Zillow says "show me the money!"

Zillow formally announced to it’s lender network today that it will start charging for it’s leads as of December. As Lead Critic points out on his blog, this was probably inevitable. Certainly based on a number of conversations I have had with Zillow users they had all anticipated this would happen. However, unlike Lead Critic, I think that Zillow's decision to charge is a good sign.

That Zillow now has the confidence to charge for their leads reflects the steady growth of their free service over the past year or so. They have now served up nearly 9 million quotes and serve just under 5,600 companies. Not bad from a standing start in March 2008.

Of course cynics will argue that giving away leads free, which is what they have done until now, makes it easy to grow quickly. In fact Lead Critic makes a good argument around the point that now that they will charge for their leads they are just like any other lead provider and will likely fade away. I don’t think that is true but I do think that Zillow is about to undergo a world of pain that it probably has not fully anticipated.

I continue to believe that Zillow has the most revolutionary lead generation service of any lead provider. It is consumer versus buyer-centric because it gives control to the consumer with respect to when they are contacted and by whom. I believe that that is the future (and soon becoming the present) of lead generation. That the service is no longer completely free does not detract from this fact.

There are other reasons that I am glad that Zillow is now going to charge for their leads. The successful users of Zillow leads already pay something for the leads effectively anyway because they use lead management platforms like Leads360 alongside auto-pricing software. So charging for leads will bring some more seriousness to the use of the Zillow Mortgage Marketplace (ZMM) by lenders. More importantly however, I think that charging will push Zillow to make their service much better than it is today as well as reducing their cycle time on new innovations. Not because they will have the funds to make these changes now (I believe the VCs took care of that problem already) but because their customers will demand more of them now that they are truly fully paying customers.

And that is where the world of pain that I referred to will come from. Take Zillow's pricing model for instance. I actually spent some time with key members of the ZMM product team last week discussing their new variable pricing model. I won’t describe it in detail as I don’t think they have publicly released the full details of it yet. What I can say is that it somewhat loosely prices leads based on demand. However, they haven’t taken the google adwords pricing model but a dynamic pricing model that is, as far as I know, completely unproven. I think they’ll learn a lot from the process but it will be a very painful for Zillow. Dynamic pricing models are very difficult to get right and I personally think that the model they are going to market with won't be optimal for either the buyer or the seller. However by not taking the easy approach the ultimate outcome could well be that after some serious tweaking that Zillow ends up with something that is superior to the pricing models that currently exist for leads (or indeed CPC ads).

So the fact that Zillow will now charge for leads for me is a positive and inevitable sign of progress. I still think they will continue to change the face of the lead industry but from December onwards they are going to have to try even harder as they do so.