Never Tell Me the Odds

In a board call last month, I finally told everyone that the commission savings that Redfin offers home sellers and home buyers dramatically lowers our profits margins and there is no evidence that it drives more revenue.

We have, I told our investors, given away $100 million because of my irrational belief that

  1. Redfin was put on this earth to make real estate better, and that
  2. One of the simplest ways to make real estate better is to give consumers more value.

The problem with the refund is that it’s like the tooth fairy: nobody really believes in it until a gift shows up under the pillow. The first act of a rational CEO,  I said, would be to keep the service exactly the same and eliminate the refund entirely.

The line was silent. Then Austin Ligon, the founder and former CEO of CarMax, asked an unexpected question: “Can you name a great consumer brand that was built by someone completely rational?”

I thought about one of my heroes, Ted Turner, who once broke through a stalemate with stunned Japanese businessmen by removing his clothes one article at a time. He publicly described TimeWarner’s decision to shut down CNN’s cash-hemorrhaging foreign offices as a clitorectomy.

I remembered that Nike was so committed to its athletes that it paid for Tonya Harding’s legal defense after her goons clubbed a competing figure-skater in the knee. I thought about Whole Foods’s concupiscent piles of fruit, which are, like someone you fall in love with, so much better than they have to be.

Wouldn’t a more calculating business skimp on the strawberries?

The problem with rational decision-making is that you can’t ask consumers to have an emotional connection to your company if you yourself aren’t guided by emotions. When the only basis of your identity is an elaborate calculation of self-interest, you have no identity at all.

Nobody cared about Han Solo until he rode after Luke into a snow-storm yelling “Never tell me the odds!” And nobody will care about your company if you don’t take a similar stand. This is why Steve Jobs hated the word “brand,” because Apple’s identity was an authentic expression of himself, not a calculated construction of the marketing department.

What this cynical, jaded, spun-out, over-hyped world is still famished for after all these years is a reason to believe. Belief is such a deep need that we find ourselves developing tearful, fierce relationships with silly little products and then feeling like dupes when we find out how cynical their manufacturers can be.

Our need to believe is why investment bankers, who are so good at making money as investors, are almost always terrible at making money as the CEOs of consumer companies. They always do the math.

The problem is, that I do too. It’s easy to be crazy, but not after you know you’re crazy. Why did Redfin go to the trouble of figuring out how many people the refund put off, and how many it drew in, if we were just going to ignore the result?

I don’t know. What’s really hard about this job is knowing when to be crazy and when to be calculating, because you can’t just be one or the other. It’s certainly easier to be calculating. It takes confidence to ignore numbers, to set aside focus groups and advisers, and do what you believe in, because then the only person you’ll have to blame for your craziness is yourself.

But if I met my old self, the one just starting out in a consumer Internet business, the first advice I’d give him would be: have the courage of your convictions.

We do this all the time outside of business, without thinking a thing of it. A lovely friend of mine once broke up with someone because he wasn’t a little crazy. How, she asked, could she be crazy around someone who was always totally, maddeningly normal? Then she said, “That’s crazy right?”

I told her it was the only completely sane thing she’d ever said.

Discussion

  • http://www.techcrunch.com Michael Arrington

    Glenn, DId you ever read Josh Kopelman’s post from 2006 where he said ”We love investing in technologies and business models that are able to shrink existing markets. If your company can take $5 of revenue from a competitor for every $1 you earn – let’s talk!”? You’re doing that, and it’s amazing. http://redeye.firstround.com/2006/04/shrink_a_market.html

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  • http://mocorealestate.com/ Bruce Lemieux

    Goals #1 and #2 are anything but irrational. The question: Does Redfin primarily deliver “more value” through buyer rebates and lower listing commissions?

    • http://blog.redfin.com/ GlennKelman

      That's the right question to ask Bruce. Our goal is to deliver value primarily by being better, not simply less expensive.

  • http://www.facebook.com/profile.php?id=676560319 Paul C. McTaggart

    Glenn:

    You only need to look around Seattle to see great consumer brands created by 'irrational' founders:

    -Howard Schultz @ Starbucks
    -Jim Senegal  @ Costco

    They were crazy enough to imagine a better world but also calculating enough to execute flawlessly.

    You are cut from the same cloth: a healthy balance of crazy & calculating :)

    Paul

  • James Erlandson

    WalMart didn't become the world's largest retailer by raising prices.

