Do you know of Purplebricks? If you have been in the market for a house or looking to sell a house, you might have encountered Purplebricks Australia—the Australian arm of the British real estate startup.
In this video, I discuss one of Britain’s business success stories: Purplebricks. More particularly, I share with you reasons why it could not replicate its success in Britain.
What is Purplebricks?
Purplebricks is a real estate agency that has a different model of selling homes; it claimed to be a disruptor in the United Kingdom real estate market. Launched in 2014, the online agency set out to disrupt the real estate market by implementing a fixed-fee structure, rather than commission, to make the process of buying and selling real estate more transparent and cost-effective.
Purplebricks rode on its successes in the UK and launched in Australia in September 2016. It promised to save Australians an average of $11,500 under this new model. However, in May 2019, it announced that it was quitting the Australian market, two and half years after entering it with a promise to shake things up.
Why didn’t it work out in Australia?
A press release from the company claimed that market conditions in the Australian real estate market have become increasingly challenging. But some real estate experts believe that problems began even before the real estate market became a challenge.
Purplebricks spent more on marketing than they made in revenue. They spent about AU$20 million to create buzz and attract the market in the hopes of growing the company rapidly. It is difficult to sustain this kind of spending.
They put most of their marketing spend on expensive TV ads instead of focusing their efforts on targeted digital marketing. Not everybody who watches TV will be selling their property at that point in time. Not only is this expensive, but it is also wasteful given their budget and the geographical reach that the company was trying to achieve. Digital marketing, on the other hand, could be executed with specific targets in mind—those who are looking to sell their property or to buy one. And when used properly, digital marketing can be effective in nurturing customers.
In my video, Small business, big problems, I discuss why managing cash flow effectively is important for any business.
They didn’t nurture customer relationships. When you spend AU$20 million in marketing, you should at least aim to nurture long-term relationships with your customers—potential, current, or past. But customers felt that their relationship with Purplebricks remained purely transactional.
They didn’t provide value to customers. Property sellers were required to pay the full fee whether their property sold or not, which left no incentive for Purplebricks agents to sell the properties. The fixed fee model typically works in booming seller’s markets, when buyers would gladly snap up whatever is available. But when the market slows down, agents will tend to prioritise properties that they can immediately sell because each property owner pays a fixed fee.
They didn’t listen to their front lines. Purplebricks did not want to change the model to suit the Australian market. There is a difference in the markets. For example, most UK home sellers would gladly handle their own open homes. In Australia, home sellers expect that agents will do this for them. Purplebricks was not transparent about charging property sellers for doing open homes, which surprised many. Their agents communicated this with the company, but the company refused to budge until October 2018, when it became too late for any changes to save the failing company.
The business model itself seems to be the issue. In the outset, a supposedly low-cost, fixed-fee model seems to benefit the customer—AU$11,500 in savings is very substantial. But it only makes sense if the customer gets the service it promises—in this case, if the property gets sold. But it turns out, paying the fixed fee does not guarantee that the property gets sold. The fixed-fee model also does not provide the traditional incentive model that spurs agents to push to sell a property. In the end, it feels as if Purplebricks is the only one gaining from this because it receives a fee whether the property gets sold or not.
What lessons can be learned?
What happened to Purplebricks Australia is similar to what happened to Bunnings UK. In my video, The Bunnings Lesson – What we can learn from it, I discuss how business arrogance can lead to costly mistakes. Business arrogance is when you think that what happens to other businesses could not possibly happen to yours. In reality, it can. It happened to Bunnings. It happened to Purplebricks.
Understand the market. In the case of Purplebricks, failing to address customer concerns despite being raised by the front lines proved to be disastrous for the company. Just because it works in the UK does not guarantee that the model will work in Australia. A product or service is only as successful as its effectivity in solving a problem. Australian property owners face different problems and issues compared to their counterparts in the UK.
The goal should have been to develop a product that suited the needs of the Australian market. In this case, Australian property owners put a lot of value in open houses that are organised by agents. It makes sense to build a model that accommodates this.
Another way it could have prevented this pitfall was to inform or educate customers about services that the fixed fee didn’t include. This is important when you introduce a low-cost model. Customers need to know in advance which features and functions will be pared down and which ones you will be offering.
Customer expectations matter. And when you choose which features to take out or offer as a paid feature, you still need to take into account what the customer values. Again, it boils down to understanding what the market needs, what it wants, and what it values.
Rationalise spending. It is unwise to spend more than what you make. And when you spend on something, make sure that you make the most out of it. Make every dollar in marketing spend work—and it works best when you work to develop a relationship with your customers. This starts when you make an effort in solving their problems.
As a new player, the odds are already stacked against Purplebricks. They are already at a disadvantage at having to educate the market about their service. And because they operated a fixed-fee model, Purplebricks does not have the same revenue-generating capacity as their competitors operating on the traditional commissions-based model. To overcome these disadvantages, they needed to attract market share immediately. To do so, they needed to make huge investments in marketing resources. Unfortunately, they didn’t maximise their marketing spending and focused on mass market channels such as TV ads. They were too focused on generating awareness that they didn’t prioritise nurturing customer relationships.
So what could Purplebricks have done differently? They were correct in focusing on marketing and educating their market. But they could have done so more systematically. They could have targeted their marketing dollars in digital marketing or utilised unconventional marketing practices that their competition weren’t fully utilising. Most importantly, listening to people working in the front lines from the start could’ve prevented some of the problems that they encountered.
I’m sure Purplebricks entered the Australian market expecting to make a profit and did not expect to make mistakes discussed above. However, no business has ever expected to make such fundamental mistakes—and it doesn’t mean that business won’t make them. Just make sure that you don’t.
If you are interested to know more about what a business has to go through when facing exponential growth, you can download the first chapter of the book, ”$20K to $20 Million in 2 Years” absolutely free here. The chapter talks about the differences between a good and a great business and puts out questions that make you consider how you can turn your business from good to great.