From NYT:
Glenn Kelman, CEO of Redfin, an online real estate brokerage
There has been a lot of debate lately among Web entrepreneurs about online ads. As growth in online ad spending shrinks, ad-based start-ups are searching for new revenue streams and Twitter is explaining why it does not run ads.
Glenn Kelman, chief executive of Redfin, an online real estate brokerage, contends that Web start-ups that do not carry ads are forced to excel at certain things that are essential to Silicon Valley’s promise, like developing software that solves users’ problems and upending the way certain industries run.
Redfin lists homes for sale. Buyers can browse the listings and make bids online. Redfin agents help negotiate with the seller, then share the commission with the buyers. The company does not put ads on its pages in part because it competes with Realtors, its most obvious source of advertising, Mr. Kelman said.
Silicon Valley once had a “swashbuckling attitude that we were going to change every industry and make it more efficient,” he said. “Once you become more like Madison Avenue, you become acutely sensitive to what’s going to annoy your clients.”
When engineers need to figure out how to guide a visitor through a Web site to make a transaction — in Redfin’s case, to make an offer on a house — it presents a different type of challenge than amusing a visitor for a minute or two to sell an ad. “It’s 30 hoops, and if they don’t jump through the 30th hoop, we make zero from them, whereas other Web sites, as soon as you land, they’re starting to make money,” Mr. Kelman said.
Selling online ads can be a hugely successful business, of course, and as a result, venture capitalists have been particularly excited about ad-based businesses for the last several years. When Redfin raised venture capital several years ago, Mr. Kelman said, “it was a little bit like being in the twilight zone, just because everyone expected us to have a different revenue model.”
Lately, he has noticed a shift in thinking. Today, he said, Redfin’s business model is often seen as an asset instead of a flaw, because the tech world is more open to alternative Web business models.
Apple’s iPhone App Store, which charges small fees for some applications, has helped prompt this shift, he said. “Steve Jobs knows how to hold his hand out, to build beautiful products and make people pay for them,” Mr. Kelman said. “That’s really coming back into vogue.”
But can Redfin’s philosophy pay off? It does not make money on the vast majority of visitors to its site. Mr. Kelman said that Redfin earned an average of $7,500 per client, but that only 100 to 200 visitors out of every million ended up becoming clients.
Redfin is not yet profitable, but Mr. Kelman said he suspected that it had more revenue and was closer to profitability than it would be if it were relying solely on ads for revenue. “The number of people who have to visit for $1 million in revenue is less than if we were ad-based,” he said.