    • http://www.facebook.com/jameswm1 James Wallis Martin

      No, but it isn't a value-added “premium” strategy that Walmart went for, they went for a low-cost strategy.  The problem that companies like Redfin and countless others run into is deciding (especially since their initial offering was to be a low-cost value) on how and whether to transition to a value-added “premium” strategy like Apple, or go with the affordable, low-cost strategy.  

      The answer lies in the volume and the level of the relationship with the customer base.  If real estate can be done merely as a transactional basis, then the low cost strategy would be a better deal for Redfin, but the reality is that the real estate market isn't purely transactional, it is also a relational business.  It is essential a mix of both, but like anyone that did their MBA or ran a company that tried to do both strategies, they failed miserably.  So the real question for Redfin is do they have the ability and financial backing to commoditize the real estate industry and make a go of the low-cost strategy like Walmart or do they need to change their business model to become more of a value-dadded “premium” model and risk alienating part of their consumer base that initially went with Redfin because at the time they were able to offer “value-added” at a lower cost than their competitors.

      Crazy sounds nice as an excuse, but at the end of the day, it is the question I stated above that needs to be addressed and worked on, rather than leaving it to “crazy” as an acceptable answer.

  • http://www.digitalquarters.net Ben Elowitz

    Glenn, I think this is your best post ever.  And that's saying a lot.  Rational calculus only gets you so far – it can't create love, loyalty, or personal connection.  Thanks for this. 

    • http://blog.redfin.com/ GlennKelman

      Too kind Ben. I'm glad you liked it!

  • http://www.techcrunch.com Michael Arrington

    Also, amazing post. Never thought I'd see something like this from a SOPA supporter :-)

    • http://blog.redfin.com/ GlennKelman

      For the last time! I am not and never have been…

  • RexHarris8

    Thanks for a healthy dose of inspiration, Glenn.  People who act on emotion in the business world can always use some additional support since others generally just stare at us funny and talk about us behind closed doors.  I hope you guys get all the success you deserve – keep on keepin' on.

  • http://www.zippgo.com/ Ash Sud

    Awesome post Glenn! I used Redfin a few months ago because of the refund, but now that I know the high level of service your teams deliver, I would probably use it even if there was no refund.

  • http://www.facebook.com/batura Scott Batura

    Well, good luck,  I guess I won't be using RedFin in the future.

    • http://blog.redfin.com/ GlennKelman

      Why not? I think the point of the post was that we were sticking to our guns?

  • Tina Fine

    now what about getting rid of commissions? and pricing based on services not tied to sales price.. how crazy is that, doesn't that benefit customers.  Redfin is half the way… looking good relative to full service brokers but it is still the old status quo broker model, just a cheaper one.

    • http://blog.redfin.com/ GlennKelman

      The agents are paid based on customer satisfaction, and we always give you all the information, online and in person.

  • http://twitter.com/phsoffer Philip Soffer

    An excellent apologia for your well-known personality quirks as well as good piece of business wisdom. I believe, however, that Han Solo said, “Never tell me the odds” as he was flying into the asteroid field around Hoth, not while he was on the planet itself going out into the snow.

    You do have your moments…

    • http://blog.redfin.com/ GlennKelman

      You said you wanted to be around when I made a mistake, well, this could be it…

  • http://www.thednetworks.com Dhawal D

    very well written, I would like to re-quote Steve Jobs “People who think they are crazy enough to change the world are the ones who do.”

  • http://alexlod.com Alex Loddengaard

    Wonderful story, Glenn.  Seriously, thanks so much for sharing.  In the words of the late Steve Jobs:

    “Have the courage to follow your heart and intuition.  They somehow already know what you truly want to become.  Everything else is secondary.”

  • http://twitter.com/golateef Lateef Johnson

    What??  Han said “Never tell me the odds” while navigating an asteroid field, not before fetching Luke from the snow in ESB.  Of course, Phil beat me to this.

    Also, people started caring about Han after he coldcocked Vader's ship enabling Luke to destroy the first Death Star in ANH. ESB came after that. Still, you can't beat the quote for pure bravado.

    The moral? Crazy may be an acceptible but not sufficient condition for inspiring consumer fans.

    Reminds me of a co-worker's quote at my first work/study job: “You don't have to be crazy to work here, but it helps.”

    • http://blog.redfin.com/ GlennKelman

      Lateef, I can't believe I let you down! What has longer odds, navigating the asteroid field or surviving a winter night on the ice plains of Hoth?

