home services such as basic installation, appliance repairs, and home cleaning — all moderately suited for a Referral Network approach when scaled.

The Best of Both Worlds

HomeOpenly is taking on both routes. While developing an Open Marketplace for Realtors, it is positioned to expand into a transparent value-added Referral Network for Mortgage, Refinance, Home Insurance, Remodeling, Design, Staging, Home Inspections, Home Security, Moving, Home Maintenance, Title and Escrow verticals. We see an opportunity to an Open Marketplace concept into all major aspects of home-ownership life-cycle with proper Internet principles to help us archive great economies of scale.

Building a massive Open Real Estate Marketplace in the Internet industry dominated by paid ads is a challenge and requires an entirely new way of thinking — Consumer Focus, Privacy by Design, Open Systems, Transparency, UX and Security by Design. Building a Referral Network isn’t easy either, but due to inherent limitations of referral fees approach, the only successful Referral Network model is that of a low-risk service transposed on a mass scale. Building a Referral Network for a unique experience or a custom service, such as that required in real estate representation, is only possible in a short term until an Open Marketplace for the same exact process takes reigns to expose high referral fees models as biased and wasteful.

Author: Litesand

Antitrust, real estate, e-commerce, fintech, proptech, bigtech

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