      • http://twitter.com/golateef Lateef Johnson

        Longer odds navigating the asteroid field by a factor of 5.  But . . . Artoo has been known to make mistakes . . . from time to time.

  • http://twitter.com/paulcreid Paul Reid

    “What’s really hard about this job is knowing when to be crazy and when to be calculating, because you can’t just be one or the other. It’s certainly easier to be calculating. It takes confidence to ignore numbers, to set aside focus groups and advisers, and do what you believe in, because then the only person you’ll have to blame for your craziness is yourself.”

    Love it. Thanks Glenn!

  • http://www.swaglove.com/blog Casey Schorr

    Great post. I'm using Redfin now – have a house under contract – also a startup founder.

    Have to admit I was turned onto Redfin primarily because of the rebate. Then later I realized you have the absolute best website to search real estate, and great brokers too.

    The only problem with eliminating the rebate would be, how are you providing more value if I still have to look for all the homes and setup the tours? I thought because I'm doing a lot of the work myself, sifting through listings and setting up my own tours, that's why I get the rebate.

    If you eliminate the rebate, and I still have to do all the work, how are you *that* much better than a competent regular broker?

    Here's how the conversation goes now when I reccomend Redfin:

    Me: Hey, you should check out Redfin. They are awesome, great website, great agents, AND you get a HUGE rebate!

    Friend: That's awesome. But what don't I get?

    Me: Well you have to setup your own tours, there's not as much hand-holding as with a regular agent.

    Friend: That's not so bad if I get a HUGE REBATE!

    Without the rebate, no way I can convince my friend to go with an online broker over a regular one.

    Keep up the great blog, love it! And love Redfin too.

    • http://blog.redfin.com/ GlennKelman

      I'm relieved the refund works Casey… 

  • michaelwolf

    People use Redfin because they have to pay less in commissions, it's that simple. Don't kid yourself otherwise. I sold my house using Redfin, was blacklisted by every Windemere agent in the city of Edmonds, but stuck with it because I believe that 6% on the sale of my single biggest asset is too much to pay, particularly in a transaction where the realtor does little more than put you on MLS and does a couple open houses. I eventually sold the house at above what the a Windemere agent told me I could sell it for through Redfin, and I was very happy with the Redfin agent (Tor). But at the end of the day, I never would have used Redfin if it wasn't for the rebate.

    • http://blog.redfin.com/ GlennKelman

      I'm not saying there aren't folks who are drawn to the refund, only that there are others who are put off by it too…

      • michaelwolf

        I guess what I meant to say, in response to you statement that there's no evidence that your commission savings drives revenue, is Redfin would not have any substantial revenue to drive if not for your more efficient, lower cost (and hence lower-commission) model. An online realtor that would charge 6% commission is a non-starter as a startup IMO.

      • Jon

        If you want to save some money, fire the person who told you that there is a significant fraction of people who are driven away by the refund. That is insane.

  • http://twitter.com/arianna Arianna O'Dell

    Best post I've read this week. Amen.

  • http://profiles.google.com/jeremy.miles Jeremy Miles

    I'm surprised by that – the rebate was the only reason I went with Redfin rather than a 'regular' realtor, or at least that's what got my attention to Redfin. Now I'd probably go with Redfin again even if it wasn't for the rebate because I want a realtor who leaves me alone.

    • http://blog.redfin.com/ GlennKelman

      Thanks for your business Jeremy! We won't put your commitment to the test in any event…

  • Jon

    That's all quite nice, but I think your math is probably wrong to begin with. I certaintly would not use Redfin were it not for the refund.

  • Guest

    So… does that mean Redfin is getting rid of the refund or not?

    • http://blog.redfin.com/ GlennKelman

      Definitely not!

  • Guest

     
    On the question of why some users might be driven away by the refund, I suggest this article: http://www.slate.com/articles/life/drink/2011/11/why_you_should_be_drinking_cheap_wine.html
    The traditional real estate market is like the $15 bottle of “every day” wine.  People just assume that if it costs more it must be better.  
     
    I think that to assume Redfin’s rebate makes them a discount broker misses the point. Redfin is premised on the idea that the 6% traditional commission model, established in the era where ordinary people had no access to data, is generally just too high and can’t fairly survive in the internet age.  So offering the rebate is like Redfin throwing down the gauntlet and saying: ”This is the commission that represents what we believe is fair to the consumer.” 
     
    In Redfin’s mind, the question of what represents a fair commission is likely separable from the question of what level of services it offers as a broker.  Presumably, Redfin seeks to offer a better level of service than the traditional broker.  They’re just making a bet that home sellers and buyers would like to pay less than 6%. 
     
    Can there be any doubt that Redfin is right about that?  The question is how long it takes until the “tipping point.”  
     
    So if the rebate goes away, it seems to me that an essential piece of Redfin’s raison d’etre (i.e., to transform a screwed up market) is lost.   It also seems to me that Redfin should be focusing super-hard on the sell side of the equation.  On that end, the rebate isn’t like a gift from the tooth fairy: it is like a hard punch to the gut.  So if Redfin can get sellers understanding that they don’t lose out if they use Redfin on the SELL side, my bet is that the market shifts a lot faster. 

  • Keith

    Fascinating, thanks for sharing.

    Glenn, why do you believe some users are driven away by the refund? Im having a hard time imagining why anyone would be. Very glad to hear the commission is staying the same, but its worrisome that it even came up in conversation at all. If the evidence does support that, why aren't the stockholders all forcing the move? Do the investors value “crazy” over their wallets?

    I don't think this is even a question of “crazy”, it's a question of if RedFin is still creating value or if they've decided to start extracting value. As Redfin grows, hopefully the answer doesn't change.

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  • James

    Thanks for the great post. We are currently on our third transaction with Redfin and although the refund is certainly part of it, I am mainly driven to Redfin by your model that re-defines the industry. We had way too many bad experiences with the “traditional” realtor approach (always pushing us to make decisions we didn't feel were in our best interest). Keep up the good work (and mission)!

    • http://blog.redfin.com/ GlennKelman

      Music to my ears James, thanks!

  • Mylene Mangalindan

    You're my hero. Are you sure you weren't supposed to be a writer? 

    Mylene

  • http://www.aaronfyke.com Aaron Fyke

    The rebate is key.  I personally think that there is a lot of pent-up distrust of real estate brokers.  Read Freakonomics, watch Selling LA, Selling NY, or any other real-estate reality show, try buying a home yourself…pretty much you realize that you don't trust having someone else leading the way; you'd rather have an agent as an adviser.  With this, the client is going to do the vast majority of the work themselves.  With Redfin, the client is in charge, Redfin is the adviser, and the rebate rewards you for that shift of effort.

  • http://twitter.com/NailYrMortgage Nail Your Mortgage

    Glenn, I think it's important to question everything.  There are no sacred cows in the world start-ups – esp. those trying to change the world.  If real estate tech companies only had to solve the problems of delivering a service at a better price point there'd be 20 Redfins in the space right now.  But service delivery is the LEAST of challenges faced by companies like Redfin.  

    To be sure, the real estate industry is a complete goat-rope (no offense to goats, PETA) and the challenges are very complex.  However, tech companies that are delivering real, not perceived, value quickly find that building a solution is the easy part.  It's the business surrounding the solution that's nerve racking e.g. regulatory obstructionists that disable new market entries ('full service' offices reqs, brick and mortar), lack of consumer familiarity with real estate transactions, price tag comparison capability, etc.  

    So I say to you, Glenn, and the rest of the Redfin team, stick to your guns.  Real estate, financial services (insurance, banking) and healthcare are great examples of industries that need to be transformed for the benefit of the consumer.  You guys are doing something great.  Don't let the nerve racking part linger.

  • pacificdude

    Value-added – ask the airline industry about that. People whine and moan endlessly about the whole experience, then pick the lowest price. Every dollar removed from price is value added.

    • http://twitter.com/NailYrMortgage Nail Your Mortgage

      exactly.  agreed.

  • Laurentburman

    great post - love not only the irrational (not really) conclusion but the very rational process of how you got there. I'm planning on using redfin for my next real estate transaction primarily because of your commitment to try to institute the concept of value for service to an industry that feels like there's clear relationship between the “service” provided (or lack there of most of the time) and the revenue the real estate companies/agents expect.

  • Ghayoor Shaikh

    Awesome Post!!
    It is necessary to keep in mind either of the things such as Less Prices and Qualitative home:)

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  • http://fauzan.dhezign.com Brian Arfi

    Awesome post, learned a lot reading this. and reaffirms myself that crazyness is needed in startups :)

  • http://blog.redfin.com/ GlennKelman

    I still remember when you posted that Redfin was shrinking the real estate market, just because it changed how I think about Redfin. I was just talking to Atlassian's Scott Farquhar about this yesterday. Atlassian charges $10 for software you buy over the web, whereas IBM charges $1,200 for Rational software that you buy from a salesman…